Sometimes the best deals are the ones you don’t get involved in. One of the most common mistakes in the investing community occurs when investors try to force deals that aren’t there. Getting involved in a bad deal could set you and your business back for months. Additionally, it may cause you to miss out on a real opportunity that comes your way. Walking away from a borderline deal may not be the easiest thing, but it is vital for the health of your business. If you are on the fence about what to do, here are five signs that should identify when to walk away from a deal:
1. It doesn’t fit your plan: Not every deal makes sense for what you want to do. Having said that, any deal that is not within the scope of your business plan may be a candidate to walk out on. Remember, you have a business plan for a reason. Having great success with multifamily investing doesn’t mean it will apply to mobile homes or condominiums. An interesting tax lien property may look good on paper, but if you aren’t comfortable it wouldn’t make sense for you to get involved in. When you entered the business, you most likely made a plan for what you wanted to do and how you wanted do it. There are also cases when a deal looks great, but the timing is just poor. Just learn to recognize when a plan doesn’t fit into your wheelhouse.
2. It is too risky: Real estate investing comes with an inherent degree of risk; this is true whether you are completely comfortable with everything about the deal or not. Just know this: it is time to walk away from a deal when the risk and time involved in the deal becomes greater than the reward. Unless the potential gain is there, it may not make sense to pursue a property of a risky nature. Weigh the risks versus the rewards. If the potential for a successful deal outweighs the risks, you may have yourself a deal. Conversely, don’t be scared to walk away if a deal seems to risky for what you could get in return.
3. It’s not in the right market: You need to be completely comfortable with the market you invest in. If you are not comfortable going to the area, you should pass on the deal. A lot can change in a neighborhood in the matter of just a few miles. It is important to do your homework and know exactly where you are buying. Your due diligence may tell you that an area, which is thriving now, may not continue that way in the future. A property located in a rough area may make it difficult to find tenants and difficult to get top dollar when you decide to sell. Even if you can purchase the property well below market value, you need to think about what you will do with it once you take ownership.
4. It’s numbers don’t add up: Your real estate business should be driven by numbers. In other words, you should have numbers and data supporting your every move. When evaluating a deal, it is easy to fudge a few numbers here and there to make the deal look more attractive. However, in doing so, you are only hurting yourself. You need to be fully confident that you are using the correct numbers, and that they are sustainable in the future. If there is any doubt in your mind that the numbers don’t work, you should walk away from the deal. It is a risky proposition relying on a deal with unsubstantiated numbers. You must conduct your own due diligence to verify the numbers that are being proposed. If there is any doubt, you should wait until you are more comfortable moving forward.
5. You have a bad feeling about it: Your instincts are a very powerful thing. There are times on most deals when your gut tells you to go a certain way. If you have a bad feeling on a property and your instincts are to walk away, you should do so. Getting involved in a deal you aren’t fully committed to will make closing on a deal that much harder. There are times when your gut lets you down, but more often than not it is correct. Listen to what it has to say.
Walking away from a deal is never easy. By making a habit of getting involved in fewer, high quality deals a year, you will keep your business moving forward. Dealing with a stretch of mediocre and even bad deals takes time and energy to recover from. It is not the easiest thing to do, but learning to walk away may be the most important thing you can do for you and your business.