“You got to know when to hold ’em, know when to fold ’em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.” ~Kenny Rogers, The Gambler
This iconic Kenny Rogers song is notorious in poker rooms across the country, and has undoubtedly played on a loop in the heads of many gamblers as they contemplated their next move in a game of Omaha or No-Limit Texas Hold’em. However, the advice found in the lyrics of Roger’s Country Billboard Music chart-topper reaches far beyond the world of old western saloons and smoke-filled poker rooms. In fact, this infamous chorus should be the mantra of every savvy real estate investor worldwide.
It’s easy to walk away from a bad real estate deal, much like folding a 7-2 off suit in poker. It’s also easy to move forward on deals that are slam dunks, like playing a flopped full house all the way to the river (please forgive the poker references for those who have never played). It’s the ones in the middle that get you, the hands that really could go either way, and the real estate deals in which you’re uncertain whether you should pull the trigger or just walk away.
A few years back, I placed a house under contract on the Northeast side of my hometown of Pensacola, FL. This lady had called me 2 years prior, and rejected my offer of $70k. A year later she called again, with the house still sitting there, and this time I offered her $60k. She rebuffed my lower offer, and once again disappeared off the radar. After a few months she resurfaced, now slightly more motivated and willing to consider an offer of $62k, and so we agreed to meet at the property to sign the papers.
After walking through the house, and making a cursory inspection, it was revealed that the home also had aluminum wiring. Deal killer, right? Nope, the seller actually agreed right on the spot (in the driveway) to reduce the contract price another $6,000 to $56k. So, we signed the contract and I scheduled a more thorough inspection with my contractor and JV partner the following day.
The contractor pointed out a lot of little things that were wrong with the house, which by themselves were no big deal. However, the seller’s attempt at being Bob Vila (the do-it-yourself superhero) had basically destroyed a good part of the house, and most of his work had to be completely ripped out and redone. The renovation costs began to mount, and it was becoming apparent that after chasing down this seller for nearly 2 years, I was once again going to have to let it go.
The hardest thing for many new investors to do is walk away from a “deal”. They are so desperate to get that first deal, that first victory, that first testimonial to share at the local real estate club…that they are oftentimes blinded to the reality of the situation. They are so eager to validate their decision to become an investor, and to recoup their start-up expenses, that they will overlook (or intentionally ignore) important repairs, underestimate the costs to improve, and overestimate the after-repair value of the home.
This is why it’s imperative that novice investors are extremely conservative on their first deal. It MUST be a home-run, no-brainer, big-profit deal, or they should walk away. If beginners bite off more than they can chew, and the deal turns south, they will probably never make another real estate investment again, and will sadly avoid the greatest vehicle to wealth creation our country has ever known.
It’s OK to make a mistake, as long as it’s not a fatal one. That’s why it’s advisable for all new investors to start their business as a wholesaler, where they never have to take title in their own names, and they can avoid some of the pitfalls and greatly mitigate their risk early in their careers. Then as they become comfortable with running their numbers, and build some confidence in their understanding of the market, they can branch out into renovations or rental real estate with the knowledge and expertise necessary for success.
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What are your thoughts on today’s post? Have you ever had to walk away from a real estate contract? Share your thoughts and experiences below, so we can all grow together.