3 Biggest Mistakes

Investing on May 8th, 2009 No Comments

It happened again. You wouldn’t think it takes much effort to keep up with a blog, but apparently, I am still learning on the whole “Web 2.0” thing.

I thought it may be useful if I shared some of the biggest mistakes I made as a real estate investor, and hopefully you can learn from my mistakes. You hear a lot of gurus say “my blood is all over this material”, and I, to a point, can empathize with them.

So hopefully at least some of this can prove helpful to others…

1. When flipping, start with your AFTER-REPAIRED value, FIRST.

Don’t just assume you’re getting a great deal because you took $30K off the list price in your negotiations. List price DOES NOT MATTER. EVER! One of my first deals in Massachusetts, I was so excited to finally be negotiating for a deal. An owner (motivated seller, of course) was selling her house in a nice section of Haverhill (for those who know MA). She was selling it for $272,000. I had learned from listening to others negotiate, that a great question to ask is “is that the best you can do?” after every counter offer. So, I was able to negotiate the seller down to $241,000, AND I got her to pay 2.6% toward the closing costs (why didn’t I go for 3%, or 5%? Well, I TOLD you I had no idea what I was doing).

Sounds like a great deal! Well, I spent weeks marketing this property to my buyers list, which I was just building. I was wondering why no buyers were interested. Then, one of my buyers educated me on “ARV” (after-repaired value):

ARV on the property was around $260K at the time. Contracted for $241K (what a sweet negotiation!), needed maybe $40K in work. OOPS! Thank goodness I never closed on that property. Lesson learned – start with the ARV FIRST, then subtract all your costs from THAT number (INCLUDING your profit requirement).

How do you get an accurate ARV? You must form a relationship with an investor-friendly real estate agent, who should know what the house needs for “flare” and how to accurately price it to sell quickly. Unfortunately, I could not find an agent I could work with, so I became my own agent. Now being surrounded by them, I’ve found many who would have been good candidates!

2. Family members may NOT be the best partners suited for your business.

Before I continue with this story, I just want to say I have a fantastic relationship with this family member. He and I have an awful lot in common, and he’s one of the smartest guys I know. However, for the task we had at hand, he was not our best choice.

We had just finished a condo conversion in Somerville, MA where we had closed on the 3-family property for $749K (this is back in 2005), and the seller wanted to lease it back from us for around $20K. Nice chunk of change to start our rehab! We had all the units rehabbed and completely redone with the stainless steel, square tile, refinished hardwood, the works. We were poised to make a good small fortune upon resale of these three units, which we turned into condominiums. (As you can see from the picture, I still attempted to do most of my own work back then – another horrible idea! My time was MUCH better spent elsewhere…)

So we decided to enlist the help of this family member to list the condos through his office. We did not check credentials or his performance / closing ratio – we just knew he was family, and that he could sell them for us. Well, it was also the top of the market here in Boston – condos sat on the market for one month… a second month… then a third… and no offers.

After three price reductions, and us switching to another agent, we lost quite a bit of money on that deal. However, it taught me the lesson to always qualify EVERYONE on my investment team. You have to know what questions to ask, and you should reciprocate the relationship with your agent (or attorney, inspector, etc) by establishing yourself as a loyal client and performer with them.

Nothing is better than if you have your entire team working for the benefit of everyone else. If you do your homework up front, your transactions go a lot smoother and you spend a lot less time!

I have some power team questions that helps qualify some team members; if you’re interested, e-mail me, I’ll e-mail you the attachment.

3. Property Management – Tenants LOVE to “test the waters”.

My first experience as a property manager was when I closed on my first 4-unit in Haverhill, MA, which I still have today. I took over ownership, and immediately assumed that the tenants would all just continue to pay as was shown to me on the statements before I closed on the property (not really having any clue about due diligence back then, I also didn’t really verify any numbers the previous owner showed me, but that’s another blunder for another day!).

The tenants were notified through a letter that their management had changed hands. The first month, everyone paid; the SECOND month, one tenant was about $500 short on her rent. “My Mom went into the hospital, and I had to pay her medical bills.” Well sure, how could I say anything to that excuse?

“It’s OK – we’ll work something out. Just do your best for now.”

That was probably the WORST answer I ever could have given her.

Next month, I received NONE from her… and worse, the OTHER tenants paid a partial amount, or were 15 days late. Hmmmm… it’s almost as if they knew they could get away with it!

Now having been in the business for a few years, I’ve heard every tenant sob story there is to hear. The truth is, everyone has priorities. Housing (at least, for me) would be a BIG priority, so I would make sure I’d pay that bill as one of my first every month. Now, I tell every tenant up front,

“This is my primary business. I don’t want you to leave this community, but I have to tell you, the systems are automated; you are late by one day, and our system sends you an eviction letter.”

Do I still have to send eviction letters? ABSOLUTELY. However, I will say that now when a new tenant moves in, and their third month when they are one day late, they receive that letter – and they are never late again.

You should treat your rentals as a BUSINESS, since that’s just what it is. You’re in the business of providing clean, affordable housing to your tenants. In return, they pay you for that service.

Of course, there have been a hundred other lessons I’ve learned (and continue to learn) through my investment efforts. I find that those are the best ways to learn; but, if you can avoid one or two by hearing someone else’s sob story, why not?

Happy Investing!

Nick A.

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