Use your time wisely
I took a call from an old friend last night. She was asking me for some advice about a property that she wanted to buy.
It was a small, old run-down house (I know right! The cheek of calling me and asking me about residential) that was going to auction at the end of the week.
Small… old… ugly… with bonus asbestos.
Not ideal – but it was cheap, so it had that going for it.
She told me about the research she'd done in the area and how houses in that area for that price range would be on the market for no more than a week, then they were gone.
It was a high pressure situation.
She really didn't want to miss out.
…and to me, that was the issue.
Her idea for the property was to subdivide like a battle-axe block and either sell off the back or try and refinance and build.
Sounds alright in theory.
The numbers were more or less sound.
Only trouble is ?here were all kinds of information she needed to know to be sure… information that she didn't know.
How much was it going to cost to subdivide for instance?
Typically if everything is perfect it might cost her $30k… But I've seen deals go totally pear shaped because of drainage and sewerage which blew out subdivision costs to $200k.
Boom there goes the profit margin.
Building issues, soil issues, zoning issues…
It's a bag of monkeys which you need to wrangle before you jump into an auction.
But, as I said, she was adamant she didn't want to miss out. It's hard to be the one that's the downer but also, I care, and I don't want to see her throw money at a deal if she doesn't know if it's going to stick.
That's the one thing I see much less of in commercial – especially amongst the circles I move in.
This is for two main reasons.
1- There's far less emotion.
I drum this into my students all the time – it's all about the numbers. There's no place for emotion. You don't get to indulge your fear of missing out. If the numbers work – good, if not, you're out. Simple.
2-The other reason is that you can make a sift offer on a property to see how much room there is to move.
You can put on a contract to lock down the deal but have your contract packed with escape clauses that give you more time.
The point of these clauses is to give you time. To find out all the details – good and bad about the property and make sure that it's actually going to work for you.
You need to make the most of that time – find out everything you can. Talk to professionals, building inspectors, your legal team, your accountant, your surveyors, the council… whoever you think you need to make certain that you know what you are signing up for.
Not doing detailed and thorough due diligence is one of the biggest things you can do to add risk to your deal.
Going back to my friend. Her emotion is one thing… it was pushing her to rush…
But it's the result of that rushing where the real danger lies.
She won't get all the information, she'll miss things, she'll add risk… it might work out (which would just be down to luck) or it might not…
… You have forced errors and unforced errors…
Unforced errors come from ignorance and lack of education, forced errors come from rushing and letting your emotions make decisions.
It's only a cheap property, but if you make these kinds of mistakes at this level – you're programming yourself to also make them when the stakes are higher, so it's worth slowing down, taking your time and minimising risk by reducing the chance for errors.
Why is commercial property such an amazing Vehicle for Wealth and Lifestyle? – Find out on this Webcast. I'll show you the kinds of deals I (and my students do) and the kind of life-changing cash flow you could get when you swap from residential to commercial