When You Loose in Your Real Estate Investment
Yes, we often talk about just how great investing in real estate is, how thrilling the rewards are and how it’s the most secure investment. This is true. However, just as with any other business venture/investment, things can go south and you suffer a loss.
So how do you recoup from the situation and minimize your loss you ask? Well keep reading!
Working in real estate or any other business can be like working on a computer and not backing up your files. With computers, as they say, it’s not a matter of ‘if’, but rather ‘when’ your computer fails. And to prevent loosing all your valuable files, a good backup strategy has to be in place. This will turn a major tragedy into a mere inconvenience.
In real estate, sometimes the same principles apply.
If you do enough deals over a long period of time, you’ll probably have one or two that just don’t perform as expected and you might even end up losing money on them. It happens to the best of real estate gurus at some point. Part of the problem is that we can’t individually control the real estate market and other factors, even locally, for the most part.
The other issue is that experienced, successful investors start to think they’re invincible and thus tend to slack off a bit, not doing as much due diligence as they previously had.
Regardless of the reason, here are a few tips to consider when you have a deal that’s going the wrong direction:
1. Don’t Chase Your Dive-in Money
Most times it’s best to just walk away, especially if you already set up an escape clause in your contract, rather than throwing more money into a losing situation.
Often, investors who have pumped in a lot of money into a deal decide due to the fear of losing out, to relentlessly continue to pursue it and pump even more money into the already dicey, headed-for-disaster deal instead of letting go.
Having “escape” clauses in your contract helps a lot. Just don’t become the investor that is known for using those clauses all of the time. You will lose credibility and not be considered a serious investor.
2. Seek Professional Advice
Do up your numbers with trusted experts to see if it currently and futuristically checks out. This trusted expert could be a mentor, lender, or another investor. Even as experienced investors, once in a while we find a deal that sucks us in emotionally, and we have to learn to separate the facts from emotion. It always makes sense to run the numbers by someone you know and trust that has the knowledge and experience to render a valid opinion. For example, a lender (especially a hard money lender) or other investors who don’t think your deal is good, won’t lend on your deal. And there’s usually a valid reason for their line of thought.
3. What’s your Exit Point?
When it comes to business and investing, a lot of sectional, moving parts are involved but in the final analysis, it’s all about the numbers. To be successful, you have to spend less than what you sell a property for and thus make a profit. Offering too much or spending too much to rehab a deal doesn’t make financial sense.
Determining your walk-away point is invaluable, but you have to stick to it, and take that decision as the situation calls for it, without dilly-dallying or endlessly second guessing. In the real estate arena, it’s all too easy to keep pursuing a deal after you have invested a lot of time and perhaps some money into it, it’s like your baby.
Still, better to lick your wounds and spend your time on another deal that makes sense. Easier said than done!
4. Have Multiple Exit Strategies
Having both a Plan A and a Plan B strategy. There have been a couple of times we’ve renovated a property and then the local market decided to take an unexpected dip.
We had several options before us – to sell and the deal loses money, to rent the property out, to sell it on a lease option or to sell on a land contract.
Although we normally don’t get as much initial cash as if we had sold at full price, it can make a break-even or losing deal into a money maker in the end.
5. Stall for the Appreciation
If you’re in a rapidly appreciating market, it might make sense to wait until the increase makes the deal more lucrative. Now this might not work a 100 percent of the time in all scenarios, but it’s been known to work out for many. Before embarking on this course of action, make sure your pockets are not entirely shallow and you have fall-back funds.
6. Bring in a Partner
If incurred loss will be made up in a relatively short period of time after which the deal becomes profitable, it might make sense to take a buffer or cushion move such as bringing in a money or credit partner. Make sure that once the deal is done, there’s enough profit to go around, so that you both don’t end up losing money.
7. Sell at a Loss or Short Sale
As difficult as it is to hear, sometimes selling at a loss to reinvest your remaining funds and time into another deal that will produce the profits you need, might be the best line of action. Especially on a property that is draining you heavily, it just might make financial sense.
The market is prone to change and so making sure that you’re constantly aware of the current state of the real estate market is vital in making the right decisions on what is a deal and what is not.
Be sure to always look at the big picture and consider your options.
If you’ve ever suffered a loss in your real estate investment, keep your head up. Look on the bright side, a win is just around the corner for you, equipped with succinct and relevant information.