Are Real Estate Investments Worth the Threats?

“Victory has a thousand fathers, but defeat is an orphan.”

-President John F. Kennedy

4-Minute read

• What Causes Investors to Fail?

• How to Increase Success

• What to Do?

• Perform a PRE-MORTEM

Failure is easy to analyze if you look well enough with the proper perspective. People don’t like to admit it, especially in advance.

I raise this right now because business observers (like me) are noting a massive surge of new players in real estate.

But sadly, the data tells us that most investors fail within the first four years.

WHAT CAUSES INVESTORS TO FAIL?

Why do people, organizations, and businesses fail? Often, it’s because they don’t take a clear-eyed look at things, especially when they SHOULD -- which is right before things get going.

Here’s what I mean...

Too many entrepreneurs are blind optimists. (And yes -- too many accountants are blind pessimists, I admit.)

Aside from the financials of a new real estate deal, other factors play a role in its outcome. And my gut is that the people on your team already know what they are. They’re probably not writing a book or preparatory articles about it (yet), but they probably have some good ideas.

Many businesses that linger past the four-year point are alive only in name. Yet very few entrepreneurs believe they have a less than 50% chance of Success. These statistics only apply to the other person’s ideas.

HOW TO INCREASE SUCCESS

Pre-mortem is applied to overcome these natural human tendencies to ignore real business plan threats. A related concept, the postmortem, or autopsy, was coined by the medical community to determine the subsequent cause of death.

Sometimes, we wish for hindsight’s clear vision beforehand. If failure is the most likely outcome, the earlier you recognize it and change course, the better. The pre-mortem looks into the future and attempts to predict what an investment’s autopsy will reveal.

In his book The Power of Intuition, Gary Klein offers a five-step exercise to help teams overcome the overconfidence bias. Research has found that people are more clearly able to understand and describe the risks of a venture when they conceive of the failure of their project as confident. If failure is only a contingency, the hopes and aspirations of all involved will neuter any attempts to assess the most dangerous risks.

WHAT TO DO?

Before you can begin, ensure that everyone on the team is thoroughly familiar with the new venture and the forgone conclusion of failure. This exercise may require an initial presentation and additional reading so that all participants fully understand the issues involved. Schedule an hour in your conference room. Each person will need several sheets of paper.

When all arrive, begin by claiming to look into a crystal ball to see the outcome of this new venture. “Oh no, the future is cloudy but disastrous. The project is a complete and total failure. Your partners and your clients are upset. No one on the team is talking to one another.”

But your crystal ball will not reveal how this happened. The question of the hour is, “What could have caused this?” Ask each team member to suggest ten reasons for the failure.

In the second step, each team member quietly takes three minutes to write down why they think failure occurred. This decentralized free association will produce many exciting ideas about how this venture may have failed.

All the participants are free to share ideas considered impolite in other situations. Too many teams get stuck in a psychological state of groupthink, where opposing feelings of loyalty and fear lead to conformity of ideas. Your team will share contrary ideas. Maintain an environment with the freedom to speak EACH idea.

The third step involves repeatedly going around the room as each person shares one item on their list. A facilitator records these ideas until all have consolidated their lists into one master list.

The fourth step is prioritizing the ideas that grew from the collective brainstorming. Which two or three appear to the group to be the most threatening? Have each person write these down independently before sharing them as a group. Sometimes, the most polished and eager public speakers can be so convincing that others in the group neglect to do their reasoning.

The final step is to reassess the new business venture. Are the opportunities worth the threats involved? Are there ways to strengthen the plan to forestall the fiasco?

PERFORM A PRE-MORTEM

A pre-mortem is so effective because it involves a shift in perspective. It’s the difference between asking, “What could go wrong?” and “What did go wrong?” The first is a theoretical future perspective, and the second is an historical fact.

Recognize each team member for their unique perspective, insightful observations, and full participation. As I’ve said, a shared vision and ownership are vital for developing the most effective teams. Allowing this team to question their assumptions effectively helps counter preconceived ideas and habits of thinking.

Are you willing to drop this investment in the waste basket?

I think you will appreciate our willingness to explore various avenues of thinking...when you consider that we consistently promote:

BE THE ROAR, not the echo®

Warmly, Janet, the Real Estate Authority