The Psychology of Losing: How Bad Deals Can Be Avoided

By
Real Estate Agent with Copeland Group Realty

houstonOne of my investors has a deal in Houston where he's rehabbing an apartment complex and will sell it in a few years at a great profit. He often comes across homes under $80k that he can fix up and sell after doing just a little with the carpet and paint. As I talked about how booming his business is, it made me wonder why I don't see those deals as often in the Austin market.

San Antonio and Houston have typically been the types of markets where investors can find low-cost homes, fix, and flip them for tens of thousands of dollars in a matter of a few months. It's pretty tough here in Austin to do that, but it's because Austin is an "appreciation" market. The values are so high that it's difficult finding an apartment complex under $5M, which is what most CA and AZ investors (or others) have when they come to Greater Austin.money house

THE SCENARIO:

H
ere is the typical out-of-state buyer scenario:

  • We get a call from an out-of-state investor or home buyer who says they want to invest in the Texas market since their market has shifted (i.e. tanked).
  • They usually have $250k-$5M cash to spend because they're selling their homes or investment properties. Most don't want to use leverage, so intend to put 100% down on their purchase.
  • We set up an investor or buyer strategy session and remind them that equity is a zero-percent return until you sell. It just doesn't make sense to buy 1-4 properties when you can instead buy twice as many, but still see cashflow. You then get all of the advantages of writing off the mortgage, etc.

We always explain that Austin is a very competitive market right now. Some buyers mistakenly think they can get a discount if they pay cash, but we're so heated that there is usually multiple offers on any well-priced property. These cash buyers even offer a quick close and short option period. If you're a buyer with a loan, you will sometimes need to make an offer above the asking price just to stay in the game.

frustratedTo prove this point, I talked to an investor at Thursday's Real Estate Networking Club who built his entire business on buying at the courthouse steps. If anyone in Travis County has been to the auction, there are literally hundreds of people there. You can't hear, see, and it's a madhouse. He  typically buys with no less than 15% equity in the properly and, lately, he's been outbid on most of them. Sometimes, he doesn't pick up any houses because the other investors are buying at retail prices.

This makes sense because there are too many buyers who just want to do a deal. They don't care if it's a losing deal. That keeps our market interesting, but it can't compare to the  sheer number of actual bargains that you can get in larger real estate markets like Houston and San Antonio.

WHY WE BUY BAD DEALS

The Austin market keeps real estate agents, buyers, and investors on our toes due to competition, but the game is getting boring because the rules are the same on each deal. Make a cash offer above the asking price and you'll most likely get the house. Otherwise, you will keep making offers until you get tired of "losing". Bad deals are made once buyers get tired of losing, so they buy anything rather than nothing.

 Now of course, there are certain areas that are hotter than others and some homes are so overpriced that they won't see an offer for a long time. The best bet to avoid losing your shirt is to stick with your standards and get a market analysis before you make an offer. Some buyers may find difficult to wait or "lose" many times. Even though they're only losing bad deals, they lose hope, blame their agents, and blame the other bad buyers in the world instead. The next thing you know, they ARE the bad buyer

In this heated market, a little more patience will take you a long way. We tell our clients that if it's a good deal now, it will be a great deal later. If it's a bad deal now, just pray and hope the market doesn't take a downturn.

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Tags:
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Rainmaker
315,537
Robert Smith
Preview Properties, PC - http://www.RealEstateMich.com - Brighton, MI
SRES, Search for Homes Brighton-Howell-SE Michigan
I have always been convinced that you make the *most* money in a real estate deal with the purchase price.   It doesn't matter if you're a resident homeowner that stays for 2 or 3 or 5 years, if you're putting down 0% or 20%, or if you're an investor.  If you can't buy at the right price, it's an uphill battle.
Feb 17, 2007 12:44 AM #2
Rainer
7,342
Sharon Brown
Property Management - Middletown, NY

I work with several out of state investors.  All work with realtors who understand the business of investing.  Most begin with a market analysis, set a purchase price ceiling.  Those with long term success use their established ceiling price as a hard stop; they are willing to walk away. 

 

Feb 17, 2007 03:23 AM #3
Anonymous
Steven Johnson
I think the trick is earning your money as an investor. The one thing you can always say about Texas is that you have to be the real deal here. If you buy a property for a million you have to be able to afford it because no one is going to bail you out in a year and reward you with a higher price. Plus our taxes are higher. If you want some equity you have to create it through repairs or predictions on an area totally off the map the way East Austin was a few yrs ago. No easy speculation here. Great Blog Dee-
Feb 19, 2007 08:33 AM #4
Rainer
474,958
Teri Isner
Keller Williams Realty at the Lakes - Orlando, FL
GRI, CRS, CIPS

Price paid, holding time and is the investment able to make money are the usual questions we are asked.  What are net profits after all expenses.

 

Feb 19, 2007 01:19 PM #5
Rainer
35,943
Dee Copeland
Copeland Group Realty - Austin, TX
Principal Broker
Thanks Steven and others. It's pretty easy to speculate and the sad thing is that I see more agents calling themselves "investor agents", when they're really just there to facilitate a sale. The client says what they want, so they do it. It's like going to a doctor and telling them you're sick and that you want to prescribe your own medicine.
Feb 21, 2007 11:07 PM #6
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Rainer
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Dee Copeland

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