8 Tips for Cutting Your Losses in Real Estate
Working in real estate or any other business can be like working on a computer and not backing up your files. With computers, as they say, it’s not a matter of if, it’s a matter of when your computer fails, and you lose all of your valuable, irreplaceable files in the process.
With good backup strategies and systems in place, you can turn a major tragedy into a mere inconvenience. In real estate, the same principle applies.
If you do enough deals over a long period of time, you’ll probably have one or two that just don’t perform as expected and you might even end up losing money on them.
It happens to most of us at some point. Part of the problem is that we can’t individually control the real estate market and other factors, even locally, for the most part.
The other issue is that experienced, successful investors start to think they’re invincible and thus tend to slack off a bit, not doing as much due diligence as they previously had.
Here are a few tips to consider when you have a deal that’s going the wrong direction:
1. Don’t Chase Your Earnest Money
Some investors who’ve put a few grand down on a deal (that all of a sudden makes no sense) have decided that because they don’t want to lose their earnest money, they’ll close on it anyway and try to figure out a way to salvage the deal.
Sometimes the best financial strategy is just to let the deal go, rather than throwing more money into a losing situation.
Having “escape” clauses in your contract helps a lot. Just don’t be the investor that becomes known for using those clauses all of the time. You will lose credibility and not be considered a serious investor.
2. Run Your Deal by Others
It always makes sense to run the numbers by someone you know and trust and who has the knowledge and experience to render a valid opinion. This could be a mentor, lender, or other investors. Good examples are a lender (especially a hard money lender) that won’t lend on your deal or other investors who don’t think your deal is good.
There’s probably a good reason for the way they’re thinking. Even as experienced investors, once in awhile we find a deal that sucks us in emotionally, and we have to learn to separate the facts from emotion.
3. Determine Your Walk-Away Point
Business involves a lot of moving parts, but in the final analysis, it’s all about the numbers. To be successful, you have to spend less than what you sell a property for and thus make a profit. Offering too much or spending too much to rehab a deal doesn’t make sense financially.
Determining your walk-away point is invaluable, but you have to stick to it. In the real estate arenas I’ve been in (including short sales), it’s easy to keep pursuing a deal after you have invested a lot of time and perhaps some money into it.
Better to lick your wounds and spend your time on another deal that makes sense. Easier said than done!
4. Have Multiple Exit Strategies
Having both a Plan A and a Plan B can make a lot of sense. There have been a couple of times we’ve renovated a property and then the local market decided to take an unexpected dip.
We could sell and the deal loses money or we could use another strategy such as renting the property out, selling it on a lease option, or selling on a land contract.
Although we normally don’t get as much initial cash as if we had sold at full price, it can make a break- even or losing deal into a money maker in the end.
5. Await Appreciation
If you’re in a rapidly appreciating market, it might make sense to wait until appreciation makes the deal more lucrative. I’m not a big fan of this, but some investors in higher priced states such as California have done well with it.
Be Aware! This can be a dangerous game and is really speculation, which can come back to bite you. Make sure you have deep enough pockets to be able to do this!
6. Bring in a Partner
Sometimes if the loss will be made up in a relatively short period of time and the deal will become profitable, then possibly bringing in a money or credit partner might make sense. Make sure that once the deal is done, there’s enough profit to go around, so that you both don’t end up losing money.
Sell at a Loss or Short Sale
Sometimes it makes sense to sell at a loss and reinvest your remaining funds and time into another deal that will produce the profits you need to run your business. For properties you already own that have gone “upside down” for whatever reason, you may consider a short sale where the lender(s) on your property allows you to sell the property for less than is owed on that property.
There are several factors that come into play on this (credit hit, seller contributions, etc) that we don’t have time to cover in this article, but on a property that is draining you heavily on a monthly basis, it just might make financial sense.
Keep Educated & Abreast of the Current Market
Just because the market was great a year ago, some factors may have occurred that have changed it. Making sure you’re constantly aware of the current real estate market is vital in making the right decisions on what is a deal and what is not.
Great ways to keep current are attending Real Estate Investor Associations, Title Company and Realtor Courses that are available to investors.
Remember, if you’re in the real estate game long enough, you may run into a deal that started out great but for some reason became slim. I hope one or more of these strategies help you muddle through a deal that has gone or is heading south.
Be sure to look at the big picture and consider your options. Here is to your success!