Investor Mistakes: Making decisions with our heart and not our head.
By Arn Mehta
Making decisions with our heart and not our head. We’ve probably all been guilty of this at some stage in our lives. Becoming emotionally attached to something that leads us to start acting in such a way can cost us in many ways and it’s no different when it comes to a property transaction.
For most of us, a property transaction is likely to be the biggest one we will undertake in our lives. For some of us we may only do this once. For others, particularly those of us that are looking to grow a portfolio and or trade properties, we may do this many times over. If we are making decisions purely based on emotion, rather than logic, this could quickly begin costing us tens, if not hundreds, of thousands of dollars.
We once met a client in our early days of selling real estate. She had been to a property seminar and thought that investing in or trading property was a good idea. She was ‘cashed up and ready to go’. The good thing was that she wasn’t going in the property game blind. She had read some books and had formed a good peer group, so already had an advantage over the majority of those entering the property market and not knowing what to do (which is completely understandable as you don’t know what you don’t know).
What was becoming a problem was that in her own mind she was a property failure. Why? Simply because in the three months since she had been to the seminar, she was yet to “do a deal”.
If there is something you will probably hear us say a lot at AssetLab is that it is so important to remember that Property Investment is not race. There is no first place. There is no prize awarded. And if we do want to think of it as a race, it is more like a marathon rather than a sprint.
So, back to our client… Three months in and no deal. Frustration had clearly settled in and so too had emotion. Some of her peers and friends had done a deal but not her.
I have heard and seen a lot of things during my career as a real estate agent but I’d never heard the following words other than this one time.
She came into the office completely distressed and almost in tears. After some discussion she said to both Phil and I;
“I don’t care even if I lose money on a deal, as long as I have done one”
We were both gobsmacked. How can someone get so worked up that it would to lead them to say something like this? She simply wanted to renovate a property and put it back onto the market and didn’t even care if she lost money. I’m sorry, but that is beyond my comprehension. We could have sold her anything so long as it had “do up potential”.
As we didn’t have what would’ve been deemed a deal at the time, AND the fact that our conscience wouldn’t allow us sell a property to a prospective client that we knew would lose her money we simply didn’t end up selling her anything and advised she may be better suited to another agent. We don’t know how that story ever finished but that is the problem with putting yourself under immense pressure and losing all rational thought.
I’ve also seen and experienced instances where some investors and/or traders have spent too much time renovating a property, and the entire project which could have taken one month ended up taking five months. When it has come time to sell the property (particularly in a falling market), not only has the expected selling price decreased, so too have the buyer enquiries. Instead of making $30,000 gross profit, the market was only prepared to pay what would have equated to about $15,000 gross profit.
Because the trader has spent too much time on the project and is beginning to see their profit dwindle, they are not prepared to accept what the market is willing to pay. Add in a few more months in a falling market and all of sudden you are now in a loss position. Pride and emotion have gotten in the way of a rational decision. The right action would have been to listen to the market, do your own research to justify and accept that the profit may not have been what you may have initially hoped for, but it is still a profit. Ultimately the trader ended up losing money because the market continued to fall.
One piece of advice I was given when I first started was from one of South Auckland’s most prolific traders. They said;
“ Arn, I’ve never met anybody who went broke making a profit.”
I have worked in South Auckland for close to 20 years both as a real estate agent and as an investor. I have seen countless first-time investors turn down some incredible deals simply because they didn’t like a few things about the house. It wasn’t something they felt they would want to say they owned to friends or family. They then ended up spending a lot more on something that certainly looked nicer, but ended up costing a lot more and something that to this day, they continue to top up. We ultimately want property to pay us, not us to pay it.
So how do we ensure we don’t become guilty of becoming too emotional? Just remember first and foremost that this is a business. The property is a rental property and not necessarily one that you will live in. It is important that you have your own buying rules and to ensure that the property stacks up as an investment. You don’t need to like the location, the colour of house or the fact the garden and lawns look like they haven’t been touched in six months. The key is, does this work as an investment and is this within my budget?
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
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