Run Away! – How to Get out of a Bad REI Deal Quickly
The biggest problem with most investments nowadays is letting emotions get the better of you. After months of searching, people get so invested (so to speak) in a property they find that they are willing to flush thousands of dollars down the toilet to make the deal happen rather than abandon it for a good deal. They mistakenly believe that pure emotional investment can turn a bad deal into a good one, which is NOT the case.
Suppose you spent a great deal of time and effort to find a profitable flip and you finally pinpointed a property. However, the more research you do into the property, the more you realize you can actually lose money on this deal. So what do you do?
The first problem was… not coming to The Investor's Edge in the first place.
We evaluate every deal thoroughly and run it through our specialized software – The Advanced Deal Analyzer. This takes into account all of the potential risk factors and deal killers and even projects an overall estimated profit on your deal. If your deal isn’t projected to make at least $10,000, we don’t approve funding on the deal. This saves both you and us a great deal of time and money by weeding out the bad deals so you can focus on finding properties that will generate the largest profit for you.
The second problem was… believing there was a “magical deal.”
Like so many who enter the lottery, we share a mindset that somehow we will be the exception to the rule – we’ll be the one to win the jackpot in spite of all the odds stacked against us. Many who invest in real estate, especially those just starting out, mistakenly believe that they will be the one to find the golden property which will guarantee a giant return on their investment. The most important thing to understand about real estate investing is that there are no guarantees. Like any investment, there are risks involved. You can still lose money in investing if you’re not careful and if you’re too emotionally involved in the deal. But instead of being crippled by this fear of losing money, you can still invest with confidence as long as you do your homework on a property and work with a hard money lender who has your best interest at heart.
You can invest in any deal as long as you have the following 3 keys:
- Thorough research on the property and what you can afford – As you search for a property, it is important to keep in mind the items which can potentially kill a deal: poor location, crime/vandalism history, fire damage/meth/mold, foundation issues, etc. It is also important to have a cash reserve when you start investing – we recommend $3-5k to start so that you can have earnest money to put towards the investment deal.
- An excellent hard money lender – The best lenders will not lend on every deal. The best lenders will also walk you through the process, step-by-step, to make sure you know exactly what you’re doing and what’s involved. They also will not be concerned with your credit score – since hard money lenders lend on the quality of the property and not the borrower, you can still get pre-approved for a hard money loan.
- A strong exit strategy – As with any investment, it is essential to have an exit strategy in case things go south. A poor exit strategy will be wrapped up in fear and do nothing due to emotional investment. An excellent exit strategy will be based on fact and numbers, not dwell on the past but be focused on what action the present and future call for.
Let’s go back to our original scenario: You just spent months looking for a lucrative property and found one you believe will make you a lot of money. However, as you collect the data from the independent evaluations and do your research, you realize that this deal is not in the best area, is located on a busy street and the market has been going down. The property is perfectly fine and going for a steal of a deal, but the circumstances surrounding it aren’t the most ideal. What do you do?
The most successful real estate investors know when they’re in a less-than-ideal deal and they get out as fast as they can. Regardless of the time and money they spent previously, they refuse to waste any more on a deal that they know won’t turn a profit. Too many less-experienced investors choose to hold onto that property that took them months to find and hope for a miracle. That kind of thinking will get you sucked into a money pit faster than lightning sand in the fire swamp. Learning to exit a bad deal quickly will help you cut your losses, prevent future losses and move on to the next, more lucrative deal.
How to Get out of a Bad REI Deal Quickly
There are two ways to get out of an REI Deal: The Offload-Loss Strategy and the Exit Negotiation Strategy
Offload-Loss Strategy: This strategy helps you determine your risk tolerance. You begin by determining how much money you are willing to lose on any given deal. Basically, how much money can you lose and still be able to sleep at night. This should be your maximum deposit on a deal. Once you’ve hit that mark, you have to execute this strategy and exit the deal. For example, suppose you invest in a rehab project you are planning to sell for $140,000, giving you an estimated net profit of $27,000. A month or so in, you realize that the comps your evaluators used to estimate the ARV were way off and the house will only sell for around $130,000. Later, you discover that there was a great deal of water and termite damage to the property that wasn’t caught during the inspections, which will cost you an additional $12,000 over your rehab budget. At the beginning, you set your loss limit at 10% of the deal, or $7,000 of your investment costs. At this point, you will have a projected loss of $9,000 if you continue with this deal. It’s time to, as the Monty Python boys say, “Run away!”
Exit Negotiation Strategy: Negotiation skills are crucial to success in real estate. When you discover you’re losing money on a deal, you need to effectively become a motivated seller. One of the best ways to exit a retail deal without it being a total loss is to wholesale the deal. This way, you sell the property to someone else who will rehab and resell it and you can walk away with a portion of the profits. For example, if you secure a property for $50,000 and find a buyer who will take it off your hands and rehab it for $60,000, the buyer walks into instant equity and you get to be rid of the deal and pocket $10,000.
The Most Important Thing to Remember…
Always remember that every REI experience, good or bad, is worth its weight in lessons for success. Not every investor will get everything perfect right off the bat, but the mistakes made and obstacles overcome prove to be phenomenal learning experiences to make even more money on the next investment and know which pitfalls to avoid. Whatever you do, stick to the numbers. The numbers will never lie. If the numbers don’t make sense and the deal is bad, don’t stay invested in that deal. Run away. In so doing, you’ll be running towards greater opportunities ahead, rather than mourning what you left behind.
See how all of this works by attending our next webinar.