Posted by Over the last couple of weeks I’ve shared two of my worst deals in a 25 + year career in Real Estate, which just goes to show that it doesn’t matter how much experience you have, things can always slip out of your control.
I’ve come to realise there are some common mistakes that people make and thought it would be valuable to share them with you – hopefully it could spare you some of the trouble I’ve had in the past!
Some of them might seem totally obvious but I’m including them because, if you’re not paying attention, they could easily creep in unnoticed.
Making assumptions
What’s the saying – when you assume you make an ASS out of U and ME? There are several mistakes you can run into purely by making assumptions.
One of the most common ones, which I’ve talked about recently, is assuming that a deal will happen just because the buyer, the seller or the tenant (whoever the counter-party is) has said they’re going to go ahead with something, but then don’t follow through.
This can cause you some serious headaches. In the past I’ve assumed a deal will go ahead because I’ve taken someone at their word, and then they’ve pulled out at the 11th hour. I’ve had signed memoranda of understanding, with someone saying they’ll be back to sign the final agreement, and then they’ve disappeared like tumbleweed!
I’m sorry to say you can never really take someone’s word for something, and unless you have a signed contract in your hand the deal is not done.
Remember, a deal is only complete when it’s on paper and fully executed.
Allowing continuity bias to cloud your judgement is another mistake I see time and again – assuming that the way things are now is the way they’re going to stay. For instance, over the last few years, we’ve some spectacularly low interest rates. Now that they’re much higher, how is that affecting you? Did you build in a contingency plan to allow for rate changes or did you assume the rates would always stay low?
Not stress testing your financial analysis
This leads me to my next point but is more to do with making sure that you’re conducting an accurate financial assessment. Any investment starts with an analysis based on any number of assumptions: the rent you’re asking for, how much you’re paying, the market strength, the interest rate, the list goes on. In this case, assumptions are all you can go on. However, cnce you’ve put those figures together it’s vital that you stress test the numbers.
Take a pessimistic view of things. What happens if your costs increase by 8-10%? What happens if interest rates jump? What happens if a tenant doesn’t sign the agreement when you thought they would and you have to wait six months? A lot of things can go wrong in a deal, and it’s very important that you cover these possibilities in your initial analysis.
There’s an old saying in carpentry – ‘Measure twice, cut once’, and that’s something you should do on paper at the analysis stage of any deal. Make sure you’ve looked at and tested every variable that could fluctuate – you can’t expect the deal to follow exactly as per your financial analysis so you have to check those numbers, and then check them again.
Overpaying
You’d be surprised how many people make this mistake. It may sound obvious, or easy to avoid, but when you’re stuck in a bubble or a very hot market, it’s easy to overpay for a property.
Do you remember post-Pandemic when prices went up? During the various lockdowns the property market stalled: building projects were delayed, estate agents couldn’t conduct viewings. However, the number of people out there who wanted to buy didn’t change. When the housing market reopened, it had far more buyers looking for the same property, which of course pushed up prices.
Big price jumps make new buyers (who are trying to get into the market) panic: they’re outbid every time. After that happens a couple of times, desperation kicks in. Not wanting to get outbid again, they start to bid more than everyone else. Post-COVID, homes were going for way over the asking price (in some cases double)… so now you might be able to see why overpaying is a real problem!
If you’re looking to rent out an asset, have a good idea how much you could ask for, and that will give you an indication of how much you should pay for it. Look at the deal from first principles: if you’re buying for a certain price you need to have a certain yield in order to make it financially work for you. What does that amount of rent look like per year? Is that affordable? Will a tenant be willing to pay that amount in a downward market?
Do your due diligence.
If you’re renting a property (whether it’s commercial or residential), you might underestimate how easy it really is for potential tenants to put on a bit of a show. They might impress you with reports of how great they are or how strong their business is, but just because someone says it, doesn’t mean it’s true!
If you’re struggling to find a tenant for your property, I can understand how tempting it can be to take the first person who comes along – you need to get your rent flowing, after all! But a failure to do the right due diligence can lead to a lot of grief and hassle down the line if you’re not careful.
Really dig into their financials and make sure you’re looking at up to date paperwork. I’ve had people giving me statements that looked great but were three years old and VERY inaccurate. In the commercial landscape, it’s a legal requirement for these documents to be filed at the companies office, so you should always be able to get hold of the most recent set of accounts.
Always check references thoroughly. Talk to former landlords and read between the lines in their communication, or better yet, pick up the phone and speak to someone. Make sure a potential tenant isn’t going to suddenly stop paying their rent, or damage your property. Take time to understand the legal rights of a tenant and of a landlord. They’re easily available online so research your obligations as a landlord, as well as the obligations and rights of the tenant.
There are some really good, honest tenants out there but sadly there are also people who just want to mess you around and play games. So do your due diligence!
Love at first sight
Falling in love with a deal or opportunity is another easy mistake to get caught up in. You might see something special in a property and get swept up in the possibilities of what it could be, then get carried away with that vision.
You have to detach yourself from that romanticism and take time to reflect on whether the deal is actually a good one. Never allow yourself to get too emotional: you have to be prepared to walk away from any deal if the numbers don’t stack up. More to the point, if you very obviously fall in love with a property, you’ll be spotted a mile away by the agent working for the other party, which could give them the opportunity to pump up the price. Keep your cards close to your chest.
Emotions could cause problems as well if you’re selling a property. You might be emotionally locked in on the price, and if you receive a lower offer than you want it can feel like an insult. I‘ve been in this situation before and really had to sit back and reflect on whether I was actually receiving a fair offer but just didn’t see it that way. Make sure you’re analysing the situation correctly and not letting your ego make the crucial decisions.
These are all easy mistakes to make (believe me, I’ve made them), but equally, they’re easy to avoid. Make sure you’re not making assumptions, conducting thorough financial assessments, doing proper due diligence, and, perhaps most importantly, keeping your emotions in check – good luck!