Ten Deadly Deal Analysis Mistakes

Hope you all enjoy this one. I'm off tomorrow for Phoenix for our first ever, Maui Millioniare(TM) Wealth Weekends. We have about 230 people coming for this wealth workshop with 100% of the proceeds--gross, not net-- going to charity. I'll let you know how it goes.

See you next week!

The Ten Deadly Deal Analysis Disasters

Mistake 1. Taking TOO Long: Good deals don’t wait around for indecisive people. Many people “think a deal to death.” The best way I know to lower your anxiety level with a deal is to move forward provisionally (i.e. with a subject to clause or liquidated damages clause of some sort. You’ll learn more about this in the next chapter.)

Mistake 2. Trusting Seller’s Numbers: Even if the have only good intentions, most sellers just aren’t knowledgeable and all of them are inherently biased at least a bit. The most common problems with a seller’s numbers are pretty obvious—they think the value is too high (often times confusing “listing prices” of local homes with actual “selling prices”), and they think the cost to fix it up is too low.

Mistake 3. Trusting “appraisals”: An appraisal really isn’t meaningful, unless YOU hired the appraiser, and YOU gave them the instructions, and YOU are handing the appraiser the check. I can influence an appraiser to appraise a “$100,000” house for as little as $80,000 and as high as $120,000 (or more). That’s close to a 40% varience on the two appraisals of the same property! So take any “appraisal” the seller hands you in the spirit that it was intended, as a MARKETING piece! The best appraisals are ones that you hire the appraiser and give them their instructions. If I really want an appraisal to be accurate then I choose a reliable appraiser I’ve used before and ask her, “What would this house need to be priced at to sell in 90 days or less?” This should give you a conservative estimation of value.

Mistake 4. Doing your math in pencil: The next time you catch yourself thinking it’s okay to “fudge” your numbers a little to make the deal cash flow or the rehab payoff on paper, BEWARE! Some investors have a tendency to “play” with the number a little to make them show a marginal deal is better than it really is. Remember, just because the deal makes a profit on paper doesn’t mean you’ll make money in the real world.

Mistake 5. Overestimating the market rents: This one happens all the time. The way you know what a house will rent for is to do a market rent survey. The rents listed in the paper or that a real estate agent told you may or may not be accurate.

Mistake 6. Overestimating the “as is” value: So many investors forget that to turn a house in 90 days or less requires the price to be REAL, not pie in the sky. What would it really take to get the house into top showing condition? Be careful to be conservative in your estimate of value going into the deal. The worst case then is that you make MORE money!

Mistake 7. Getting bogged down in process… Use the 3-step process you just learned about so that you incrementally invest more time in the deal only as it proves it is warranted. Learn to trust your due diligence and evaluation process and make sure it is checklist driven. This is your best insurance that you’ll do it the right way every time.

Mistake 8. Worrying about the house on the Quick View step: On your first pass, you are only concerned about three things: 1. What is the real market value of the house? 2. Is your price right? 3. If you are planning on holding onto the property long term, will it cash flow?

Mistake 9. Underestimating the time it will take to Flip / Fix / Fill / Sell: I’ve bought a lot of houses from investors who got stuck with holding costs being too much for them to handle. Be careful here. If your exit strategy is to sell the house to a retail cash buyer it will need to be in showing condition or you’ll struggle to find a quality retail cash buyer. Always be conservative with how long it will take you to execute your exit strategy and if possible, build in a healthy cushion of extra time.

Mistake 10. (The Biggest Deadly Deal Disaster of All) Hiding behind analysis because you are afraid to pull the trigger on the deal! At a certain point as an investor you will need to step forward in the deal and commit.