"Survivorship Bias" principle teaches newcomers to ignore the advice of experienced real estate investors and analyze the failed experiences of other newcomers first.
Table of Contents
Aysia Harris wrote at BiggerPockets: "Where would you guys recommend starting off wholesaling as a beginner?"
Jonathan Greene answered: "Learn how to estimate repair costs. If you don't know repair costs as a wholesaler, you are worthless to all investors."
In mathematical statistics, such advice is considered the "Survivorship Bias" logical error:
Survivorship Bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to some false conclusions in several different ways.
"Survivorship Bias" Example
In World War II, 50% of U.S. bombers did not return from a mission. The bombers that did return had holes in them. The military could not armor the entire bomber, it would be too heavy. They had to decide which parts of the bombers needed to be armored.
The U.S. military began collecting statistics. They were marked on a single drawing the holes of dozens of returning bombers:
The Air Force leadership analyzed the drawing and decided to armor the wings, the center part of the fuselage, and the tail, where the most hits occurred.
Fortunately, the mathematical statistician Abraham Wald also saw the drawing. He gave it the exact opposite interpretation:
- The red dots show places where hits did not prevent the bomber from returning to base. Therefore, it makes no sense to armor them
- The military must armor the white spots on the blueprint where there are no hits! These are the gas tanks, the engines, the cockpit, and the rear gunner's hemisphere:
After armoring using the Abraham Wald method, the percentage of bomber losses dropped from 50% to 20%.
Estimate repair costs
Back to the advice of an expert investor for newbie wholesalers: "Learn how to estimate repair costs."
Builders need an accurate repair estimate, but wholesalers don't. In the era of COVID-2019, many wholesalers have even started doing remote repair estimates. The remote estimate is not very accurate, but it's enough for wholesalers.
And what is a critical skill for the novice wholesaler?
Critical skill for the novice wholesaler
Only one out of every 100 novice wholesalers makes it to the end of their first deal. That 1% is the "survivorship." Buyer investors give sincere advice to 100% of first-time wholesalers based on their experience with the survivorship 1% of first-time wholesalers.
But 99% of novice wholesalers are "dead" for real estate investing. An investor-buyer cannot advise "dying" novice wholesalers because he cannot see them.
I would like to give novice wholesalers the following tips.
1) First, the newcomer must "survive":
- Streamline the search for motivated sellers
- Streamline the process of adding to the list of investor-buyers
This will move the novice into the 1% of novice wholesalers who have "survived" and have been able to submit their first deal to investor-buyers for consideration.
2) Only then the "survivorship" newbie wholesaler can listen to the advice that investors-buyers give to the 1% "survivorship" novices.
Would you like to receive articles like this? Subscribe to our mailing list right now.