I have never been a huge fan of the status quo. While I have some appreciation for the mundane, I would rather blaze my own trail than do things as they have always been done. Interestingly enough, this really comes in handy when approaching investment properties. Doing what makes sense to me may not be the status quo, but it makes me feel comfortable.
Recently, I was looking to close a deal on a 32 unit apartment complex. When asked by my agent how many of the units I wanted to look at, I remarked, “Uh, all of them.” He seemed taken aback by this, and then mentioned that taking a sampling of the units was the status quo. Perhaps looking at five or ten and then extrapolating what the other units look like is a tremendous timesaver. Lucky for me I had all the time in the world.
Interestingly enough all but four units actually looked good, but those four units looked really bad and had a material effect on my offer and the amount of concession I asked for. Looking at all the units would have saved me about $8,000 had I closed this deal. Even as an investment banker, I cant make $8,000 for three hours worth of work.
I will also take this brief interlude to point out the inherent conflict between realtor and investor. That extra two hours actually cost my realtor about $380 (3.5% x $8,000), plus two hours of actual work he could have done securing additional deals. Clearly the status quo worked in his favor. I don’t mean to suggest that is why he mentioned it, but I do mean to suggest that it is harder for him to work in my best interest when our incentives don’t align.
As investors it is important to remember that a deal and all of its components must make sense to you. While the status quo is surely there for a reason, it may not be in your best interest to follow the status quo. Many first time investors or investors who are unsure of themselves fall back on what most people do, assuming they are making a safe choice. This may not always be the case.
Great investors seek to understand why the status quo is in place and then act in accordance or contrary based on how well it meets their needs. If the scenario were for a 1,000 unit property (hopefully, it will be in a few years), I might have acted differently. Clearly I would not go through every unit, but I would certainly have several people from my team view everything. That is the way I invest.
A final scenario that shows this even better is the signing of binding agreements. To protect myself I avoid signing any agreement (except the agency agreement) before the due diligence period is over. This is a pain in the neck for my mortgage broker, but if something goes wrong I can exit the deal without any encumbrances. If that means I have to pay a little extra for a fast appraisal or I have to negotiate a longer closing period, it’s worth it to me. I have saved far more than I have spent with this policy.
No one can become great doing what everyone else does. There are times to go against the grain. Understand there are costs to this as well and make sure you are willing to pay them. Reputation and trust play a role here as well. Contrarians, who disagree for arguments sake or for pennies, will find it hard to find good people to work with. Seek to have a reputation of hard, detail-oriented, and fair investor and it will be easier to find fair honest people to work with.
Brian Brady says:
Some Freakonomics at it’s best.
June 19, 2007 — 7:40 am
Jeff Brown says:
As long as your behavior is backed up with rational thinking, and the post examples were easily rational, I wouldn’t even consider it contrarian. I’ve actually had to insist with my own clients – “look at every single unit interior.” Geez
You’re not difficult in any sense of the word – EXCEPT when compared to the average investor who sheepishly goes along with the agent who just doesn’t want to ‘waste’ his time doing his job.
Contrarian my rear end. You were just demonstrating evidence of having an IQ with three digits before you hit the decimal point. 🙂
June 19, 2007 — 8:53 am
Cathleen Collins says:
And when you sign that agency agreement, Michael, you should still be able to exit “without any encumbrances” (unless of course there’s a specific transaction in play that the agent introduced you to). Your agency agreement should include a firing clause. Any agent worth his salt should be confident enough to say, as Russell Shaw does, “If you’re not happy, FIRE ME!”
June 19, 2007 — 10:40 am
Doug Trudeau says:
Michael – Well put. This is another example of good service, due diligence, and making the best decision all rolled up in one. Takes me back to my repeated 6 P’s; Proper Prior Planning Prevents Poor Performance. A few minutes or hours now an save days or weeks later.
June 19, 2007 — 11:02 am
Russell Shaw says:
Ditto on the welcome back. Your insights are brilliant.
June 20, 2007 — 11:47 am
Erion Shehaj says:
“No one can become great doing what everyone else does”
Michael, that is an outstanding statement. But to qualify it, different is not always better! One has to find that balance between feeling secure that you are making a sound financial decision as an investor and risking to appear less than serious in the eyes of the seller and/or associates.
June 20, 2007 — 1:12 pm
Chris says:
Michael nice to see you back! Great post and excellent insights!
June 20, 2007 — 4:16 pm