Avoiding Driving Off of the Emotional Attachment Cliff in Real Estate Investing

Stepping into the world of real estate investing is like entering a thrilling adventure, but for newbies, the journey often gets tangled between excitement and strategic decision-making. It is common for emotion to accompany a deal, but emotion can be speedbump as well as a turbocharger.  There are a lot of good ways to buffer against this.  By understanding the dynamics, you can overcome frustration and potential disaster.

The Temptation of New Opportunities

For those fresh to the game, the excitement of entering real estate can cloud judgment.   This can often be catalyzed by articles, media coverage and, of course, commercials meant to draw people into real estate investing.  Most of these focus on the success stories which translates to a connection to the desired end state and not the journey to reaching it.  The glitter of potential profits sometimes takes the spotlight, making it easy to overlook the potential setbacks of a deal gone wrong.

This is perilous as it can impact the structuring of the deal itself.  An emotional “this is the best deal ever” perspective can cloud judgement and weaken a negotiation position impacting the merits of the deal itself.  Emotional attachment and sometimes even desperation become palpable, and counterparties, sensing the emotional vulnerability, may seize the opportunity to negotiate less favorable terms.  The attachment short circuits the most important aspect of the negotiation and prevents the investor from walking away.

Sometimes this can be on a price, but it can also include other terms of the deal that invalidate or add to the price due to repairs and of the deficiencies.  For many deals, the real test often comes post-negotiation during inspections or appraisals, where unforeseen issues can add unexpected costs. Despite these revelations, emotional commitment often prevents investors from reconsidering, even when realistic numbers signal a poor investment.

Overlooking Trusted Advice, Especially from Lenders

Every process, especially ones that impact large expenditures of cash and assumption of risk, needs a failsafe to help counteract the aforementioned challenge.  In the world of real estate, this can come from mentors or trusted advisors on your team.  Because these individuals are committed to your success and not to a particular deal, which gives them an important perspective.  They are not looking as this deal as an essential stepping stone to your becoming a big time investor.  The are analyzing the deal, its merits and whether it makes sense.  So many investors view this as an annoyance and not a benefit.

In the heat of deal process, new or journeyman investors may disregard valuable advice from trusted partners to their peril.  I, of course, can speak from the perspective of a lender who sees scores of deals.  Since we are the money guys, we are very connected every component of a particular deal.  As you would expect, we do simply do not do deals lacking feasibility, profitability or just plain practical sense.  So many investors equate our insights to obstacles standing in the way of what they see as a perfect deal that we just don’t understand.  The advice that we give brushed aside by emotionally invested investors who believe their gut feeling outweigh financial, practical and market realities.

I even see some investors approach the lending process with the belief that the deal is so good that we should through away guidelines and our deal analysis in favor of their numbers and skewed risk appetite.  Some emotionally blinded investors even demand terms that shift undue risk onto lenders.  They do not realize that their perceived risk is a direct result of emotional commitment and not common sense evaluation. Even when lenders explain the reason why a deal does not make sense providing not only a failsafe but an antidote to unproductive deal attachment, they shrug it off as ridiculous.

This does not always result in the death of a deal, but in terms that shift their initial assumptions.  It might fit the box to get approved, but when re-analyzed it may no longer make sense from a risk or resource allocation perspective.  In this case, the investor usually believes that the deal is so great that changes in terms do not mean the underlying merits of the deal have changed and they can still make it happen when doing so is the wrong choice.  While this may not result in catastrophe it can actually hinder the journey to success in real estate investing by tapping resources that could be used it better, more profitable deals.

A Bit of Logic and Help Goes a Long Way

In real estate investing, finding the sweet spot between passion and practicality is key. New investors should recognize the potential emotional pitfalls and actively seek advice from trusted partners, building a team that includes an experienced lender. This harmonious blend of enthusiasm and wisdom ensures a successful dance in the complex realm of real estate investing.  Create and head your own fail safes by building and using a reliable team by your side, especially a trustworthy lender. Their experience and business savvy serve as a much-needed reality check, preventing decisions solely driven by emotional attachment and setting the stage for long-term success.