the-abcs-of-real-estate-investing-ken LifeFeeling

Chapter Eight: The Big Commitment
The last chapter was all about determining the valuation of a property; in essence,
building your buying case. The Five Step Property Evaluation is like embarking on a factfinding
mission where you search for the information you need to create a snapshot of the
property. I say snapshot, because you really won’t know everything there is to know about
the property. You’ll have a good idea of what the property is all about and a sense of how it
got to be that way. You may even have an idea of how it will perform in the future. But
you’ll know far less than 100 percent of all there is to know. And that’s okay. At least the
picture is concrete and real, based on numbers and facts. There will be time to find out all
the details during the due diligence phase.
Commitments are tough for me anyway. Just ask my wife. Although, thanks to her, I
learned many years ago how to recognize a good thing when I saw one. The same is true for
property. I’ve gotten much better at taking the leap toward commitment particularly if I
follow one simple rule. When I know 70 percent of everything there is to know about a
property, that’s enough to make a decision. To me 60 percent is too little, and if I wait until
I know 90 percent, someone has either already beaten me to the punch or I fall into the trap
of never having enough information to make a decision. As I like to say, analysis paralysis.
Looking back I probably didn’t know 70 percent of all there was to know about my wife
when I made the big commitment. You might say I got lucky. That was marriage. Don’t try
your luck with real estate.
Before we go any further, I want to point out that if after your analysis you don’t think
the property is a good investment, in other words, if the net cash flow is too low, then you
may need to walk away from the deal or offer a much lower price to make the numbers
work. These numbers don’t lie and unless your math is wrong, the estimates you arrived at
are factual. It is perfectly okay to walk away, although you may feel like you did a lot of
work for nothing. But remember, every step in this process is a learning experience, and
with every exercise, every calculation, every building walk-through, you are getting
smarter. The next time you’ll be twice as fast and three times more thorough. Learning is
never a waste of time.
I walk away from most deals at this critical point. I make this statement because by now
most people are emotionally involved in the property and the process and are reluctant to
say no go to a deal. It takes me about thirty minutes to do the Five Step Property Valuation
process once I have all the information I need. I use the numbers and my common sense to
move to the next deal if the one I’m working on doesn’t jibe.
Should you decide the property still looks like a good idea, you’ll find your high level of
preparation will put you in an excellent position for negotiation because you have all the
numbers and all the facts. And believe me, numbers and facts take the emotion right out of
the process. But let’s be real. There may be some hostility on the part of the seller, who
thinks the property is worth far more than you’ve shown it to actually be; that happens
often. But the difference is that armed with the numbers, you are not waltzing into the
seller’s office making an arbitrary low-ball offer. Instead, you are coming in with a wellprepared
case, based on research and facts, calculated with industry-standard formulas, and
a realistic offer number. Kick and scream as the seller may, you’ll both know that the offer
you are presenting is a fair one. It just may take the seller a little longer to arrive at that
conclusion.