Five Reasons Why Competition is a Bad Thing

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Several weeks ago I wrote about why competition is a GREAT thing because it can have many positive influences on your business. While I’m generally a firm believer that competition from other real estate professionals brings out more positive actions in one’s business than bad, I want to discuss the negative side of this equation to tease out some red flags when facing fierce competition.

Here is a non-extensive list of reasons to be cautions when you’re faced with stiff completion.

1) Market saturation

A rise in competition can be a strong sign that one’s market is over saturated. Given the fundamentals of supply and demand in any market, you’re bound to find competitors chipping away at any economic benefits they can over time.  Because of this, real estate markets get hot. Real estate markets cool off. And, over time, the cycle starts over again.

A sharp rise in competition can signal an over-saturation in your market.  While no one can truly predict how any specific market is going to perform in the future, this point highlights the importance of being as knowledgeable as possible about your chosen market. The most astute real estate professionals tend to sense when their market isn’t behaving as it should—signaling a likely over-saturation of competition. When this happens, a shift in strategy could be a wise decision.

2) Anchoring

Competition offers an excellent way to benchmark your marketing strategies, pricing, quality of product, etc. But it can also stifle the growth and develop of your business.

There’s a saying that states we are a conglomeration of the five people we interact with the most on a daily basis.  In your business, your five closest competitors likely influence your business decisions far greater than anyone else.  Our competitors often show us new and innovative ways of doing business—which is fantastic! But they can also limit our potential by forcing us to anchor and limit our creativity, strategies, and business growth. If you think this is the case; easy, just find new competition and strive to perform at or above their level.

3) Bidding Wars

This can be one of the most dangerous aspects of competition.  When you are fully engaged in a deal and find yourself in an intense bidding war with a competitor, your potential upside can erode away in an instant.  Bidding wars, in the heat of the moment, can cause anyone to lose their rationality and sense of logic. By recognizing a bidding war when it happens or, better yet, before it happens, you can save yourself from numerous headaches and a potentially bad deal.

To avoid an intense bidding war, know and be firm with your exit strategy despite the urge to out-duel your competition.

4) Collusion

No real estate market exists in a vacuum.  At any given point, there are likely multiple competitors vying for the same piece of pie. These competitors likely come from many different backgrounds, levels of experience, and degrees of expertise.  Because your competition likely knows each other (and is always seeking an advantage), there can be high potential for collusion.

Whether ethical or not, collusion does occur.  This can be a difficult obstacle to handle for anyone seeking out good, sound deals.  Colluders tend to form with other colluders because this action tips the economics of a given deal in their favor.  When collusion does happen ethically it can be a large disruption to your business because your leverage is diminished. When it isn’t done ethically, be sure to turn the other way and head for the hills because you don’t want to be anywhere near it.

5) Caution with Low Barrier-to-Entry Markets

A dramatic rise in competition, as we know from recent history, can be a sign of a market bubble.  One could argue over the validity of bubble predictions, but it’s still incredibly difficult to get exactly right. Chances are, however, that when competition enters a market that has very minimal experience (if you’re on BiggerPockets, that’s not you), deviates drastically from market fundamentals, or takes on “head scratching” projects, a bubble is likely forming.

Competition in low barrier-to-entry markets forces one to continuously question the direction of that market because competitors will always be lining up to take a crack at the next hot deal.  If there’s a low barrier to entry in your market and you’re seeking to grow your business for the long term, try (as best as you can) to transition your business into areas of the market that are harder to enter. It’s a challenge, but you’ll be faced with much less competition and more long term viability.

As mentioned earlier, competition can be an amazing aspect of any business. It causes us to stay on our toes and keep us improving in new, creative ways. It allows us to gauge the performance of our businesses, transactions, and products. Yet it can, however, be a strong hindrance on our growth, creativity, and market potential.  So while there’s no right or wrong way to handle competitors, hopefully looking at both sides of the coin will help you grow your business in the right way.  The one sure thing you can get out of this: You’re always going to have competition!

What do you think? What are some other “bad things” about competition?

Photo: ArtBrom

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.