An emotional reaction is the enemy of sound decision making. Emotions, whether positive or negative, can trigger strong responses to situations. In almost all cases, these reactions will be flawed in some way and cause you to make unforced and preventable mistakes. Over the course of 2023, I’ve learned this lesson more than once. As a new real estate investor, especially in the first half of 2023, I made a ton of emotional decisions. I bought properties I shouldn’t have and made a few decisions without processing their full ramifications. This is something I’ve dedicated vast effort to no longer do while simultaneously trying to correct mistakes I’ve made in the latter half of the year. Over the course of a few key emotional decisions, I’ve learned to subdue my emotions and take a more analytical approach to my decision making.
A costly lesson
Lesson: Don’t take unbiased advice at face value and make sure you do your due diligence.
In mid 2023, I bought a deal from a wholesaler I knew and did many deals with prior. This particular deal was in the Tampa market, a place where I was and still am extremely interested in. He walked the property and told me about the neighborhood and how it was up and coming. “The house is in good shape and it’s in a great spot,” he said. Given our relationship, I took his word at face value. Under the pressure of potentially losing the deal, I, along with my partners, decided to move forward. Unfortunately, the wholesaler who’s word I took at face value was of course biased and I don’t fault him for that. He stood to make a good chunk of change on the deal and he didn’t want it to slip through the cracks. Unfortunately, the home was not what we bargained for.
In order to close on the deal quickly, we borrowed money at an extremely expensive rate for a short period of time. We sort of had a plan, but we were looking for the money to execute the plan with little to no knowledge of the area. Time went by and we began to grow desperate. Our initial money came due and began to accrue and more and more interest. We were in a deep hole. Eventually, we had to borrow more money to pay off the first lender and offer even more interest to the other lender all while covering the monthly mortgage on the property. Before we knew it, we were $77,500 deep into the house with no way out. This all came as a result of the emotional reaction we had when this opportunity presented itself. I was really regretting this, and let me tell you, this story is just beginning.
By month three, our plan changed. We decided in order to get the most amount of money possible out of the deal and to protect our private money lender, we need to wrap the deal. This means to find a new buyer to live in the house by owner financing it to them at a higher interest rate than we have in place with the mortgage company. Our thought was to get as much cash out as possible as quickly as we could. There was just one problem….
Unwanted visitors
Over the course of this process, we had several showings. More than one showing reported that there were trespassers gaining access to our property and using drugs inside. We tried to recruit the aid of the police and other local boots on the ground. They helped to some extent, but the problem persisted. Eventually, my partner Nick decided to go down there, secure the home, and install a security system.
Since this occurrence, we haven’t had any issues with unwanted visitors. We actually just entered an agreement with a buyer and are hoping to close the deal within the next couple of weeks. There are so many takeaways from this process, but emotion was the clear culprit to my poor decision.
Key takeaways
Over the course of this deal, my team and I lost thousands of dollars. We also spent a large amount of time dealing with issues arising from this property including physically going out there to install a security system. The deal we ended up taking was the best solution we saw to accomplish the goal of no longer being responsible for the monthly payments while not having to worry about how to solve the day to day issues with the property. We are basically at a breakeven. Our private money lenders made a lot of money, the wholesaler made a lot of money, and we got caught holding the bag. It’s been a tough lesson, but what I’ve learned I’ll never forget.
- Emotion was responsible for this decision. My emotional reaction to wanting to buy in Tampa made this opportunity seem appealing. We took the word of others, oftentimes biased, and failed to do our own due diligence sufficiently. This deal was the definition of a Hail Mary as we had no idea what we were doing from the jump. Our process has become much more refined and emotion free due to this experience.
- No matter what your relationship is with someone, bias is inevitable when they have a vested interest one way. Seek the advice and feedback of those who are inclined to have your best interest in mind and get as much feedback as you need in order to piece together the puzzle.
- Understand the best and worst case scenario for every decision before you make it. Especially in real estate, things will go wrong. You will have to deal with some turmoil. What is the worst possible outcome you can think of in the scenario you’re about to put yourself in? Are you okay with it if it happens? If not, it’s probably too high risk to take on and wouldn’t be a sound decision.
- At the end of the day, emotions are the enemy of sound decision making. It’s great to get excited for opportunities, but don’t let it cloud your judgment. Make decisions based on cold, hard facts. Don’t compromise on this for any reason.