Lesson from Today’s Hunt
We have a pool in our backyard and two ducks often hang out here. We also have a pool fence to keep out small children.
Today, before writing this email, I woke up and let Charlie, my English springer, into the backyard as usual. By nature, he is a hunting breed. Ducks especially.
As I followed him out I noticed the confrontation – he was chasing and attacking one of the two ducks who made the error of being on the wrong side of the pool fence.
So it began, me chasing Charlie, Charlie chasing the ducks. Each time I separated Charlie from the duck I hoped the duck would fly away.
Instead, the duck tried to lunge and fly toward the water, bouncing off of the pool fence with each attempt-and right back into the danger zone of the dog.
Luckily for the now-injured duck, Charlie did listen to my command to go back inside.
Charlie watched from inside as I guided the now-flightless duck and it’s mate out of our backyard on foot. Both ducks survived the encounter.
The Lesson – What Always Worked, May be the Thing that Bankrupts You
The first instinct of both ducks when Charlie ran outside was to try and get to the water. Safety would have been better sought by simply taking flight and getting above the danger.
As I reflected on this error in judgement, I realize that the ducks likely jump off into water all the time to avoid the occasional coyote or rattle snake (both live in the area near my home). That was the thing they’ve prob done 100 times to easy success (survival), but almost cost them their life.
But the Bankruptcy?? Let me explain
Right now many large apartment owners are teetering on bankruptcy, praying for interest rates to drop back to maybe 4% so all of the deals they’re currently stuck in will be able to refinance.
It was this one action, repeated 100 times with success, which placed these operators in their current difficult situation:
Buy a building, raise rents, refinance and pull out as much cash as possible to buy the next building. Repeat. Same strategy for BRRR investors.
The same thing that made them rich may actually make them poor. Or certainly a lot less rich.
Office building owners have experienced the same thing. And many other asset classes over the years.
In 2008, when values collapsed, it was the 10-100 house single family rental operator who faced the large evaporation of their wealth. Along with many developers.
What About House Flippers? & Brokers? What is the action You’ve Done with Success 100 times that might Bankrupt YOU?
It might be how you’re using the MLS to evaluate your After Repair Value & analyze the market.
For the past 15 years, we’ve enjoyed a mostly stable and increasing real estate market. This type of market will forgive mistakes around inaccurate forecasting of the finished value, the resale price, of your fix & flip deal.
If you think a house is worth $200K, and you’re wrong and it’s only worth $180K or $190K on the day of purchase, you might be saved in an increasing market. If that market increases at 5% per year, it might actually be worth $200K by the time your renovation is done.
In a declining market by 5% per year, the opposite can occur. You think the house is worth $200K and it’s only worth $180K or $190K on the day of purchase. Going the opposite direction, that house might be worth $180K or $170K by the time it’s complete.
Be aware the the way you analyze a market MUST change if your market changes.
How to Beat the Market
If you’re flipping houses, the 5% change in price is not a major factor for two reasons:
- Superior Product – If you’ve done a nice job, buyers will pay more for a better product. Renovated houses usually hold their value long enough for you to exit before downward trends affect pricing. If your product is not superior, and you’ve done a marginal job on the reno, you might get hurt.
- Speed of Sale – Get in & out of every renovation as fast as possible. If you can enter & exit a flip in 6 months or less, the risk of a downward trend in the market is greatly reduced.
In conclusion, what is that one thing you’ve done over & over, and it’s worked, that might stop working? Â Being aware of this, looking for this, might help you spot the market change in advance and allow you to manuever your business to remain successful. Lest we need to take a moment of silence to honor & remember past success….
A good book worth reading on this subject is Who Moved My Cheese?
Here are 32 properties for sale, many work for fix & flipÂ