Show Summary

Real estate investing is not only an emotional roller coaster, it’s a game of understanding that each side has wants and needs. Those needs drive certain behaviors in us, and while natural, you will be far more successful as a real estate investor if you have a high level of awareness of those emotions. Especially if you are able to understand your own behaviors and tendencies when negotiating your next real estate deal. This is powerful information…don’t miss this show!

Highlights of this show

  • Meet Patrick Donohoe, CEO of Paradigm Life, Podcast Host, Educator, and more.
  • Join the conversation in the importance of understand real estate buyer and seller behaviors, and how better understanding will help you get more deals.
  • Join the conversation on the importance of understanding your own emotions, tendencies and behaviors, and how knowing these things can both help you land more real estate deals, and also keep yourself from doing bad deals.
  • Learn about the Winner’s Curse, and how many real estate investors will win a deal at all costs by getting caught up with emotion, yet lose money, or potentially get wiped out.

Resources and Links from this show:

Listen to the Audio Version of this Episode

FlipNerd Show Transcript:

Mike: Hey, it’s Mike Hambright with FlipNerd.com. Welcome back to the FlipNerd Expert Interview show, where I interview awesome guests from the real estate investing industry to help you learn and grow. Just a quick reminder of the REI Power Summit that’s coming up. It feels like I’ve been talking about this for months and months. Actually, I have been talking about it for months and months, but it’s coming up very soon now.

It’s going to be one of the largest online real estate investing events ever. It’s 100% virtual. You can join from anywhere. And you’re going to get access to all of our content and presentations for 12 months in the event that you want to rewatch something or you can’t watch it the first time around. So we have over 50 great speakers, including my guest today, which we’ll get to in a second here and lots of vendors that can help with your business. So check out REIPowerSummit.com.

For today’s show, I’m joined by my friend Patrick Donohoe, who again is going to be one of our speakers at the REI Power Summit. Patrick has been on the show before and we wanted to bring him back because he’s got so much great content. He’s the President and CEO of Paradigm Life, which he started back in 2007 to teach others how to make better financial decisions. I’ll let Patrick tell you a little about his business here in a bit.

But today, we’re going to talk about investor behavior. There’s a lot of psychology in this business, for those of you who don’t know that. There are a lot of head games you play with yourself, and it’s important to understand both how you act in the process of buying or selling homes, and how the other side acts. So you can really make a huge difference in your business if you understand the psychology in your tendencies, and Patrick is going to share his thoughts on that with us today, so it’s going to be a really interesting episode.

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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

Hey, Patrick. Welcome back to the show, my friend.

Patrick: Thanks, Mike. It’s great to be back.

Mike: Yeah, always good to see you. This is an interesting area that we’re going to talk about today. We actually don’t talk about it all that much. I don’t know if you’re going to talk about this a whole lot, but one of the biggest things that a lot of real estate investors that fail, they fail psychologically. They convince themselves they can’t be successful. This game really is a lot of roller coasters. It can be. It plays a lot of mind games with you, so it’s an important area.

Patrick: No, it’s super important. I think whenever you have transactions, whether it’s a real estate transaction or otherwise, there’s always another person on the other end of that transaction. And the more you know about human psychology and you know about yourself, and know about other people, you’re going to be able to figure out if you’re getting a good deal and use logic.

Because often times when you get into transactions, sometimes there isn’t much logic, especially when things get dicey. People tend to just act irrationally, and it’s something as human beings we’re all subject to. Whenever we get into the heat of the moment, we think we’re going to behave a certain way, but we end up not doing that.

I think there’s a lot you can do, and I’m sure you have experienced the same, but doing business online, because the company I own, Paradigm Life, we do everything virtually. We do all of our lead generation, all of our relationships, all of our consulting is done over the Internet. So we meet such a broad base of individuals, and we’ve heard thousands and thousands of stories. They all point to the same thing as I’ve been saying, when people make bad decisions, it’s typically because in the moment, they’re more emotional than rational.

I think there’s a lot that you can do to educate yourself so that when you do get to those stages, you do have a clear head and you make the right decisions because it can completely ruin you if you don’t. Also, you can get better deals because if you really understand how other people are going to act, which is what most people do when they’re faced with difficult financial challenges, you can also do very well.

Mike: Yeah, absolutely. This is going to be interesting because I think a lot about the psychology of it, for sure. I think a lot of people sometimes fall in love with a deal so much that they make bad decisions.

Patrick: That’s why people get out of real estate. And even though as we consult with investors, you say and you educate things, but it’s just people do fall in love and they’re so adamant about this one property that they saw. Even though the numbers change and they weren’t what they thought or the repairs were more, they still want to get it even though it doesn’t make any sense.

Mike: Right. I want you to tell us a little bit about yourself, but we’ll come back to this theory, kind of a phenomenon that’s referred to as “the winner’s curse.”

Patrick: Sometimes. That’s a very well said statement.

Mike: Before we go much deeper, tell us about your background and let people learn a little more about you, if they don’t know you already.

Patrick: Sure. So I’m from the East Coast, originally from central Connecticut, and I moved to Utah to go to school back in 2003, and didn’t really intend on staying here but I’m still here. Our headquarters are in downtown Salt Lake City, and I live with my wife and three children.

We’ve been in business since 2007. That’s when Paradigm Life was founded. We have about 60, a little shy of 70 employees. What we do is we’re financial consultants. My background is economics and financial services. Right before 2007, we discovered a strategy and a way to do financial planning outside of Wall Street, and then we took that and ran with it on the Internet. Most of the people that were doing that kind of consulting were all face-to-face and local markets and presentations and speaking and so forth. We just took that message and brought it to the Internet. We’ve been doing it for about eight years now.

Mike: Awesome. For those of you that are listening right now, what Patrick’s alluding to is his business focuses on, well, you do a number of things. I don’t want to say what your business does because I don’t know your business as well as you do. But really, this concept of infinite banking, so there’s some life insurance products you can use to essentially become your own bank and borrow from your life insurance policy and stuff like that that are actually really powerful. It’s more of a vehicle. When people hear “insurance,” they’re like “Well, I don’t need more insurance” or whatever. But, it’s a different type of product, and I know.

So if anyone wants to go back and watch that or listen in, I believe that was show number 166. That was a little over 100 episodes ago. FlipNerd Expert Interview Show number 166 we talked about building wealth through infinite banking, and it was really interesting and kind of an eye opener for me, so I encourage people to go back and check that one out.

So on the topic of psychology, we just referenced this term called “the winner’s curse.” It’s like an economic discussion about people have a tendency to just want to win. That’s kind of the theory that auctions are based off of. You say “I’m not going to pay more than this,” and very rarely to people not go over that amount.

Patrick: Well, look at eBay. On eBay, you don’t want to lose, so you keep putting more and more money on it. So yeah, you’re right. People want to win. And again, it’s that emotion. And it’s all natural. It’s natural to be emotional, but when you realize how it affects and influences your decisions, then you’re going to realize, especially in the investment and business world, that if you don’t have that together, the failure is inevitable.

I’m not saying that failure will completely wipe you out, but I’ve seen one or two bad decisions completely wipe people out and that’s where the danger is. There’s lots of solutions to it, which I’m sure we’re going to get to, but you’re right, you want to win. Also at the same time, the more you win, I’m not sure if this is part of “the winner’s curse,” but the more you win, the more you think you’re bulletproof, the more vulnerable you become. Once the turbulence starts, that’s when it all could come crumbling down.

Mike: I think this whole issue is exacerbated a lot because of the industry, too. Real estate. People tend to do relatively few deals. It’s not like we’re buying and selling pizzas or tacos or anything like that, you know, small ticket items. These are big ticket items. A deal or two a year, especially outside of single family could totally wipe you out for a long time or could make your life good forever. In real estate, I’ve talked about this a number of times, there’s this feast or famine mentality, and everybody is always trying to feast because they’re worried about the famine. I think that probably exacerbates some of the psychology that you’re talking about here.

Patrick: No, it does. And that’s where you’ve got to realize, we always look at hindsight. We always look at what’s happened, but it doesn’t mean that’s what is going to happen in the future. I think there’s still a lot that we can learn, and that’s what it all comes down to. It comes down to your level of education. So for me, I’ve made some terrible decisions in business. And I’ve made some bad decisions in real estate too, and luckily they weren’t severe. But through that all, and also really connecting with clients and consulting with clients, you start to put the pieces of the puzzle together where success really is a mental game.

Most people think it’s a product or an area or a market. It’s not. I think it really comes down to understanding yourself and also understanding the other person, the other end of the transaction. In the same light, it’s also having a team. I think one person doing everything themselves is incredibly limiting because you don’t know everything. The sooner you can recognize that, the better. Once you realize that, that’s when you put a team around you that can help in the event where you do have a big decision. Then, it’s not just all on your shoulders. You’re able to bounce ideas and brainstorm and talk through it.

That’s why I’ve had a number of business coaches for a long time. With one of them, that’s all I do. I talk through and he’s just tells me if I’m full of crap or not. He calls me out and it helps a ton because it makes me really rethink and put myself in the position of pulling the trigger or adjusting or not pulling the trigger at all.

Mike: Yeah. Talk about that not everybody has a coach that they can talk to or make can’t afford it or whatever, but just talk about that kind of self assessment of, I think it’s a maturity thing too, as you start to get older, you start to realize “I’m going to be honest with myself. I have some tendencies here that I know that I’m prone to, of falling into this trap” or whatever. That’s a big part of it. It’s not so much that you have these tendencies. It’s being aware that they exist, right?

Patrick: Yeah. And being okay with them, right? And it is. You’re human. I think we have this perfection complex as Americans where the slightest thing you do, you’re somehow shamed for the rest of your life. We all have issues. We all have things that we can improve. We have weaknesses, but the sooner you acknowledge it, the better. Especially when it comes to business because then you realize, “Hey, I have this weakness. This is an issue I have. I’m going to figure out a way to counter it.”

That’s why it’s big in real estate to have a team. Even though you may be a one man show, it doesn’t mean you can’t have a team because that’s where the beauty of the Internet is. There’s so many private Facebook groups or you have other networks or blogs or forums where you can bounce ideas off of people. There’s tons of meet-up groups as well. So it’s not like just because you’re limited on financial resources or are a one man band, that you can’t go out and actually create your own team. And, that’s what I’ve tried to do.

I don’t consider myself that intelligent. I think the biggest thing that I’ve learned, and I learned it in college, which wasn’t the actual academics themselves, but it was the fact that if I surround myself with smart people, then I’m able to do study groups and really learn so that I could do well. I think if you can apply that to your life, it’s going to give you such an upper hand. Because at the end of the day, yeah, you’re right, one, two deals a year, it might be the deal of the lifetime, but like you said, it could completely wipe you out.

And I’ve seen it wipe a lot of people out. There are people that got wiped out in 2008-2009 that if they really did things just slightly different, they would’ve killed it because of all the opportunities that existed in 2009-2010.

Really, it’s the emotional idea because I think we’re all just obsessed with security, and whenever something compromises that, it freaks us out. We do everything in our power to have it, and often times that’s emotional.

So my point is, there’s lots of ways to attack it, but I think the first thing, as you said, that’s important to do is to be aware of it. It does exist. You’re going to be emotional. How do you temper it? And that’s where it comes down to the strategies of doing that. And I think the best strategies are, number one, just to read and study and build out a business plan. Really have core metrics, have core parameters that you fit within, and you don’t budge.

And that’s hard for people, because like you said, they might love this house because it’s on the corner, it’s on this street. “They raised the purchase price by $20,000. Oh, I still like it.” But it doesn’t make any sense financially. Those moments are when you basically say, “I’m out.” And those decisions are going to make you a better investor because they’re going to set you up for better deals down the road.

Mike: Sure. Can you give an guidance on whether it’s an individual transaction or just in the context of you’re plan, your business plan, long-term plan, your annual plan, whatever it might be, of how people can set aside time? It’s funny how every 3,000 miles people will go get an oil change, but nobody ever says, “I need to do some maintenance on myself. I need go to sit down and have a check-up.” There’s no reason why. I think anybody who is listening to this is more valuable than their car. You just think of it differently.

But any kind of guidance on . . . on a specific deal somebody might write, “This is my walk away point. These are the pro’s and con’s.” and evaluate it. Any general guidance on how people can get better at assessing themselves, either an individual deal or themselves over a period of time?

Patrick: Sure. I think the easiest thing is just understand a pro forma. Once you actually do audit the pro forma when you’re doing your due diligence, see if it lines up. That requires understanding some basic math and basic numbers, but there’s a lot of spreadsheets and calculators that you can buy out there that will do it for you. That’s where you start.

Numbers, if they’re done the right way, are objective. They won’t lie. I think if you understand those, that’s a great place to start. I would have one of those assessments for each property that you own. If it’s a long term buy or if it’s a short term, you need to have those financials. You need to have the property financial statement, and really understand those numbers.

If it comes in high, low, “this expense came in more than we anticipated,” you need to put those in there and let the numbers really tell you if you’re winning or losing. I think often times people don’t want to lose, so what do they do to their numbers? They fudge the numbers. Just from client experience, I have countless clients that will send us their fact find or intake, which gives us an idea of their financial snapshot, and they have paid-off properties that have barely cash flowing after operating expenses. Anyway, it’s really just individuals and how they assess and how they quantify or score the deals that they’re doing. And then it’s just the frequency.

First, it’s learning how to score it. And then having the frequency by which you analyze it, which could be monthly. It could be quarterly. My wife and I, we analyze everything once a month financially. We look at our entire financial statement. It’s just a habit. We’ve created that. Sunday evening, the first Sunday of the month is when we go in and look at literally everything financial just to make sure we’re on the same page. Because that’s a big error that I made in 2008. We didn’t really have those meetings, so when stuff started hitting the fan, it wasn’t really pleasant on our marriage. So that’s what rose out of that. That chaos was just our being on the same and being upfront with one another.

Mike: Yeah, that’s good. Let’s talk about the psychology of the person across the table from you, if you will, when you’re buying. I coach and mentor a lot of folks and we talk a lot about building rapport, really trying to understand, being a problem solver, all those things. But, I think a lot of people that are in real estate, they want to kill something, they want to win, you want the deal done.

You think a lot more about why this matters to me, why I want this deal, instead of “How do I solve this person’s problem? What do they want?” Because, anybody that’s a veteran real estate investor that’s listening to this is going to understand this, but for a lot of newbies, they don’t is that it’s not always about money. Sometimes it’s about time or ease or a lot of those things. But, talk about how you can start to assess the psychology of the person “across the table” from you.

Patrick: Well, you hit the nail on the head. Let’s dive deeper into that. You’re right. At the end, when somebody decides to sell their property, they just don’t wake up one morning and say, “Oh, I think I should sell my property today.” They’re doing it for a reason. I think individuals naturally are guarded, and so they’re not just going to come out and say, “You know, I want more time, and I just want to spend more time with my wife and go on vacation and not have to deal with this hassle property.” They don’t want to do that. Why? Because they don’t want to be taken advantage of.

And so when they come to the table, they’re holding very close to their chest the true reason that they’re selling. And that’s where you hit the nail on the head, which is building a relationship of trust. That’s the thing with just how I’ve done deals is you really want to care about the person because I think if you take advantage of a person, it’ll come back to bite you. So you always want to make sure each deal is a win-win, and that you walk away with what you want and that they walk away with what they want. If that deal doesn’t take place, I think it’s going to hurt you in the end.

I’m not sure how all that works, but my point is, the more you understand about them, the more they can feel it. And that’s by asking questions, really getting down to the core and peeling back the layers, so that they feel comfortable with you. And that’s when they’re willing to say, “You know what? This is why we want to sell. We’ve been doing this forever and we just want some cash. We want to pay off a bunch of debt and we want to retire.” Or whatever the reason is.

You’ll never truly get to that reason until you figure out that person because they’re coming to the table emotional. You knowing that, or just assuming it, because I think it’s a pretty safe assumption, that’s going to allow you to be in the position to ask good questions and really get to the point where you get a good deal out of it. More often than not, you get a better deal than if you just went to the table and tried to hard buy them.

Mike: Right, right. And I’d say, in my experience too, there’s really a couple other things I wanted to elaborate on there. One is, it depends on what type of real estate investing you’re in, but if you’re working directly with a seller, as we do in my business, most deals that you look at, you’re not going to buy. Their expectations are way too high. But if you go into it saying, “I’m going to try to help this person today and try to understand what their problem is and try to help them solve the problem,” that comes back around. You get referrals that come back around. That same person might come back around months or even years later, and they remember how you treated them.

Once thing that will hopefully resonate with people today is that it’s a more competitive marketplace. A lot of times you’re up against competition more. Unfortunately, we’re in an industry with a bunch of bozos sometimes, and they don’t treat people right, and they’re willing to sell to you for maybe less than they would take somebody else’s offer because they just trust you more. Or at least you might get, as I like to say, another swing at the ball.

Sometimes, if they don’t like you, they’re just like, “Nope. Sorry, I’m not going to take it.” But sometimes, if they like you and you built that relationship with them and you took time to kind of understand them and what their needs were, they’ll say, “You know what? I really can’t take that, but let me tell you why and what I can do.” So you might get another, like I said, kind of swing at the ball to figure out a way to make it work.

Patrick: Yeah, and it’s a purely emotional state. And if you understand that, and you understand everybody has that side of them, you’re going to recognize that people are not going to make decisions with pure logic. I think it also leads to trends. Trends often happen because of collective emotion. That’s where I see real estate . . . there are some guys who just totally cleaned up in 2009 and 2010 where everybody was selling, just getting out because they didn’t want to have anything to do with it anymore. They just wanted out because the pain was so deep. They wanted out by any means possible.

And at the time, nobody wanted to get into real estate because everybody was afraid of it. But it was an illogical fear because people still needed a place to live. Even though they’re getting foreclosed on doesn’t mean they’re just going to go live under the bridge. They needed to go somewhere. So I think a lot of times, when you pay attention to the collective psychology of investments or investors, then you’ll be able to really quantify deals objectively with numbers and see the disparity.

If you can do that and figure that out, that’s when tons of opportunities present themselves. Because right now, everybody’s buying. You can start to question what’s really going on and if there’s going to be a correction. There’s been a lot of talk and more talk. And who knows what’s going to happen and when?

But at the same time, if it does happen, what is your emotional state going to be? What should you do? What should you look for? What’s your game plan? And that just all comes down to preparation. It comes down to education because a lot of these skills are built by experience. If you don’t have that experience, you need to go find somebody, or a group or books or whatever, that has had that experience. That’s going to allow you to have the upper hand.

Mike: Yeah. I’ve been investing for, I guess, seven and a half years or so. Until recently, when the market that I’m in is on the overheated side, like it feels like it keeps going up, up, up, which is not typical for Texas. But one of the things I’ve come to appreciate is some of the people that have been in this business for a long time that know how to ride out cycles, and all the things that we’ve talked about today, they know how to ride that out.

I saw some people that kind of came back into investing a few years back. I remember thinking, “I thought they were, like, out.” But no, they were just on the sidelines. They were waiting. Everybody gets that in the stock market, right? They’re like, “Hey, the market’s overheated. I’m going to wait until there’s a correction, or I’m going to wait until the stock comes down, then I’m going to buy at this price point.” But in real estate, one of the challenges is people kind of assume if you stop buying, you’re dead. But it’s like no, they’re just wise enough to sit on the sidelines and wait until the right opportunity.

Patrick: Exactly. I know Ken McElroy, who is one of the Rich Dad Kiyosaki advisors, and that is exactly what he did. He saw and he knew. He knew the metrics. He knew it was overheated, and he knew he needed to be in cash because he had that experience. And it all works in cycles. Real estate is one of those assets where it’s always going to be in demand, so it’s just a matter of time where things start to shift around.

No tree grows to the sky. So it’s not just going to continue this upward, upward, upward movement. And typically, it doesn’t get there and plateau. There is typically volatile type of movement, and if you can just position yourself the right way, and that way really is just understanding what humans want, which is often derived from their emotional state. If you can figure that equation out, you’ll do awesome.

Mike: Well, Patrick, we have a few minutes here. Any kind of final words of wisdom on the topic of investor psychology?

Patrick: Yeah. This is my thing, I think we discussed a little about this on the last podcast, but my thing is you really got to pay attention to who you take advice from because everybody has flaws. Everybody has a motive. Everybody is there and they have a bias. So understanding that is important, but I think if you base all of your decisions on one bias, then it’s a 50-50 gamble. You’re flipping a coin. So you really need to look at multiple angles. And right now, you turn on media, you turn on every news station and there’s an opinion there. And there’s often times a very similar opinion.

You just have to question all the time, “Is that true?” Whether where the economy is going or what’s happening to the dollar or what’s happening to society or whatever. In the end, what’s the motive of traditional media? It’s all ratings, so they’re going to say whatever they want just to get higher ratings. There has to be some check and balance. But my point is, there’s so many alternative mediums for news and media and opinion, like your podcast, but you also have a lot of other podcasts that are out there. And it doesn’t mean what people are saying out there is true. It just means it’s their opinion. And I think understanding multiple opinions is going to help you come to the truth.

I’ve always settled on what investment and wealth-building should be. If it strays outside of your business, it strays outside of, of course, what we do because I have a bias, it strays outside of real estate because most of my investment is in real estate and my business and insurance. I think when you stray outside of that, there’s a lot of risk there, but people are all in there. There’s trillions and trillions of dollars in “outside” because people just conform to the status quo and do what everybody else is doing. And there’s no logic involved whatsoever because if people actually do the logic, it would tell them to do the opposite.

So I think right now, as you’re educating yourself as an investor, it’s really understanding what you believe, what’s true, what’s a good rate of return, what’s a safe deal, what are your parameters. And then sticking to a business plan, and stick to those parameters. Once you do that, it’s very difficult to fail.

Mike: That’s awesome. Great advice. Well, thanks for sharing with us today, Patrick. For folks who want to learn more about you or Paradigm Life, I want to reference it again, show number 166. Patrick joined us and talked about building wealth through infinite banking. It was a fascinating topic. How else would they maybe learn more you or get a hold of you or your company?

Patrick: We do a podcast. We’ve had a podcast for seven, almost eight years. It’s not video. You guys are, like, super sophisticated. That’s why I had to wear a nice shirt and shave.

Mike: I won’t show you my setup here, Patrick, so you keep thinking I’m really sophisticated.

Patrick: Oh, you are. But anyway, it’s just an audio podcast. We actually broadcast live every Wednesday morning. We have Andy Tanner. We talk about really cool stuff. He’s on tomorrow. But anyway, that’s one way, just to listen to our podcast. And then also, our website, which is ParadigmLife.net. We have a free e-learning course, so you can learn about everything that we do without having to obligate yourself to anything.

Mike: Sure. Patrick, how do folks find your podcast?

Patrick: Just go on iTunes, and search “The Wealth Standard Radio” or on our website, we have a tab that has links to subscribe on iTunes, to tune into the actual podcast page itself.

Mike: Fantastic. Well, Patrick, thanks again for joining us. Always good to see you. Thanks for speaking at our upcoming REI Power Summit. I’m excited to see you there, too. So if you folks want to learn some more about Patrick, please join us there as well. So Patrick, have a good day. Great to see you.

Patrick: Likewise. Thanks, Mike. We’ll talk to you soon.

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