Monday, October 15, 2012

The 8 Big Investing Mistakes You Need to Avoid

If you've ever invested in real estate, you probably know some of these mistakes too well. If not, learn from ours! 

1) Buying In Spite of Horrible Neighbors

If the house next door has a house with a boat sinking in the front yard, rusty old car piled up on cinder blocks, an old camper from Woodstock with extension cords running to it and the lawn hasn’t been mowed or cared for since the Reagan administration…think again about your decision to buy.
No matter how much you fix up a house, you cannot change the neighborhood. The neighborhood will play a large role into the buyer’s decision whether to buy or not buy. When investing in real estate, always think ahead to the sale. Think “what would a buyer see that would detract them from buying this house?”
If the predominant answer you get is the next door neighbor, then move on. There are other flips in the sea . . . 

2) Hiring Your Friends

This is always a recipe for disaster. Although I do hire family members (they are in the legitimate trades after all), hiring a down and out friend to paint or roof or do any other subcontracting work on your project is usually a recipe for disaster, leading to wasted time and cost overruns. In many cases, you’ll end up doing the work yourself anyway.
Bottom line, if you hire your “friend” to work for you on a real estate project, chances are pretty good, he won’t be your friend when the project is done.

3) Buying Houses With Title Issues

This is especially true if you are new to real estate investing. Many guys I know make millions buying these kinds of problematic properties. So don’t get me wrong,  there is opportunity here, but only if you know what you’re doing.
Whatever you do, don’t buy a house with a title issue if you are new to real estate investing. Unless you either have lots of money or a real good understanding of title and title law, stay away because it could take years and lots of money to fix.
To avoid these mistakes, have a solid plan laid out with your attorney. But only if you feel confident you can go forward with it.
If you do venture down this road, have a solid plan with minimal loss to simply walk away if the costs run you too high. Better yet, if you’re new, don’t bother and aim for properties with clean title.

4) Hiring Contractors Based on “Trust Me”

This is a painful one. Too much personal experience here, especially in the early days.
I’m trusting by nature, but when it comes to general contractors, beware of the contractor who says“trust me I’ll take care of you”. When you hear those not so magic words, kindly show him the door.
This is especially true if they are reluctant to give you any kind of plan, estimate or time frame for the rehab completion.
Even more importantly, make sure they are licensed, insured and you get everything in writing prior to him setting foot into your property. Lastly, make sure you have an agreement of terms – what he will do for you and exactly by what time and date he will complete it.
Some contractors are notorious for “flying by the seat of their pants.” Don’t fall for it. Get it all in writing.

5) Not Sticking to Your Numbers

Way too common of a mistake here. Aren’t we all guilty of this one?
This is what we call “eraser math” and unfortunately it rarely works out in your favor. If you are about to buy a house and the rehab numbers, the comps, the ARV, the 70% rule don’t quite match up – don’t make the mistake that far too many real estate investors make.
If the numbers don’t work, they don’t work. Face facts and move on.
  • Could you get your rehab costs lower? Could be.
  • Could you sell it for a few thousand over market value? Possibly.
  • Could you buy it for a few thousand over your maximum ask price and still make a profit? Maybe.
Way too many question marks here . . .
Don’t buy a house if you have to adjust your spread sheet to make it work. Don’t lower your rehab budget or add to the selling price. In most cases, you’ll go over your budget and not under.  And then you’ll be under water.

 6) Buying on Emotion

“I love this place! It has so much…potential!”
In real estate investing, talk like this can get you in financial trouble quickly. The problem is that it’s easy to get carried away with emotion. I’ve done it. We’ve all done it. It’s hard NOT to do it.
However the more “detached” you can be, the better. Of course, this may cause you to miss a few deals on the way, which is fine. But the more you stay true to the rules and the fundamentals and theless you lead with emotions, the better off you’ll be.
When you get even the slightest tingling feeling of emotion coursing through your veins, take a break. Remove yourself from the situation. If possible, think with your logic…not your emotions.  And if you can’t get the price you want, move on to the next offer. There will be other deals.

7) “Faking It”

For the new investor, this is so tempting to do. Don’t be tempted to stretch the truth and be more than you are – especially when you are first starting out.
It’s best to be honest.
Yes, it’s less glamorous.
Yes, it may lose you a few deals.
Yes, it may seem like the wrong thing for your business.
But in the long run, it will get you more deals, more partners, more investment dollars and more listings because you’re honest.
People by and large want to help other people. It’s human nature. So partnering with a mentor or someone who knows the ropes can help you get through this early time.
If you don’t have any house flips or wholesale deals under your belt already, it’s perfectly alright to tell people as much. In many cases, you’ll get some old-timer real estate investor to take you under his wing and help you along. Better yet, you could pay for a good honest mentor/coach and ride his coattails to your first deal.  Either way, don’t “fake it.” Be up front and honest.

8) Breaking Promises…and Breaking Trust

The local real estate investing community is tight-knit. Word travels fast about people who are dishonest and untrustworthy. And the quickest way you can make a bad name for yourself is to make promises you cannot or don’t choose to keep.
Reputation is EVERYTHING.
So go out of your way to make sure you keep yours intact. As they say: “Reputation is hard to earn…but easy to lose”
And you can destroy your reputation that took you any years to build up in mere seconds. Sad but true.
So stick to these principles instead:
  • Don’t make a promise you cannot keep
  • Do what you say and say what you’ll do
  • If you give someone your word, don’t go back on it….even if it may cost you thousands of dollars
  • Do your best to treat others as you would like to be treated
  • Be reliable. If you say you’ll be at a certain place at a certain time, be there
  • Be open and honest, be transparent
  • Be fair, don’t take advantage of people
Breaking promises can crush your real estate investing career quickly. Don’t be paranoid about it, just do what is right. If you do that, then chances are you’ll be in good hands.
But when you break your promises and develop a reputation as someone who cannot be trusted, word will spread. Reputations is everything in this business and trust me, word will get out quick.
There are a lot of mistakes you can make in real estate investing, but mistakes are what you learn from, so don’t go out of your way to avoid them.
Source: Bigger Pockets, Mike Lacava