Tim Reamer – Cottonwood | Commercial – Harrisonburg Va Commercial Real Estate

August 2, 2015  |   No Comments Yet

Imagine six kids in a circle passing a basketball around when a man in a gorilla suit walks right into the middle and waves hello. Would you notice the gorilla?

Chances are pretty good you wouldn’t if I asked you to count how many times the ball was passed between the children. Nobody that was paying the slightest bit of attention would miss the gorilla, right? And that’s exactly the point, because you don’t think you would, but half of the people that have watched a video of this very scenario missed the gorilla. It’s called, appropriately, the Invisible Gorilla Test, and it was part of a study conducted by Christopher Chabris and Daniel Simmons to illustrate inattentional blindness.

In other words, we tend to think we are taking in information as if our eyes are a video camera and our brain is a DVR when in fact we are only aware of a very small amount of what is going on around us and processing even less. It allows for overconfidence that leads to silly mistakes.

That’s a problem, and it’s one of the reasons that I have made mistakes as an investor that I likely wouldn’t have made as an objective broker performing the same task for clients. As an investor:

1. I’ve Overlooked Key Information During Due Diligence

On more than one occasion the gorilla waved right at me and I missed it. Not in the video, but in the form of underground fuel tanks, easements, and various liens among other items. One time, as a personal project, I was eager to put together a plan to purchase several lots to locate a large fuel station near a small, but growing, university. It made perfect sense—the student population would drive both fuel purchases and inside sales of items like coffee, sodas, and other snacks.

I submitted the idea to the site selector who wrote back a very simple, and in retrospect, very kind sentence, “Isn’t this University associated with the LDS Church?” In other words, the inside sales of high margin items like coffee, cigarettes, and alcohol were likely non-existent, soda sales, while not prohibited, would have been drastically reduced, and just for good measure—most of the students didn’t drive. What’s worse is I knew this—I just ignored it because I was focused on the idea and not the components of the transaction. As a broker, I have a thirteen page checklist detailing all sorts of due diligence items that require attention. It’s reviewed with each transaction, grows longer with each project, and includes a reminder not to be an idiot.

2. I’ve Been Overly Optimistic About the Numbers

When I first started purchasing small residential properties as investments, I put together a budget for the projected rents; operating costs like taxes, insurance, and lawn care; and improvements like painting, roof repairs, and more. The funny thing about those pro-forma budgets is they generally produced a handsome positive net cash flow. The less funny thing about my actual financial statements is they didn’t match the rosy assumptions. They didn’t match for a couple of reasons. First they never match exactly—the goal is just to be reasonably close. Secondly, they couldn’t be reasonably close because I didn’t use reasonable numbers.

As a broker I’ve had the opportunity to review hundreds of financial statements and pro-forma budgets from parties with varying degrees of experience. This practice has allowed me the benefit of recognizing a few common mistakes within the spreadsheets of those with less experience:

• Real expenses such as snow removal, turnover costs, and property management, among others, are often forgotten and when they’re not they are underestimated.

• Reserves are rarely maintained or shown on budgets by those that have not felt the pain of funding an unplanned, but easily anticipated, capital expenditure.

• Budgets for initial improvements or ongoing maintenance generally miss the actual costs by 20% or more and it’s not the contractor’s fault. How could it be? The contractor was never consulted.

I’ve been guilty of all three and more. These mistakes allowed me to look brilliant on paper early on (in my own mind) and less so within my rental accounts later on. After the early missteps, I know I prefer the opposite.

3. I’ve Lost Good Deals Trying to Make Them Slightly Better Deals

On a few occasions, I have had the opportunity to purchase a property at what I considered to be significantly less than the actual market value. I didn’t purchase a single one of them. Why? On each occasion, I tried to negotiate the price down an additional $5,000 or $10,000. In some cases, I believed the property was undervalued by 5-7 times that amount, which is kind of like driving for twenty minutes to save a nickel per gallon on gas, but I just couldn’t help myself. In the end that equity went to someone that wasn’t penny wise and good for those purchasers—because their temptation to negotiate was probably just as strong as mine, but they were smart enough to discuss it with a trusted third party, realize their foolishness, and just pay the reasonable asking price.

The one bit of solace I can take from these mistakes and hopefully you’ve taken from your errors is a finding from a study examining dopamine neurons—when the mind is denied the emotional sting of losing, it never learns how to win. If that doesn’t sound as pleasant as you might like, consider this—a lot of my mistakes, and perhaps yours, could have been avoided with the assistance of an objective and informed third party.

Tim Reamer provides commercial real estate brokerage and consulting services with Cottonwood Commercial and specializes in national retail representation, investment property (multifamily | commercial | NNN), and development projects. Learn more at www.timreamer.com.

SHARE