Analysis Paralysis

I didn’t coin the term. I’m not sure who first did. The Analysis Paralysis is a big problem in real estate investing. But first, let me tell you about a patient I took care of last year.

My night in the ER

Ethan is a 55-year-old gentleman. He was getting up to go out fishing early in the morning (when I saw him last year) and he got a sudden onset of chest pain. I know that we healthcare professionals have drilled into the public that chest pain is a heart attack until proven otherwise, but you should know that 99% of people who come in to the ER with chest pain aren’t having a heart attack. We think this is a good thing. Not because it causes more people to come to the ER, but because we would rather treat 99 people with chest pain due to muscle strain or indigestion than have 1 person with a heart attack not come in to the ER.

When you look at it from a doctor’s perspective, that person walking in with chest pain has only a 1% chance of having a heart attack. It is easy to dismiss people out of hand. It is our job to ask details, do an examination, and perhaps tests to change that percent higher or lower. Ultimately, people with a heart attack at my rural hospital will need to have a clot-busting drug called a thrombolytic, of which 7 out of 100 have a serious complication like bleeding in the intestines or brain. A fraction of them will die from the drug.  So, we need to choose very wisely who will have this terrible but life-saving treatment.

Ethan’s EKG was not normal, but it wasn’t the kind that lights fires and sets off alarms. It was almost something that we call a STEMI (a bad heart attack) but not quite. I learned from him that he has sharp pain in the middle of the chest, something that is not usually from a heart attack (it is often a pressure feeling). But Ethan didn’t look right to me. I like to think that physicians who have done this for a while develop a sense of who is sick that can’t be quantified or written in a text book. You might hear one experienced doctor saying to another doctor “He doesn’t look good.” A very non-medical thing to say, but it immediately gives the other physician an image that something needs to be done. Right now. If your typical layman said this same statement, you might not get too excited, but when one physician says it to another, we know. It’s bad. Ethan didn’t look good.

Our guidelines clearly state that if the patient has a STEMI and has no contraindications then he needs to get thrombolytics and don’t worry about the risk. That STEMI, if untreated, is more likely to kill him. The guidelines also spell out exactly what is defined as a STEMI. But you won’t find ‘not looking good’ in the guidelines.

If this guy was having a STEMI, he would likely die, possibly in minutes, without proper treatment. If he wasn’t having a STEMI, thrombolytics might just kill him. I had a decision to make. It had to be made right now.

My role as an Emergency Physician has helped me so much in real estate. I’m able to evaluate risk quickly and make a judgement based on it. I’m able to deal with the consequences. They are not always right, but I make my decision, and stick to it until some other piece of information makes me reassess. I bring that into real estate and frankly, while the stakes aren’t life or death, they are very similar.  But there are so many variables to consider. Here is a tiny fraction of them:

1. The quality of the pain
2. How long has the pain been there
3. Other diseases the patient has
4. Family history of the same disease
5. Vital signs, such as blood pressure
6. Risk of the treatment
7. Risk of the suspected disease
8. Other possible diseases that might be present
9. Allergies to medications
10. Medication interactions
11. The patient’s personal beliefs
12. Do I know enough about this disease to make a reliable decision

If I estimate any of these incorrectly, what do you think will be the outcome? And this is just one patient of the 20 or so I see every shift.

What does this have to do with Real Estate?

When evaluating a deal there are also many variables and judging one incorrectly can lead to a big loss, or worse. A huge loss might mean collapse of your business, and maybe even your personal finances unless you have protected them. It is a big importance to take the time to analyze each variable and get the estimation right, the first time (or the only time). Here are just a few variables:

1. After Repair Value
2. Comparative Rate (price per square foot)
3. Capitalization Rate
4. What things need repair
5. Repair cost
6. Time to complete repairs
7. Time to sell the property
8. Time to rent the property
9. Expected appreciation
10. Utility costs
11. Sale costs
12. Insurance cost
13. Property tax
14. Capital gain tax
15. Rent

Just take a look. Are there any of these that you can know with certainty? Clearly the right thing to do is to take your time to calculate each one. You might not even know what some of them are (hopefully you do if you follow this blog). You might then buy a book or spend time on the internet researching. You might run across some other property to look at or learning objective to review. Maybe you want to run the figures by someone on Bigger Pockets. Maybe you need to discuss with your spouse but don’t have time to get together for this big conversation until Wednesday. Before you know it, you’ve sunk a week into analyzing this property. Somebody else has swooped in, offered a slightly lower price than you can, and takes the property. Now your brain tells you that you must have calculated pretty accurately because someone else offered about what you did. If you had gotten in at the start of the week, you would be the owner of the property now. You had Analysis Paralysis.

If you knew your stuff, you probably would have made a yes or no decision within an hour. Honestly, if it is a ‘no’ decision you should be able to make it within a few minutes. A ‘yes’ decision takes a little longer. I know you are afraid of losing money. I am too. But face it: it’s not life or death. A loss stings but in real estate it is rarely your entire investment.

Back to the ER

I evaluated the variables and the guidelines. They all said not to do it. Don’t give him a medication that will break down any blood clot in his body and can cause him to bleed to death. They said he wasn’t having a heart attack. In 30 seconds, I had made my decision. I recommended to him that we give him the drug.

It went in the face of all the guidelines. My decision boiled down to one thing: “He doesn’t look good.” And there you have it. All those years of medical training and I risked his life on the way he looked to me. Physicians are not all-knowing individuals. We train for years and years and this is a help, but in the end, we can make mistakes too. But this time – this time I was right. They flew him to the big hospital and he had a blocked artery that was opened up. The real tragedy would have been if I suffered from Analysis Paralysis. You can guess what would have happened.

Sixty seconds after he got in the helicopter, I was sewing up a laceration on a drunk person who crashed his three-wheeler. I’m not making this up. Three wheeler sales have been outlawed since 1988. So’s drinking and driving, but this is South Dakota, and who’s counting?

Take the time to educate yourself on these Real Estate variables now. Evaluate them over and over on possible deals you have found, so that you can do it quickly, sometimes without even paying it much thought. When the real deal comes in you can make your decision and not suffer from Analysis Paralysis. Believe me, it is a disease. It is a lack of confidence, and the best way to build confidence is learning. That’s why you are here.

Now, go out and evaluate ten deals. If you truly know your stuff and you find yourself in Paralysis, remind yourself it is not life and death. Tell me how it goes in the comments.