There are times in the career of every real estate investor that can be looked back on as pivotal. Transactions that went awry, situations that turned bad, and problems that turned up. These are all inevitable for anyone in the real estate business for any length of time. Sometimes they are the reason beginning real estate investors decide to get into another line of work. Sometimes they are the real beginning of a long and successful career investing in real estate.
The clearest example of this sort of make-or-break transaction is a renovated house that languishes on the market. There are many things that an investor can do wrong in selecting, renovating and marketing a fix-and-flip property. Sometimes they have done everything right and the house just does not sell. There are even situations when less marketable houses in the same area sell at a higher price than the renovated home. These are the times when a real estate investor has to know what to do next.
Know The Numbers of Your Real Estate Investment Beforehand
Every fix-and-flip investor should know their return on a transaction. The return on a transaction is a function of both the amount of money they put in and the time it takes to get it back out and into their pocket. Waiting for a house to sell reduces this percentage even if there are no monthly out-of-pocket expenses for interest, utilities or property taxes. Of course, there are always monthly outlays. A property that sits on the market both requires a larger investment while it is taking longer to provide a return.
The real estate investor needs to know these numbers like the back of their own hand. Success means knowing the reduced percentage earned for each month the property sits on the market, and the reduction caused by a current sale at a reduced price. There are online financial calculators that can be used to compute various “what-if” scenarios, but it does not matter if the investor uses a high or low tech method of doing the actual calculation. What matters is that the investor knows the numbers.
Those numbers include any upcoming balloon payments on hard money loans used to finance the transaction. Communicating with a lender about the status of a property nearing the end of a loan term may be a difficult but vital conversation. Hard money lenders in the fix-and-flip sector have probably encountered this problem before. Some may be more willing to reach an accommodation than the real estate developer expects.
Make Smart Decisions About Your Real Estate Investment
Knowing the numbers and the timing of any upcoming events – like the aforementioned balloon payment – is important. These facts can only tell the investor what they should probably have known before they bought the property. What the numbers cannot do is predict the future. The numbers can show the return at the a lower price this month in comparison to the current market price next month. The numbers cannot say if the house will sell at either price or in either timeframe.
The real estate investor cannot tell this either, but they can evaluate the emotional toll that pushing for one result or the other will take on themselves. Sometimes this intangible – but very real- cost is too high. A smart real estate investor will get out of the deal at a financial loss before the emotional cost has to be paid. In these situations the lesson to be learned is not to get involved in transactions of that size again. There is value in this that should not be discounted.
However, sometimes this emotional reality check turns up a surprising – and previously unknown – reservoir of inner strength. Some real estate investors discover they can weather storms better than expected. Some investors go so far as to take a significant loss on a project while still remaining committed to a real estate investment career. There is value in this lesson too.