Three Understandable Goofs Newbie Real Estate Investors Often Make

Note:  This is the next post in my series the ABCs of Buying, Selling and Investing in Real Estate.  Each post, I choose a letter (U this post) and write a fictional advice column about the post.   The story is fake, but the advice is real(ty)

 

This post continues the story found in Three Underappreciated Investments All Real Estate Investors Need to Research

Ulysses called me one late Tuesday evening as I was enjoying an after dinner drink on my back patio.  Ulysses had contacted me about a month earlier asking about how to get started investing in real estate.  He had done a lot of research into real estate investors, but a lot of it contradicted each other so he was not sure what steps he needed to take to get started in the business.  After our initial conversation, I was hoping he would just jump into the mix and we would start looking at investment properties together.  I had not heard from him so was pleasantly surprised when he called.  I was immediately disappointed, however, when he started off by saying he had yet to do anything.  He was still doing some reading and listening to podcasts.  He said he felt he was finally ready, but had one additional question for me before we went looking at properties.  Last week, he had attended a local Real Estate Investment club and got involved in a conversation where each investor was talking about their worst investment.  Almost all of them, Ulysses told me, had been the investor’s first project.   None of them had turned out like the investor had hopped with many of them losing money.   He wanted to know what I thought were the biggest goofs I had seen newbie real estate investors make with their first projects.  

This is what I told Ulysses….

I told him that I was going to be frank with him and said he really needed to get away from the education via books and podcasts and just start looking at properties.  He had been studying for a very long time so he had real no excuse not to go look at homes.   There are some things you have to learn by doing and with real estate investment(REI), there is no better teacher than diving into your first project.   I did lighten my tone after that initial remark and told him that everyone makes mistakes so he shouldn’t be afraid to move forward based on some conversations he had with some seasoned investors.   I told him. “You either win at investing, or you learn something about it.  Failure shouldn’t really be in your vocabulary.”   Ulysses said that was all great advice, but he didn’t want a lesson to cost him thousand of dollars if he could help it by learning from other peoples mistakes.   I smiled at his retort.  It made sense.  With this in mind, I told him about three goofs that I had seen some newbie investors make in the past.

  1. Pay a Huge Fee to Learn REI –  in the world of REI, everyone is an expert and has something to teach others about their experiences.  Almost all of them will make claims that their method is the only method that will get the students millions of dollars in profit via REI.  Some of these experts are celebrities from Television while some are just other investors who feel they have done enough to be an expert in the field.   No matter who it is, almost all of the real estate investors will charge you some premium fee to learn their master technique to succeeding at REI.   I would have to say that 90 percent of them is not worth the money.  Don’t pay it. There are plenty of places  to learn without breaking your bank before  you even put in one dollar into an actual real estate investment.  I have had newbie investors call me asking for some specific information that their mentor had told them only real estate agents could get for them   I had to explain that their mentor had told them wrong.  For example, one investor called me with telling me that he wanted to know all the properties that had been bought with cash in the last year.  I explained that the date was inaccurate at best because real estate agents were notorious bad record keepers.  Even if we were good at that chore, the license agreement I had signed with the local MLS preventing me from providing batch information to my customers and clients.  I found out the investor had spent $999 on the class.  It was a complete waste of his time and money.
  2. Buy a Property without due diligence – Here are two concepts newbie investors should learn today and stick with them.  Option period is a time period that you you get to allow you to inspect the property at length to determine rehab costs, which then gives you ammunition to send over a repair amendment to the seller.   I never recommend that an investor goes without the option period no matter the tempation.   You don’t want to take a chance and roll the dance  to find out that you got a lemon that requires thousands of dollars more to fix than you anticipated.  Along the same lines, newbie real estate investors should try to avoid the “blind offer.”   This is the type of offer you send to a seller without even looking at the property.   Most good listing agents will not even consider blind offers because of the high likelihood that the real estate investor will back out due to something discovered about the property.  It wastes the time of the seller.   I personally believe that blind offers are a very bad business practice for real estate investors because you can get yourself into some terrible situations  Of course, it is sometimes unavoidable like with foreclosures, but it is something that should not happen if you can help it.
  3. Try DIY for the Rehab/Repair Work – We all have had some experiences of some kind helping with rehab/repair work at home.  These experiences do not equate to you being a pro at rehab work.   Many newbie investors feel that they can save a ton of money and try to do the work themselves with real no experience in doing most of the work.   Buyers are not dumb and they can tell almost immediately if a rehabbed house was done by the investor versus a contractor by the lack of quality in the repairs.   Even if you know how to do  some of the work, don’t do it without a contractor there to help.  It is better to spend the money on the contractor than have a house that sits on the market for months because the rehab work you did yourself is not on par with buyers’ expectations.

Ulysses sighed.  He said he had heard similar stories from some of the investors he had been discussing REI.   He admitted to me that he had already learned the first goof, having spent some money on an “expert” who turned out to be too good to be true.  He wasn’t even remotely interested in doing a blind offer on a property and didn’t see the logic in foregoing the option period.  Finally, he said he had no rehab experience at all so contractors would be his first call after his first purchase.   He asked me to send him any properties as he was finally ready to make the leap.   Silently, I yelped with joy!