5 Signs You Need To Walk Away From A Deal
By Paul Esajian on November 23, 2016
Every investor is in constant pursuit of their next big deal. This is especially the case if you haven’t closed a deal in a while. When you are starved for deals your criteria gets expanded and you look at deals you would not normally entertain. This is one of the worst things you can do. As difficult as it may be you need to stay disciplined and only look for deals that fit your goals and make sense financially. In most cases your instincts are a good indicate of whether or not it is time to move on. When you pursue deals with limited upside or too much risk you will end up with regret if things don’t go as planned. Here are five signs that you need to walk away from a deal.
- Numbers Don’t Make Sense. Garbage in, garbage out is a popular accounting phrase. Simply put it means that if you put bad numbers in you will end up with poor results. As a real estate investor you can plug in any numbers you like to make the deal look appealing. You can convince yourself that the deal will be profitable if you increase revenue while lowering expenses. While this looks great when you are making an offer it is a much different scenario when you actually take ownership of the property. The real estate business is driven by numbers. Even the slightest variance can make a good deal look average and an average one look poor. The more realistic you are inputting the numbers the stronger the deal will be. If the numbers are weak it is time to move on and find another deal.
- Too Much Has To Break Right. In almost any business there is a fine line between success and failure. This is certainly the case in the world of real estate. As risky as real estate can be at times there are ways to mitigate your risk. Think about what it will take for the deal to be profitable. If you need the seller to accept a certain price, repairs to fall below your estimates and the sales price to set new market records you are probably asking for too much. The stars will not align perfectly on every deal. In most cases something will throw a monkey wrench in your plans that will put the profitability of the deal at risk. If there is too much that has to break your way you need to take a pass. Things may end up falling in line but it is too risky to find out. There are safer deals out there if you are willing to stay patient and wait the market out.
- Risk Vs. Reward. You should never put all of your eggs in one basket. What may appear to be the deal of a lifetime could completely wipe you out if things don’t go your way. Prior to getting involved in a deal you should always evaluate the risk versus the reward. There is nothing wrong with making a small profit but what you are putting at stake for it? What if things don’t break your way? Do you have multiple exit strategies in place? It is ok to swing for the fences from time to time but you should never put your business at stake. Investing in real estate isn’t some poker tournament where you push your chips all in. If you lose all your money you can’t re-buy and wait for the next property to come along. If you feel the deal will leave you overextended without justifying the return you have to walk away and wait for a better situation.
- Pressured To Close. There is always at least a little sense of urgency on every deal. However you should never feel pressured to act. Think about who is pressuring you and what their motivations are. A selling agent may want you to move quickly because they don’t want you to change your mind. A fellow investor may be hiding a flaw with the property they don’t want you to find out about. A business partner may have an ulterior motive for wanting you to get involved in the deal. Constantly moving the deal forward is expected and understood but being pressured to act without diligence is a completely different scenario. Most professional investors will give at least a day or two to investigate the property. If you are only given a few hours to act you should take this as a sign to walk away.
- Not Sure What To Do. Real estate investing is too difficult to simply purchase the property and figure it out as you go. A deal may appear great on paper but once you take ownership you are presented with issues you never imagined. Without having a firm grasp on the deal, property and exit strategies you need to take a step back until you do. The risk of getting involved in a deal that doesn’t make sense is too great to act without a plan. You don’t necessarily need to know every move to make with the property but you should have a general idea of what you intend to do.
Sometimes the best deals you make are the ones you walk away from. Walking away is never easy but you need to have conviction in your purchases. If there is any doubt you could be setting yourself up for disaster.