Wednesday, June 26, 2013

New Real Estate Investor Malady

One of the most common ailments for new investors is what is known as the “Shiny Object Syndrome.” It is an affliction with adversely affects the investor’s ability to focus, and negatively impacts their profit potential. Let’s examine the causes and symptoms associated with Shiny Object Syndrome.

A new real estate investor gets excited about investing in real estate and starts out with the intention of “wholesaling.” “Wholesaling” means buying a property at a low price and selling it at a low price, just like wholesale commodities which are bought and sold to buyers who will then add value before mark-up for the retail market. Wholesaling involves finding the deals. Find the deal and get it under contract, then flip it to another buyer with enough room for significant profit.

The most effective strategy for wholesaling is to find the BUYER first, rather than the property. Most new investors get this backwards. They get so excited about finding “deals” that they think their buyers will automatically materialize when they get something under contract. Not very effective, and here’s why.

Every real estate investment association is filled with investors who buy properties. Many of them buy unlisted properties from other association members who “bird dog” by finding them the properties they want. Find out who in your association is actively buying properties. Then find out what they want to buy. This is known as “building your buyers list.”

For example, I buy single family homes in good neighborhoods in the city of Seattle, that have three bedrooms, two baths, at least 1200 sf, and that retail for less than $400,000. I prefer houses that have some kind of off-street parking, and avoid those on busy arterials or in “war zones.”

So I am not interested when my bird dogs show me vacant land anywhere, houses in Covington or Puyallup, 21-unit apartment buildings, or anything out of state. They may or may not be good deals, but they are not my focus.  However, bring me a lead on a funky three-bedroom single family home in Ballard for under $350,000, and I am all over it! Find out what your buyers want first, then go find it.

Suddenly the new investor is hit with the first attack of Shiny Object Syndrome, as his buyers are not interested in any of the deals he has brought so far. The new investor decides this wholesaling stuff is too hard, and maybe soliciting underwater sellers for lease options would be easier than wholesaling. Off he goes, down a new path!

Well, plenty of underwater sellers, but where are the lease option buyers?

Second attack of Shiny Object Syndrome: new investor hears about how a lot of investors are making money flipping mobile homes and figures he has enough money of his own to buy and sell mobile homes. Maybe he buys one or two, but longs for bigger paydays….

Shiny Object Syndrome is really beginning to incapacitate this poor new investor. He adds attending the foreclosure auctions to his list of activities, but can’t recall whether he is looking for properties for himself? Or for some buyer?

The cure for Shiny Object Syndrome is to keep it simple. Pick a focus. For most new investors, this means finding the deals, and selling them to investors who want them. Repeat, until you have the resources and the experience to do the entire deal yourself.

Stick with the basics and get really good at the path you have chosen. Follow it through long enough to give it a chance to succeed. Ask for guidance from more senior investors. Keep the faith, and close off the exit doors. Be patient and persistent, and you will succeed.

1 comment:

Fei said...

Dear Wendy!

It's Fei here. I can't believe you are the blogger Wendy I have been following!! I love love LOVE your blog. There are many many new investors out there every day, and bumping their heads all over the place, that's why having someone like you sharing your thoughts and experiences is so valuable. :) Can't wait to see you at the next meeting!

XXOO, Fei (& Brian)