Top 10 Dumb Real Estate Investment Decisions A Free Publication from Remcon Properties Michael Medinger Smashwords Edition Copyright 2013 Smashwords Edition, License Notes. Thank you for downloading this free eBook. You are welcome to share it with your friends. This book may be reproduced, copied and distributed for non-commercial purposes, provided the book remains in its complete original form. If you enjoyed this book, please return to Smashwords.com to discover other works by this author. Thank you for your support. Introduction Investing in real estate can be an incredible way to unlock cash flow and value, even in volatile markets. However, there are pitfalls with investing in real estate, just as there are with any other investment. This free ebook outlines a few of the most common pitfalls so that you, a prospective investor, do not have to fall prey to them. These items are a part of my own experience in real estate investment. I have personally fallen prey to these things, or had a near-miss with them. Take these to heart, and enter the market with the right kind of attitude: plan boldly, and execute carefully. #10 Entertaining verbal offers on property Our firm is in the process of selling a newly renovated property. We’ve received a number of verbal offers from people represented by inexperienced real estate agents. Some were high offers from people we can never seem to contact again. Others are lowballs from other investors who are fishing for a fire sale. In all, these have been monumental wastes of time. Always treat verbal offers like someone who is merely putting feelers out. This is an indicator of interest, but it is often not serious. An easy way to screen for serious buyers is to declare up front: “I will only entertain offers in writing.” This protects everyone involved, and will save you - the investor - a lot of headache. #9 Handing over the keys without a contract Did you know that giving the keys to someone is legally considered a form of constructive ownership? Save yourself from an avalanche of litigation: never give keys to a buyer or renter until the ink is dry on all the paperwork and all the necessary money has changed hands. If escrow is not complete, or if you’ve not collected your security deposit and first month’s rent, then don’t hand over the keys! Talk to your real estate agent for how best to handle your keys, especially if you are unavailable to hand them over on the spot. #8 Risking more than you can afford Sometimes investors get greedy. Inexperienced investors can get starry-eyed over a deal that’s too good to be true. Other times they get emotional during a bidding war and make dumb mistakes, getting in way over their heads. The key to real estate investing is to have a plan and follow through. Know your limits - especially your financial limits! The pre-approval process from a bank is a great way to know what you can and cannot afford as an investor. Choose an experienced real estate professional who can help you get through this process! #7 Failing to keep up with regulatory issues Did you know that the EPA requires a Lead Based Paint disclosure form for all properties built before 1978? Did you also know that this applies to rentals as well as sales? Regulatory pitfalls, taxes, and the nuances of red tape are a mountain of headache for investors, but they must be performed. This is a part of your due diligence! To continue the Lead Based Paint disclosure example, the fine for failing to furnish this is $10,000 per violation. Take regulatory issues seriously and put together a team of professionals who can help you make the best of things. #6 Not having a risk management plan Not all homeowner’s insurance is the same. Some people do not realize that the Private Mortgage Insurance attached to some mortgage notes do not protect the homeowner - it protects the bank! If you are going to be a real estate investor, than owning the right kind of insurance is an absolute must. If you are going to rent property, then it is doubly important that you have the right kind of insurance, especially of the kind that will cover tenants in the event of an accident or calamity. If you own multiple properties, then you should consider a combination of incorporation and working with an experienced property manager. Incorporation will limit your own liability in the event of calamity. A properly licensed, bonded, and insured property management firm will add to your risk management portfolio on the front-end. #5 Being ignorant of accounting basics You don’t have to be a CPA to be a real estate investor. However, you should know the difference between an asset and a liability - as well as the difference between a liability and an expense. If these terms make your eyes glaze over, then don’t fret - get educated! Pick up a book on accounting basics, or take an Accounting 101 class from your local college. The old cliche “Knowledge is Power” is meaningful in real estate investment: in this business, Power is Money. #4 Spending too much on renovation If you know what you’re doing, you can make a pretty penny from a property that requires some tender loving care. Whether you’re just re-doing dated decor or extensive repairs, know your budget and don’t go over! Spending thousands of dollars on a “white elephant” feature that will not give you a net return is killer - it can turn what would have been a great investment into a money pit. #3 Failing to get a home inspection Some people are the “know-it-all” type and seem to know more than they really do. Others have legitimate expertise in real estate and do not want to rely on others. Do not give in to this sort of hubris! When buying a home, always get a professional home inspection. It’s not expensive, and will yield results. You’re very handy with home improvement and don’t need to pay a couple hundred bucks to have a home inspector tell you what you already know, right? Wrong! A good, independent home inspector will put together a list of items that need remediation, and do so in exhaustive detail. If you are buying an investment property, this list becomes an itemization of dings and dents that will subtract from purchase price, thus creating value for an investor. This is truly money well spent. #2 Selling low This may seem like a common sense item, but it happens often enough to mention! Selling real estate is tricky - and it is best done with a clear head. Be on the lookout for high- pressure buyers who want you to take whatever below market offer has been presented. Right now, this is a lot easier since markets continue to be very seller-friendly, and alternative offers are usually abundant. In a cooler market, guard yourself and sell at the right price. Also, beware of selling because of external pressures, such as buying a different property. Patience and planning can prevent tens of thousands of dollars from being swept off the table. If a seller is in a hurry, he can be stiffed with nickel-and-dime items like appraisal, inspection, new appliances, and all manner of other things, adding up to a lot of money. #1 Buying high Even more important than selling at the right price is buying at the right price. If you are a real estate investor, make this your mantra: All value is captured at purchase. Investors who can buy property at the best price are most of the way toward a successful investment. Those who buy property that is too expensive will see no end of trouble. Small expenses are magnified, and the pressure to sell at above market prices becomes way too strong. According to conventional wisdom, the three most important elements of real estate are “Location, Location, Location”. This may apply to commercial real estate, but far less so when it comes to residential real estate. A savvy investor realizes that coastal properties and other highly desirable properties rarely cash flow well as rentals. Not all that glitters is gold! Buying investment properties without a suitable discount will cause stress, magnify expense impact, and minimize returns. This is without a doubt the worst mistake an investor can make. We understand the impact of buying, selling, and everything in between. Call us for professional and courteous advice regarding the next addition to your real estate investment portfolio! . Top 10 Dumb Real Estate Investment Decisions A Free Publication from Remcon Properties Michael. elements of real estate are “Location, Location, Location”. This may apply to commercial real estate, but far less so when it comes to residential real estate.