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Have you heard the old saying “numbers never lie”? Well, what happens when they do? Did you ever wonder how people can buy a particular property for an amount far over what you feel market value should be? That’s the topic of this week’s episode of the Cash Flow Guys Podcast.
What does this really mean? I honestly feel this is a fallacy. After all, a market is an intangible, so how can we apply a temperature to it? When I hear “it’s a seller’s market” or “the market is hot” I cringe because I feel these are limiting beliefs.
I really believe that opportunity is everywhere, and I don’t believe there is such as thing as a hot or seller’s market as it pertains to me and my business. I believe in focusing on finding problems (and solving them) instead of looking at what’s for sale.
The media, Realtors, sellers and buyers that lack problem solving skills or desire share such beliefs in there being such a thing as a seller’s market.
The lie better known as a hot market often leads inexperienced investors to overpay for properties.
What happens when you overpay or over improve:
When we overpay for a property many things happen as a result of bad decisions. For starters, overpaying for a property often leads to a self esteem problem. When the investor realizes they overpaid, they feel silly, embarrassed and desperation sometimes sets in. They often made the worst decisions of all during this time.
The overpaying investor often tries to make up for this mistake on the “back end” which can mean cutting corners on maintenance and other important items. Vendors can often be impacted by overpaying because the owner is looking for ways to recover from the loss of overpayment.
Property Management: Instead of paying your management team a fair wage, we often try to renegotiate this critical service. Worse, we sometimes use the amount someone charges as a means to decide to hire them or not. Recently, a management firm offered my company a discount due to the volume of properties we needed them to manage, we refused the discount in exchange for excellent service.
Other Service Providers: When we overpay, we often start thinking twice about things such as hiring licensed and insured professionals to perform services on our properties. We begin second guessing the use of a unlicensed electrician versus a licensed one. We start to think about using a handyman to handle our plumbing and A/C. When these thoughts enter our head we are heading for financial trouble.
Omission of Costs: When we ignore the simple math involved in a real estate investment we are essentially saying that we are ok with losing money. Many investors are so focused on “getting deal that they operate as if they have blinders on. The careless investors begins leaving off the cost of property management, repairs, utilities, and often they guess at the cost of insurance and other items. These investors are often quick to focus on the number of units they have instead of the quality of the units they have. Let’s not forget that just one deal can launch someone out of the rat race if structured properly. It does not take 100 units to escape the rat race for most people.