How to Analyze Risk in Real Estate Deals

Before we had to start a frantic search for a new real estate partner on the two real estate deals we were working on in August we circulated details on one of the deals to some people who had previously expressed an interest in investing with us.

At the time, we were simply gauging people’s interest because we were seeing some really good opportunities and wanted to line up a few other people to work with in the coming months.

The one deal we were working on was really attractive in terms of immediate returns, and in it’s 2 – 4 year ROI. In fact, within 4 weeks of closing we’ve made $8,000 on that deal, and will be making $500/month each month in positive cashflow. Plus, we’ve got a locked-in Annual ROI of 13% that can only go up.

And there are multiple exit strategies and options for this property in the future if the current strategy falls through. It’s an awesome deal.

Because it is such a good deal we wanted to show potential partners what was possible. Many people were interested, but more than one person responded saying that the deal sounded too risky. One of my friends, someone in the real estate industry in Toronto actually said “sounds way too risky for my first deal”.

I was truly shocked. Real estate deals just don’t come with much less risk than this one.

Honestly, even though it’s a down market, this was such a desirable property that we could have flipped it for a small profit! Buyers were literally waiting for the deal to fall through – anxious to grab it from us.

But, the thing is, everyone views real estate risk differently.

And, likely we spend too much time presenting potential pitfalls of a deal but we always strive to undersell and over-deliver. It’s one secret to happy real estate partnerships. And if someone perceives a deal to be too risky we don’t want to partner with them and have them losing sleep over it. So it’s not a bad thing that people weren’t interested in the deal, but it did make me stop to think about how we could better present potential risks in the future and how you can measure and evaluate risks involved in potential real estate deals.

So … I dug into my notes from the books I’ve read and the courses I’ve taken. The one thing that kept coming to the surface for me was this tool that Keith Cunningham shared in his Business Mentoring program that I took earlier this year. The tool is intended to be used to evaluate potential businesses to buy (he specializes in buying floundering businesses and turning them around), but I think it works extremely well for real estate investing too … I created this video to show you how it works. You can also download a one page summary of the tool below.

Download the One Page Summary of the Risk Analysis Tool:

Downlad Real Estate Risk Tool

Published on October 8th, 2009

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