Identifying a Really Good Deal involves Setting Emotion Aside… at least in the First and the Final Analysis

We are probably experiencing the greatest “buyer’s market” in real estate in more than a generation.  For a buyer, this is probably the perfect storm.  Ridiculously low interest rates… REO (that is, foreclosed properties currently owned by lenders) properties continuing to dominate the market… list prices pushed downward by a continuing stream of distressed properties… short sales… Fannie Mae… Freddie Mac… HUD homes… all competing for a buyer’s attention.  Whether the buyer intends the purchase to be his or her principal residence, or the buyer is an investor who recognizes the opportunities this market presents, it is solid analysis that identifies great opportunities.  And in that analysis, there is little room for emotion– at least when a prospective purchase is first identified.

I have increasingly begun to represent first-time investors or investors who are in the beginning stages of building up a real estate portfolio.  Many of these people have worked very hard to build a solid credit history and accumulate some cash or other assets.  They know that placing their money into money market funds, CD’s or mutual funds can hardly be considered putting the money to good use.  There may be some security, but there is hardly any return on investment at all.  Those who had struggled and sacrificed to accumulate decent balances in 401K’s and other retirement savings may have seen those balances decrease significantly in recent years, reducing what had been considered conservative investments to a fraction of the owners’ goals and expectations.   And, of course, many people have seen the values of their homes decline with the other markets over the last several years.  There has been more than enough suffering to go around.

But the real estate market has been showing signs of reaching “a bottom” in recent months.  (Scroll back to the previous edition of this blog for details.)  The financial publications have been buzzing lately with the notion that this is the time to enter the real estate market, and many large and small investors, as well as owner-occupants, have begun to cautiously wade into the water.

As I work with new investors, one issue presents itself frequently.  New investors have a tendency to look for a home based on emotional factors first, and then try to force the financial analysis to support their conclusions.  It’s really only human nature, and it may even have commendable roots in the Golden Rule.  After all, if you are going to buy a property to offer as a rental to someone, it should be a home that you would live in yourself, shouldn’t it?  As a general proposition, the sentiment is laudable.  But as a primary factor in determining the suitability of a property as an investment, this mindset can be a big mistake.

In the next installment of this blog, I will conclude this discussion of approaching real estate and home buying in general with the right mindset.  That installment should be available on or around September 1.  In the meantime, if you have any questions, or I can assist you in any way, please do not hesitate to contact me.  You can do so via my web site: http://www.EricDorerRealEstate.com.  You can also search thousands of listings in the greater Charlotte area free of charge on my site.