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Distill It, Net It Out

Distill it, Net it out.

I am sure that all of you have heard term "analysis paralysis" and even seen or experienced the phenomenon yourself. If not, it means a decision that needs to be made is forestalled and in most cases avoided, by excessive analysis. As Realtors, we see it all the time. Commercial transactions may have a higher incidence of it, but more and more residential buyers are suffering from the same malady. I may suffer from the reverse malady: "Ready? Fire! Aim!" but both maladies have some things in common and the same solution: a written short summary of the opportunity.

In stressed asset acquisitions, we have an expression about a deal “having a lot of hair,” which means there are complications like multiple mortgages, expired zoning, or environmental issues that muck up thinking. The opportunity is often hidden under a lot of other noise and challenges that must be cleared up.

At Market America Realty & Investments, we have developed a document called a BFI – a Basis For Interest sheet for real estate investments. It is a distilled summary of the opportunity and why we would or would not be interested. To view an outline for a BFI – CLICK HERE

We have found that most opportunities can be distilled into a few pages – and in fact need to be – in order to be analyzed. Don’t get me wrong, you may fill a few three ring binders with data, comps, pictures and background information, but all of this must be sifted through and boiled down to the opportunity in clear, understandable terms.

Some points about examining deals:

1. The more complex the situation.

Ok, it's pretty clear that if there is a deal or transaction that you don't understand, you will have to do some analysis first. The less background and experience you have, the more comparisons and indeed, study you will have to do. A guy like me, who may have many transactions under his belt on duplexes for rent may seem like a "ready, fire, aim" guy when buying yet another duplex; but the reality is that familiarization lessens the need for analysis. I may make assumptions on past experience that the newbie cannot. He must analyze more deeply.

2. The higher the risk.

We must always keep in mind that the amount of analysis should be in direct relationship to the amount of risk. If I am a newbie making an offer on a duplex, and the only risk I am making is to spend the next thirty days doing deeper analysis, then the actual making of the offer is a low risk step. Many newbie buyers fail to realize this. They will ask for all sorts of information that is not as easy to get as it would be if the property was under contract. I am often asked, for example, for a list of tenants in commercial buildings prior to receiving an offer. The prospective buyer wants to look at lease expiration dates, the financial credibility of the tenants etc. It is better to make the offer first, based on assumptions of what is expected in the due diligence period, and then to adjust the offering price, based on facts discovered, after the due diligence period is over. There are ways to mitigate your risk (due diligence, escape clauses), and they will help you avoid analysis paralysis.

3. The ability to delegate

Buyers need to build a team of trustworthy advisors that includes good real estate agents, attorneys, and accountants. The inability to trust those people will lead to analysis paralysis. I see it all the time. I will say this, "trust but verify;" after all, it is YOUR money, not your agent's and certainly not your accountant's. But, delegation to your support people should be routine.

4. Prioritization

In order not to get bogged down in minutia, set your priorities. I have often said that sitting down with your real estate adviser and establishing priorities and objectives is critical. This is not to say that they cannot be changed, but actually writing down your objectives and sharing them with your trusted advisors will help you to crystallize your analysis and avoid paralysis.

5. The Ritualist

The ritualist is the person who goes through the ritual of the analysis but ignores the purpose. I see ritualists every day. I'll say to someone, "Did you get through to so and so and find out the answer?" They reply, "I faxed him," or "I sent her an email," or "I left him a message." All of this just to let me know they are trying but don't have the answer. They think the proof of the attempt will satisfy me. In the same way, the ritualist forgets that the goal is to make a purchase, not just to do the analysis.

6. Goals

"Setting the goal, making the goal, scoring, keeping your eye on the goal post." We all hear these things, but many fail to take action. Unclear goals will muddy the analysis. What are we looking for? What are we trying to prove? Is the goal an 8% cap rate? A certain cash flow? A home on a golf course for under $700,000? Without clearly defined goals, analysis gets stalled.

7. Experience

Ever hear someone remark that so-and-so has "good gut" instincts on when a deal is right? This may be true, but his instinct comes from experience. He has seen the situations before; he recognizes a situation from the big picture. He picks up details while absorbing the entire picture. He may look at a deal for a ten year old rental property and make some assumptions during his lighting fast analysis. He knows that ten years is about the life of a water heater, air conditioner, and most appliances. He didn't actually go into the home and inspect them yet. He made his offer without inspection, figuring he would get to see if his offer was accepted during the due diligence phase. To some, he may look like a "Ready? Fire! Aim!" guy, but his experience tells us that he really is not.

8. Pack Mentality

Warren Buffet: "Be fearful when everyone is greedy and greedy when everyone is fearful" I love it. It changed my attitude the entire rest of the day when I heard that. People are very fearful right now; buyers are scared and sellers are desperate. Now is the time to get greedy. Following the pack? Not me. Too much analysis will slow us down.

9. Defensibility

Some people go though analysis so they can later say, "This is why I did not buy." They are doing the analysis for the wrong reasons. They want to be able to defend their inaction.

10. Alternatives

Remember when Yogi Berra said, "When there is a fork in the road, take it?" Successful people are all about alternatives. "If not this, then what?" If you have already decided that you can invest, say $100,000, what are the other ways that you can do this? What are the alternatives? Any analysis should take this into consideration. There is always an opportunity cost. Look for it, look for alternatives.

11. Hung by their own Petard.

"Don't let him get hung by his own petard," is an expression that I have used when talking about a decision made, not on reliable analysis, but on faulty analysis that was self serving. He knows his goal and made the data support the answer he already had in mind. If you are going to be honest with anyone, make sure it's yourself.

12. Fear of Failure.

If we keep analyzing, we eventually will be right or the deal will be gone and we will not have to fail. Weigh your risks. Sometimes you will not know if the fork you take is the correct fork or the wrong fork until you take it. It's not like jumping out of a plane at 30,000 feet. You should be able to turn around and try the other fork. (Stick your toe in the pool before you jump in).

13. Romance versus Logic.

Buying a home and buying an investment are two different things. Don't confuse them. You need romance in your home; you don't need it in your investments.