I’ve partnered with many investors and the one thing that I continue to see over and over again is the fact that the investor falls in love with the house. What I mean by that is they become attached to the property itself instead of the financials, which is not the ideal situation.
You've heard many people say in the past it's just business and that's exactly what it should be, just business. When you purchase a property to renovate and sell or rent, you should only be interested in the numbers and location. I hear many newbie investors and some seasoned investors comment that they really love an area or they really love a house but that's not what they should be focused on.
As an investor you should first say I love these numbers, I like the ROI and/or I like the potential cash flow. If the numbers work then you can start deciding whether or not you like the area, feel comfortable going there to collect rent, or if you are flipping, would you consider keeping the home as a rental if it does not sell. More or less this should be your train of thought as an investor. If it is not, you may start getting into a little bit of trouble.
Let me explain, recently I did a project as a joint venture with an investor in an area that he really liked. With my experience and expertise, we were able to purchase the property at the right price and came up with a very detailed renovation scope of work. Going in we had a game plan. We acquired it for the right price, we finished the projects on budget, we maybe went a week over our timeline but the plan was still in action. My JV partner fell in love with the house once it was completely renovated so he tried and successfully convinced me that we could potentially get more money for the property.
I agreed to list the property at a higher price but if the home did not have plenty of showings or no offers came in within a week or two we would price reduce. You can see where I'm going with this. The home was placed on the market at $399K and soon after it was price reduced and price reduced. Keep in mind that our initial projected value for this property was $365K. Fast forward quite a few months later and we are now at our original projected ARV.
If we would have only listed the property at our original planned price, I bet it would have already been sold. I take some responsibility because I did not push my agenda hard enough so some of the blame lands on me as well. However, when someone really believes something it is easy to convince someone else of it as well. It is important to make sure you have a plan and execute it accordingly whether you invest alone or you are in a JV. Keep in mind that like most things there are exceptions. However, in this case there should not have been an exception, we should have stuck to the plan. As I mentioned earlier, you should not fall in love with the property. As an investor your primary focus should be profits, that's it!
On another property I consulted on, the investor had a hard time listing the property at my suggested ARV. The comps for the property showed the value at the price that he wanted to sell the property. However, the actives told a different story. There were multiple properties in the area that had been recently renovated that were listed for less than what he wanted to list the property. There was a market shift occurring and the area was declining in value or leveling off. He was not interested in hearing what I had to say. He loved the home and believed in the area so strongly that he could not image that the home would sell for any less than what we had originally planned. The market proved otherwise. He closed the property at the original price I had suggested. He made a profit but it could've been more if he would have listed it at the sold price from the start thus avoiding carrying cost.
Keep your emotions out of real estate. If you stick to your numbers, you are more likely to succeed. Also keep in mind that just because you can prove a property was once worth something does not mean it will have the same worth in the future. For this reason, make sure to follow neighborhood sales trends in addition to recent comps.
Source: Fall in Love with the Numbers