How many times have you heard successful investors say, when you’re in a deal and something goes wrong, trust your gut.
I look at a lot of deals. Typically, a deal will come across my desk through a broker or friend and I’ll do a quick back-of-the-envelope analysis. If the deal looks appealing after the BOE, I’ll do a full-fledged model backed by cursory due diligence including market rents, demographics, comparable sales, financing assumptions, and anticipated capex. If the investment returns are strong, I’ll perform comprehensive due diligence and refine my model.
For each deal, I do countless hours of analysis, but in reality, the deal never works out the way it does on paper.
I was listening to an interview with Peter Linneman by REFM where he discussed that most students have a tendency to say, what the hell am I doing all this analysis for, if it’s never going to turn out this way?
The analysis is not a road map detailing how the investment will play out, it’s the discipline of making sure you understand why you’re doing the deal and the risks associated, so you can make sure you have the skillset to succeed if things go wrong.
Young people often say, if things go wrong, I’ll just use my gut. Well guess what, you don’t have a good enough gut yet. You have to earn your gut.
When you hear successful developers say you just have to use your gut, keep in mind that they did a lot of analysis first, the did a lot of thinking first, and most importantly they have a gut that’s been honed over many years. Sam Zell saying I just used my gut is not the same as a 25 year old saying, oh I’ll just use my gut.
Real estate investment and development is about eliminating as many risks as possible, and if there’s risks you can’t eliminate, make sure you understand them. If something goes wrong, which it will, hopefully you’ve earned a gut that you can trust.