Breaking Down Confirmation Bias in Commercial Real Estate Investing

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You can't judge people, right? For the most part, if you're only trying to ask for money from people who have, like, you know, pretentious cars and Rolexes and golf memberships, like, I hate to break to you, but all of their money is going to that and it's not going to you and your investments. Alright, let's go. Alright, what is up and welcome back to how to invest in commercial real estate.

We have an exciting show for you guys today. Yeah, we do. What is it? Well, before we get into that, we have been super busy.

We've been buying a ton of stuff. About a month ago, we bought a shopping center in Floricent. That was for those that don't know what Floricent is.

Yeah, northern St. Louis. A little under $11 million should be paying out a third quarter distribution there. We are in the middle of splitting off the Panda Express in Chipotle out parcel, hopefully getting that up for sale before the end of the year and a lot split finalized.

Right after that, we bought the first of many petromax gas stations. The first one was located in Dawson. That one was a little over $5 million.

That one will not be paying out a third quarter distribution. But if we still have it at the end of the year, it'll pay out a fourth quarter distribution, most likely. And then lastly, last week we closed on our new shopping center, Martindale in Amarillo.

I think that was $4.5 million deal. Yeah, something like that. My cash flow.

A little older, a little rougher, but great cap rate. Sticky tenants that want to be there. Yeah, a lot of new investors on all three of these deals, by the way.

So I'm really excited about that. We've been testing out some new Facebook ads. We've got a lot of new investors from that.

That was exciting. Jackson, the new guy down at Fort Worth has been calling all those leads. He works in Fort Worth.

He lives in Dallas, maybe. Okay. Trying to beat.

And then we don't give too many specifics. We've got another shopping center that's closing here in a few weeks. No, let's give specifics.

We are non-refundable with $325,000 of earnest money. We are buying that thing. Okay, we are buying it.

Yeah, so it is launching out. You should get the information on it very soon. If you haven't already is a grocery anchored center in Houston, Texas.

We're going to be closing on that August 28th. Very little room left, I think, maybe $700,000. It is a Mexican grocery store anchored center.

Really cool investment thesis that I guess I won't get into too much detail, but it's up on the website. If you have that, if you don't, just go to the criteria and fund.com. Join the investor list once you get approved. You can go in there and check it out.

Even if it's closed, you should be able to click in and see information on it. But, generally speaking, I think we're hitting an 18.5% IRR in year five. Big possibility we can hit a refi in year five, get all of the investor equity out, and then just cash flow this thing in perpetuity.

So, yeah, really excited about that deal. New partner on that deal. Just a new equity partner.

Super excited about bringing her on board into the deal. Big reason we were able to get it. So, yeah, and that's a big trait for us.

That's what, 14, too, I think. Yeah, that's big. Maybe one of the biggest, and maybe the biggest deal.

Yeah. Criterion's done. Yeah, because before that it was 12, wasn't it? Maybe.

Yeah. So, off the top of your head, any idea after all this closes, how many assets we'll have in our management at that point? Again, let's end up 150 million range. I think we're 150-ish before Little York.

So, yeah, that should put us 160, 165, and then we've committed to buying the three additional stores in Henderson, the Petrimack stores. That's another 10 or 11 million, so that should put us up 175 range, which I would be happy if we closed out the year there. Be ecstatic.

I'd actually be ecstatic if it started to lower a little bit because we started selling some shit. We'd be really happy about that. We'd get reinvested rates should be hopefully starting to tick down.

I know nobody's trying to force out a too soon, but anyway. Yeah. 10-year, 10-year treasure is down almost four.

It was like four and a half, just, you know, three weeks, four weeks ago. Yeah, it's moving. All right, so, topic for today.

We want to talk about confirmation bias, and, you know, what are the pros and the cons and how do you utilize that in commercial real estate? You know, we may, you may not be that familiar with the term, but it's like this weird quark that our minds have. That's great. Yeah.

Clean that shit up. Let me clean this. So, it's been a confirmation bias.

It's this weird quark that our minds do where we have a set of beliefs or a set of ideals or thoughts, and we tend to look at the world with that perspective, and we are sharply attuned to the things that fit with our worldview, and we ignore even subconsciously all those things that don't fit. And so, you kind of think about it in religion and politics, right? Let's, you know, not too much on religion, but, you know, if you're religious and you're looking at, you know, let's say you're a Christian, you're looking at Islam, and you can easily see the flaws of Islam and where their book isn't right, but you don't see any problem with your book or your feelings. And the same with other religions do the same thing, looking at yours.

We do it with politics, too, where, you know, it's so easy if you have a side to look at the side that you're against and say, wow, look at all these things that are doing wrong, and look at how terrible all their politicians are, but then we don't see and can't see any of the flaws in our side. And so, what we want to do is talk about, is that hindering you in your attempt to get into commercial real estate, and how do we go about addressing that? So, that's what we're going to talk about. Yeah.

You know, one of the things, when we were talking about this topic is, people come up to me and say, hey, you know, I just don't know any good deals. I don't have any good ideas. You know, I don't even know where to look.

And, you know, I tell them, like, you've got to get confirmation bias working for you, and how you do that is whatever you focus on expands in your life. And so, I'll give an example that I gave you guys for the show, is if you're going to go buy a car, and you're like, start looking at, let's say, escalates. And you're like, well, you know, I'm looking up for a black escalate.

And what happens immediately when you're driving around town? You begin to see every black escalate that's on the road. You instantly, your mind sees it. But what happened before you started looking at black escalates? You didn't see that black escalates when you were driving around.

But they were there. They were there the whole time. And that's the trick your brain does.

But you can use that to your advantage by beginning to focus on real estate and beginning to read about real estate. Now, all of a sudden, you're driving around town. You're going to notice opportunities.

You're going to notice commercial real estate. And you're going to begin to think ahead, how do I profit from that? I wonder who owns that. I wonder how much money they're making on that.

That's center. And so, you begin to use it by focusing on what you want in your life. You're going to be able to see all these things that you were missing before.

Now, all of a sudden, you're going to drive past a center and there's going to be a sign up for sale or something. And you're going to see more of those than you ever did before. Yeah, and so that's one way that you can use this kind of, this rule of confirmation bias to work in your favor is decide what you want in life financially, or you want to go after real estate.

And once you begin to focus on that, then the opportunities start to present themselves where they were there before, but you couldn't see them or weren't looking for them. Yeah, before I got into commercial real estate, I didn't notice much. But now that I start talking to people, it's amazing the number of people I talk to that are in commercial real estate or some sort of real estate.

And I'm able to talk to them about that now. Before, I would have just said, oh, great, that's fine. And, you know, the compensation would have moved on.

That's right. It's not just people that are in commercial real estate you're talking to. Once you say, I'm in commercial real estate, what are that person going to do? They're going to think, oh, do I know anybody in commercial real estate? Do I have it? And they're going, oh, my uncle, he owns the center.

Or, oh, my cousin, they're a commercial broker. Like, you know, getting talking about it, focusing on it, begins to build those opportunities out for you. And you'll have things come into your life that you never knew, you know, were there.

Or you didn't even know why they're coming in your life just because you're talking about it. You're focusing on it. And it can work with anything.

It doesn't work with a real estate. It can work with anything you're focused on. Yeah.

I think a really popular way of doing that in commercial real estate is when you're looking through the offering memorandum and you see kind of the, not the prospectus, but the performer. Right? Typically, the selling broker or even maybe the seller themselves will put together a sort of performer. And it's dangerous, right? It's dangerous to look at that and then just think, oh, man, everything's just going to go up for the next 10 years.

And then my return's going to be X. You know, that's an idea of confirmation bias, right? Yeah. And then for us, I'm immediately trying to like prove or disprove that. I mean, almost kind of ignoring it in the beginning and then just focusing on my underwriting, right? And then just going in and looking at the deal, focusing on the underwriting because their advertising perspective may not be right.

Their underwriting may not be right. Their performer may not be right. And all those things that if you look through, you know, a fresh set of eyes, a new perspective, trying, you know, thinking, hey, people buy multi-tenant retail shopping centers like this all the time to make money as an investment, to grow rents.

I know all of these facts, right? If you see a retail center that is trading, the chances are somebody bought that with the intentions of making money, underwrite that deal. Look at the deal. Call somebody about the deal.

Ask questions about the deal. And then it's giving you all of this information that you can now go look out on the world. Hey, I know somebody just bought a retail center just like this.

Here was their plan. I wonder if I can do that similar thing with this and just kind of collect and stack all of those perspectives, right? That's great. I'm just dropping all kinds of stuff.

Yeah. So one way confirmation bias might work against you in real estate is as you're looking through deals in your mind, you're thinking, oh, yeah, I knew that's going to be a 7% cap. Oh, that's going to be a 7.5 cap.

I can't buy any of those. But just what you're saying, if you have a negative confirmation bias, you might pass those off, right? But if you don't, then you're going to dig in and maybe you see that that NOI has some things in it that you wouldn't normally expect, and maybe it's a good deal, right? Yeah. So it's always, if you're aware that we have this kind of flaw in our brains, then you're going to do things to combat it or to use it, and you're using it in your favor, like we talked about earlier, deciding to focus on it, talking about it, bringing that.

But also, like you guys are saying, when you're looking at deals, you're going to bring your own bias into evaluating that deal, because maybe, oh, well, I had this deal one time, it didn't work out, and it was a multifamily, so I don't want to look at multifamily. You can develop a bias over time based on your own experiences. And what we want to tell you guys is always be questioning your experience and don't get into a bias rut where you're missing things, either positives that make it a good deal, even though you've already decided that it's not, or negatives that you should be aware of that you're going to miss, because, well, the last five deals that looked very similar to that, they were home runs for me, and so this is a home run, you really got to make sure you're not falling into the trap of looking at it through that lens, it's always going to work, it's always going to be great.

Yeah. So I think the easy way to combat that is data, right? Some data point outside of somebody's opinion or perspective or just anything. We're using companies like Placer to look at how many visits a store gets, how popular they are compared to other stores in that chain, in that state, or in that market, or compared to other chains.

So there's lots of data, whereas it would be easy to just say, well, in the offering memorandum, it says that there's 700,000 visits, and it's the best Mexican grocery store in all of Houston. It's like, I bet every Mexican grocery store says they're the best. The OEM always makes the claims, but like to your point, the data is the data.

Exactly. So let's talk about what's so great about, well, this store is ranked number two in all of the stores in the state of Missouri. What's the benefit or the, why do we want that information? Yeah, there's tons of information you can drill down.

So you can drill down on performance by square foot and say, okay, I have a really good store here, but compared to all of the other Joanne's fabric, my sales per square foot are really low. I may look back at seeing if I can claw back some square footage from Joanne so I can get a rent increase from them. That could be one use of that data, right? Well, another one, going back to the question I tried to ask you guys, is if you're finding out how that store ranks against all other Joanne's in the market in that state, why is that important? Well, do you want to buy the best or do you want to buy one of the worst Joanne's? Yeah, you know that Joanne is looking at all their stores all the time, and if it's the number two store in all of Texas, well, there's a pretty good chance they're not moving.

That's right. Exactly. So that data creates security where there may have been an absence of security before.

Hey, I don't know what Joanne's going to do. They only have a year left on their lease. Oh, they're the number one store in all of Texas? Okay, they're not going to close this one.

They may close others. They're not going to close this one, or it's less likely that they're going to close this one. They'd have to close all their stores.

They're going to close the number one store. So it's that kind of thing where, yeah, you can have a bias or you can have an unknown, but then you use that data to kind of combat the unknown. Yeah, another weird data point about a center we're acquiring is half a mile away within walking distance is the best McDonald's in the state of Texas.

You know, I mean, just weird data points, and you can start to collect all of these, and then you just look at the data and try to form an opinion. What does all of this tell me? This has 700,000 visits. This is one of the best in the, one of the best in that chain in the state.

This one over here that's super close to the top 10%, it's telling me everything in this general area is working, right? This isn't a dead area of town. All of these retailers are actually thriving. They're getting tons of visits, businesses popping over here.

That is something you would want to know from me, not from a person, right? If the selling broker is telling me that, it's like buying a used car and the guy saying it runs great. It's like, I'm sure it does. I'm sure every car itself runs great.

Until it doesn't. Until it doesn't. Right? Well, we don't have any guarantees in this business, and we're putting investor money at risk, and so any additional information we can get to kind of make us feel good about the selection that we've made on a property we're going to purchase, it's all good.

It doesn't mean that it still couldn't go south, but at least if it does, and our investors come to us and they say, hey, what were you thinking here? Well, we got the data points right here. We didn't go in blind. We got place your data puts this up at the top of stores, best McDonald's performing, right down to us.

We have a story to tell on why we decided to take a risk on this property versus any others, and so the data helps. I think of Wall Street traders, big-time Wall Street traders, and I don't know this for fact, because I'm not a big-time Wall Street trader, so the full disclaimer on that, I am not a big-time Wall Street trader. I'm not even a full disclaimer.

Okay, good. Everybody knows. Everybody knows.

That's great. Yeah, Brian over here is. Anyway, they have to document their thought process, right, because of insider information, like they have to document some sort of file or theory or thesis, hey, here's why I think this is a good trade.

Here's why I'm allocating $10 million to the stock or whatever it may be. They're not just like, you know, getting an idea, and then it goes up through the roof. Like you have to be able to defend that.

Hey, how did you make this trade that went up a thousand percent? I'm sure somebody's asking that question, and you need to be able to plausibly deny that or, you know, in the inverse, right? Like we think of the big short, right? I think everybody's seen that movie. The guy who made that bet, everyone was telling him to sell that position because it was costing him so much money. And he was just like, but the data, but the data, but the data, you know, the defaults on these mortgages are going to go through the roof and eventually these bonds are going to go bad.

Like eventually the data, the data, the data, and he ended up being right, right? But throughout the process, everyone was calling him crazy because the perspective is mortgage bonds will never fail. That was, that was a perspective. Everyone believed in this confirmation bias of like, mortgage bonds are never going to fail, right? And that, that's what, that's what happened.

Yeah. Well, is there any examples of confirmation bias we've talked about how it can help us, but how does it hurt us or how can it get in the way of what we're trying to do? Well, I've got, I've got an example. It's a little bit different than, than real estate, but maybe it applies a little bit, you know, back when I was working my nine to five job, I had a confirmation bias, negative confirmation bias that there was really nothing else I could do to get away from my day job.

I was an engineer, I really didn't feel like I could make it as a consultant. I didn't know what I was going to do, but then all of a sudden I changed my attitude. I thought maybe there's a lot of opportunities out there and I would go to lunch with someone and that person would say, Hey, I want to, I want to do this and I would think, Oh, well, I could do this with this person or someone else.

I want to do this or you guys were talking about real estate and I thought, well, maybe I can do real estate. So that's, that's not a negative and it's not really answering your question, but it is a real world example of how it, how I changed my, my mind on my confirmation bias and it actually helped me. You know, that's a good example.

One of the other things we can get in trouble doing is when we're looking for investors is looking for hallmark signs of who we think could invest, but ignoring the average everyday person that actually is a can and is capable and ready to invest because we may, Oh, well, we need to get millionaires and what do millionaires look like? They drive this kind of car or they live in this kind of house or they have this kind of job, but we're not, we're not able to see all of the other people that have money to invest. They have really great jobs. We just don't identify them or their job as having money to invest.

So we have to, we have to keep our minds open and reach as many people as we can. And Brad, you can talk to this. This podcast, we have a lot of average listeners and not by a lot.

I use that measurably, but, but the podcast is reached people that we would have not thought could invest, but they have. Yeah, absolutely. I get, we all get phone calls regularly, right of Brian's got stopped at the grocery store.

You know, it's freaking hilarious. Hey, I've listened to every episode of your podcast. You know, we've got emails of people saying we've enabled them to quit their jobs or just completely random investment commitments.

Hey, I heard you guys talk through that deal. I've listened to you guys for the past year, what you're saying resonates with me. I'd love to invest $100,000.

So yeah, you can't judge people, right? For the most part, if you're only trying to ask for money from people who have like, you know, pretentious cars and Rolexes and golf memberships, like, I hate to break to you, but all of their money is going to that shit and it's not going to you and your investments. We have raised so much more money from people that don't have any sort of measurable flashiness. You would generally never know they have money.

Obviously, you know, we know them. So we know they ran successful business X before they were retired or whatever. But generally speaking, he drives, you know, like a scar.

Yeah, we eat at modest places for lunch. You know, we live in Tulsa, Oklahoma, live in reasonable homes. I mean, for the most part, you can't just go around judging people and what opportunities they're interested in.

And I think it's the big, you know, people ask this all the time while we're doing this podcast. And every time I just say it's a passion project to lower the barrier to entry to commercial real estate so people can get outsized returns. I mean, people don't do retirement calculators with an 18% annual compound of return.

And if you did, you would be more excited about getting people involved into that. Good point. Right? It's exciting.

If you look at, you know, 40 years compounding, we've talked about it many times at 8% versus 18%. Some believe it'll blow your mind and you'll be like, okay, I'm going to spend all my free time figuring out how I make 18% on my money because look at this difference. But if you don't think that that's possible or if you don't know how to do that and you think the only thing I can do is put it in a mutual fund, well, then that's fine.

But we're just trying to make people aware that it is possible. And once they're aware of it, some people are going to be like, okay, I'm going to try to figure out how to do that. Yeah, you got to go through life open and ignorant in a way, you know, with the sense of not knowing and an eagerness to learn.

And I think if you can go through life asking more questions than you're answering, you're going to be fine. Well, all right, guys, until next time, I'm not investing in commercial real estate. See you guys.