Dumb real estate investing decisions are certainly not limited to short sales; just one look at the shattered remains of millions of portfolios testifies only all too well to that fact. Nonetheless, it is still prudent to ponder the top seven real estate investment dangers lurking in the psyche of the average Joe or Jane. It is likely to make the difference between becoming a savvy short sale investor versus a complete short sale sucker.
1. Self Attribution Bias. Psychology has long recognized the tendency for investors to attribute success to ourselves while simultaneously blaming losses on others or outside influences. Learn to recognize a little luck when it comes your way and take responsibility no matter what happens...in the long run, you will find that more control is comforting.
2. Prospect Theory. This largely irrational desire to sell highly appreciating properties to 'lock in profits' while holding under-performing properties until they get back to their former high. Don't be afraid to let go of a bad property and don't always be in a hurry to pay taxes on gains from a productive property.
3. Overestimation. While there is nothing wrong with performing a "best case" scenario be sure you have a "worst case" scenario sitting right beside; keep it real.
4. Case Study Conclusions. Don't rely upon case studies, testimonials or even research compiled from small numbers; realize it for what it is...possibility but not probable outcomes.
5. Testosterone Effect. Before you begin screaming gender bias,
we aren't making this up! The testosterone effect is so named because men tend to buy/sell and trade stocks far more often than women. They also tend to make more snap judgments and take greater risks. This is true of all investments including short sales; don't automatically sell simply because you can. Take a look at the long term potential as well.
6. Hindsight Effect. You have heard it before but it's worth repeating...do not base expectations of future profits on past results. Markets are "mean reverting" and tend toward a real estate homeostatic position over the long haul....a fact that should make every short sale investor tremble with delight given the current market.
7. Hollywood Effect. Don't do it because everyone else is doing it..do it because it makes sense. Don't buy in a specific area simply because you heard it in the media...buy because you know the fundamentals. The media exerts an undue amount of influence on novice investors - learn to use that to your advantage.
See you at the top!
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