• Ryan Luby

Analysis Paralysis



There is a common phrase in investing and in real estate investing specifically called analysis paralysis.


It's exactly what it sounds like. Analysis paralysis refers to a case where someone is actively trying to take action investing, whether it is their first house or their 50th... and rather than quickly evaluating the investment, running the numbers, weighing the risk, and taking action, a person chooses to continue evaluating the investment from all angles. Checking into this and that, but never actually taking action to attempt to buy the house. It is a common trap because like any investment there is a risk in taking action. And to counter that risk you need to evaluate your opportunities. But there is a sweet spot in the evaluation process. A point of diminishing return.


Some of the best real estate investors are capable of evaluating properties, sight unseen in less than five minutes. This is not a coincidence. This is a conscience choice. A good investor understands that one of the most important factors to evaluate in any investment is time. Sure a great investor could evaluate each house for an hour or two and get extremely precise numbers, calculate specifically every dollar that will be spent, where it will go, and why. But a good investor understands if they take longer than five minutes evaluating a house they are getting to the point of diminishing returns. Where every second they spend without offering on the property, they are missing out.


If you notice a property is listed for $125,000 and you can see from pictures it needs work, you start digging into the numbers. You have two choices. You can evaluate what the house will roughly sell for, the ARV (After Repair Value) let's say it is $195,000. Then very roughly calculate the work needed based on photos. Needs a kitchen (12k), two bathrooms need to be re-done (8k), paint throughout the house (6k), needs new flooring (8k), appliances (2k), and you know the home has a septic and a well so you take your rough repair total (36k) and add 20% in case you may need septic or well repairs, and to cover any other unexpected costs, including financing. So we're at a total repair estimate of around $45,000. For a house like this I want to make around $50,000 in profit so, now that I have all my numbers I can do the math to find my offer price. (ARV-Desired Profit-Repairs=Max Offer) $195,000 - $50,000 (profit) - $45,000 (repairs) = $100,000. So now I know the most I can pay for the house, to still have enough money to cover repairs and make my desired profit. I don't hesitate, I give myself a little room for negotiation since I don't know how much the seller needs to sell their house, I send over an offer right away for $87,000 (well below my max offer amount.)  Likely the seller gets back to me with a counter or some feedback, and then the negotiation starts.


On the other hand. I could have really dug into prior listings, and dug up any info I could find at the town, called septic companies in the area to try and pull old reports for this property, gone on Home Depot's website to calculate exactly every dollar I would spend to get a more accurate repair value.. but.... all the while. Someone else might have ran the numbers in 5 minutes and made an offer for 87k... and now they are in negotiations to purchase. And I'm still stuck looking at the numbers to get a more accurate offer, meanwhile the other investor just did what he needed to get rough numbers to get started, then offered well below his max offer and now he will likely buy the house. The nice part is, the investor who didn't hesitate and made the offer will be able to continue evaluating the property even after he makes his original offer. Best of all, if the seller agrees to a price.. that investor now has time to evaluate everything, including getting inspections without the risk of anyone else swooping in and stealing the deal.


This is all very useful for real estate, but the same principles apply to life.

Analysis paralysis actually runs rampid in most of our lives.


The reason that hesitant investor, hesitated in the first place is because he kept thinking about the potential cost if the house had asbestos. Also the roof doesn't look great so that might be a big expense. And the market is ok now, but he is thinking about where the market will be in about 4 months when he wants to sell the house... Which is why he never gets the offer out fast enough.


He is overly concerned about steps 10,11 and 12 in the investing process.

On the other hand, the investor who acted fast didn't even take those later steps into consideration. The good investor was solely focused on step 1. Check the ARV.

Once he completed that, he moved to step 2, evaluate the repair cost. Then step 3, Then  4, and so on..


A number of people do not work out as often as they would like because they are thinking about how difficult it is to be 10 minutes into a session on the elliptical... or how annoying it might be to get sweaty early right before work... but that mindset is focused on steps 10, 11, and so on.. But step 1 is get dressed and put your shoes on. Could you do that?


Good. Now step 2 is get your keys or bike. Step 3 is go to the gym, or wherever you exercise. Step 4 is warm up.. Nothing complicated so far.


It sounds oversimplified because it actually is overly simple. That's the point. If you make it more complicated by focusing on later steps, you will never take action.


No one would expect a college freshman interested in the medical field, to think constantly about how to perform brain surgery... brain surgery is like step 200 for them. And imagine the stress and frustration if that student truly thought about how to perform brain surgery every day. Not only would that student have a tough time ever getting into medical school, but they might have a tough time getting through any of their undergraduate courses. They might even change their major or stop going to school at all because they get so discouraged that they know they can't do brain surgery right now. But reality is they shouldn't know, and they don't have to. They just need to know step 1. Go to today's class. Do today's homework.


You can't make money on a real estate investment without taking action on step 1 first,

You will never come close to brain surgery if you can't focus on doing well on the homework you need to do today, And you will never start exercising if dwell on how hard it would be to run a marathon.


It doesn't matter what you do, if you are focused on how to do steps 4, 5, 6 or 10, and 11, or anything other than completing step 1. You are setting yourself up for analysis paralysis.


Step 10 is always more intimidating than step 1, and without step 1... nothing else matters.


Simplify your life. Don't turn easy tasks into overwhelming mountains.


Just figure out what the first step is. Then do that without much hesitation.


Learn more on this:


Article: Investopedia

https://www.investopedia.com/terms/a/analysisparalysis.asp


Article: The Art of Now

https://www.psychologytoday.com/us/articles/200811/the-art-now-six-steps-living-in-the-moment


TedTalk: One Step At A Time

https://youtu.be/gLVSD5vFk9w

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Jan 20, 2018. GROW created with Wix.com