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Investor Errors to Avoid
Error #1: You don’t evaluate enough properties to get a “knockout deal”
You look at 5 or 10 properties and “fall in love with one” or you write offers on everything you see trying to get “low–ball” deal which turns out to be just a waste of your time. The key to success in foreclosure investing is making good use of your time. Set up your criteria for evaluating whether or not you have a winner and stick with it. Every week, use the 50-5-2 approach. Evaluate 50 properties, look at 5 make and make an offer on 2. That’s much better than driving around to see 50 and never writing a “good offer”. Also, remember that most great investment properties fit into the area you are investing in. Watch out for oddball type properties and that includes properties that are way too big or way too small. Most suburban homebuyers are looking for the typical 3 bedroom, 2 bath home with a 2 car garage. If you buy 1 or 2 bedroom homes with only one bath it will take longer to market. Same goes for homes where there is no place to park a car.
If you’re a lst time homebuyer or even a homebuyer making a move or stepping up, you have an opportunity to walk into a substantial amount of equity. Buying a home is different than buying an investment property. For example: How long will you live there? Do you need to be in a neighborhood with children near schools? These may be considerations in your decision about which property works for you. But, if you want to take advantage of a great deal, you may have to balance your homebuyer instincts with home investment sense as well. Would you live in your 2nd choice neighborhood if that property was so good you could likely resell your property two years later and pocket Tax Free up to $250,000 if you’re single and up to $500,000 if you’re married? But what if it was going to make your family so miserable that you instead wound up in a divorce. There are many great property opportunities so make very careful choices.
Error#2: The deal looks too good to be true and you buy a property without due diligence.
More than one investor experiences this problem. Failing to get an inspection. Not conducting a comparative market analysis prior to buying and only later discovering that the home lingers on the market or has to be sold at a loss just to try to cover the loan.
Discovering later that the property has a zoning violation such as a garage built too close to a property line or an added room that had no construction permit.
Watch out for LIENS. There are certain liens that stay attached to the property. These include IRS liens, mechanic’s liens, contractor liens and property tax liens. Make absolutely certain that none of these show up on your preliminary title reports because if they do, they will be coming out of someone else’s pocket and that pocket could be yours.
Error #3 – You Purchase a property with a “history.”
What is a “history?" Properties that have been contaminated with mold or amphetamines-amphetamines which require more than average cosmetic rehab efforts. In fact these properties require govt. inspections prior to being sold.
Yes, you as an investor can still buy the property using a hard money cash close. The problem develops when you try to sell the property to a homebuyer who has to get the property by qualifying for a conventional, FHA or VA loan and the lender won’t touch it. Also, some properties with mold or contamination have to be gutted and all contaminated materials properly disposed of, not “dumped”.
Other examples of properties with a “history” are properties where there has been a heinous crime such as a suicide, murder, torture or other notorious act. These properties are difficult to market to homebuyers because of homebuyer fears about “bad karma” or other superstitions. Some properties are even believed to be haunted. Although there is no valid reason for the ongoing belief that the property itself brings bad luck, when given the choice between a property that has no such history and one that does, the home buyer will close the one that is “clean” every time. One of the problems is that the neighborhoods know the history and that often people attach a stigma to the family. Oh, you moved into the old “Jones house where the guy murdered his family. Clearly as an investor, you have many properties to choose from without this type of problem that will affect marketing the home for resale.
Finally, beware of properties that have been listed for sale for a year or longer. In fact, some properties have been for sale for several years. What is wrong with it? Even if there is nothing wrong with the property, your homebuyer will think there is.
Some lenders are very skeptical about loaning money on these types of properties, including your hard money lender.
Error#4: The loan you set up with your lender is not structured correctly.
Generally private hard money lenders charge points to set up the loan and a higher interest rate. Some lenders will give you funding without asking for any payments until you sell the home. Some lenders will also loan you the money you need for the rehab. Don’t set up a loan that is expected to be paid back on a short fuse. What if you can’t sell the property in 3 months. What lender charges will be tacked on? Are there other penalties that could affect your bottom line profit?
Error #5: You buy properties in an area where property inventories are overloaded.
Some areas of the country have vast inventories of homes that cannot sell. The prices are so low that it’s like giving the property away. Lenders stay away from loaning money in these areas and you should too.
You have to look at the fundamentals. Why are so many Detroit homes vacant? It’s simple. Lack of jobs. The automobile industry there is depressed and so is the real estate market. If you’re going to invest, choose good neighborhoods with good economic fundamentals and good future prospects. Good prospects are not based on rumor. They are based on fact. Do your homework. It sounds good that a WallMart is coming to a small town until the residents start moving out because they lose their jobs at retail stores and other businesses that can’t compete.
Error #6: You fail to rehab properly and either overspend or under spend.
If you buy a property @ $100,000 that is bank owned and you do absolutely nothing to improve it, why would a new lender be willing to loan more than $100,000 on that property. Nothing has happened to improve the property so isn’t it really just worth what you recently paid for it? Some investors are very unrealistic, expecting to buy a property and then resell it days or weeks later for $50,000 profit without doing anything to the property. Fixing the roof is minimal maintenance. It does not substantially boost the value of the home. Everyone expects the roof not to leak. Banks respect rehab projects. A good rehab does improve the property value. It can even be a cosmetic rehab like fixing the landscaping, repainting, new light fixtures, getting rid of the old cars, new double pane windows to make the house more energy efficient. If you’re going to do rehabs, pick up a good book at your local bookstore on how to rehab and what adds the most money to the property. It will really open your eyes. The other problem is “over-spending.” You decide to add granite counters. You replace all the doors with solid wood. You install super high-grade carpeting. All of these would be expected in a high end property in a high end neighborhood but if you’re in a lower income neighborhood, it’s over kill and it only eats up your profits. Use common sense. Economy light fixture replacements, good grade of paint instead of the best, economy grade appliances instead of designed appliances. In today' market, you want to create a property that has good “eye appeal” but a new coat of paint sometimes does just the trick. Some rehabbers install one really good thing that “fits the home but doesn’t stand out like a sore thumb. For example, adding a built in dishwasher or a micro-wave oven with hood over the stove….or a nice shower head or two tone paint job. Also, on the subject of paint, pick good neutral colors. Some rehabbers use the same paint color every single time because they know people like it. Avoid stark white. It costs pennies to add some nice neutral colors and just a little planning. Remember, everything you add to the project deducts from your profit.
Error #7: You wait to start marketing the property until after the rehab is done
Some rehabbers don’t want to spoil it for a homebuyer by showing the property until it is completely finished and “sparkles”. This is a mistake for two reasons. First, the longer you delay the marketing the less prospective home buyers you add to your data base which affects not only the sale of the current property but your next property. Second, the homebuyers actually love to see the rehab in progress because they still have the opportunity to get involved, pick colors, carpets, etc. It makes them feel like it’s their home because they help put it together. Tell each prospective buyer that you will sell the property with a Home Buyer’s Warranty Plan. It reassures the buyer that they will not have significant out of pocket expenses. A plan like this might cost you $195 to $395 but it covers things like water heaters to go out and other things that could go wrong. Also, if you build your “buyers List” you will literally have people lining up to work with you because they know you sell properties at wholesale prices. Smart investors market the property immediately as soon as the rehab is underway and are sometimes able to sell the home in just a couple of weeks even before the rehab is finished. The quicker you sell the property the lower your costs will be on the money you borrowed. The result is more bottom line profit and more deals that you can do.
Error #8: You rely on your gut instead of an appraiser and a CMA.
Investors don’t guess. They pack a calculator. They do the numbers. They hire appraisers. If you don’t want to do these steps, don’t get into the real estate investing because you will lose money. A CMA lets you know what real properties recently sold for that are comparable to your subject property. Carry and purchase the best calculator known to man. A CMA is not gospel and is definitely not 100% foolproof if you are dealing with a one of a kind property. Carefully evaluate the CMA report. Analyze it. Look at the sales prices, average sq. footage, property conditions, etc. These properties in the comarison report may merit further research or a drive by for comparison purposes. Get yourself a good calculator and pack it around with you. If you expect to make money in investing, you have to sell your property less than the CMA valuation in most cases. If you sell it at full price you could have the property sitting there or many months. Once of the best knows mentors in rehab says, “Don’t be Greedy”. It’s an adage to live by in your investing business. Make a good fair profit and move on to your next deal. Word of mouth spreads and you’ll have plenty of homebuyers to work with as friends and family of homebuyers you’ve closed come to you for property. Sometimes other investors will buy these properties from you for long term rental and that works too so correct pricing is vital to your sales strategy success.
Error#9: You fail to get enough bids on the rehab work.
Sheet rockers, painters, electricians and other tradesmen are vital to your success. Make sure you get a written bid from at least 3 for each aspect of the project. Also, beware of subcontractors. If you pay the contractor and the subcontractor doesn’t get paid, the subcontractor can place a lien on the house and you wind up paying twice. Make sure you write in your agreement a deadline for the completion of the work and the penalty if it’s not completed on time.
Error # 10: You fail to build your list of potential buyers
Instead of setting up a card filing system or a database, you write information about buyers on scraps of paper. Bib mistake. You need to keep a list by date, name, 2 telephone numbers, e-mail, fax, address and information about where the buyer is interested in living and what type of home, such as how many bedrooms, baths, parking, schools, etc. Your buyers list is the most vital part of your real estate investing business.
Error #11 - You don’t understand the difference between “pre-qualified and “pre-approved.”
Your end buyer winds up not qualifying and your property is tied up for 30 to 45 days. Make sure you do not put your property under contract until you are assured by the buyer’s lender that the buyer is approved for a loan. If your buyer promises cash, verify the bank accounts and get the buyer to put that money into escrow. You can’t afford to waste 30 to 45 days tied up with a buyer who can’t perform. But, if it happens that is when you list of buyers is going to be a big help.
Note: Now, most banks and financial institutions will require you to show “proof of funds” when you are offering to do a deal with cash. They treat a private hard money loan the same way and will need to have proof from you lender if the form of a letter that the funding and closing will occur timely. Part of the trick in getting the best deals is to be able to move quickly. Discuss this with your lender and go prepared when you meet with the banks REO agent. The REO agent will recognize you as a professional when you are prepared to write an offer and show proof of funds.
Error #12: You fail to anticipate the possibility of the unexpected and have no reserve for it.
For example, the tear down of a bathroom wall reveals mold. Always add at least a month or two of carrying costs to the expected selling time and keep at least 10% in reserve for the unexpected repair.
Error #13: You try to do the contracts yourself but you don’t know what you are doing.
You may think you’re going to save money without having a real estate agent or lawyer involved and you wind up making serious mistakes on the contracts. Make sure you are doing your contracts, paperwork and closings correctly. Also, a lawyer can also set up an LLC for you to protect you from personal liability. Most private money lenders don’t care if the entity that buys the property is an LLC as long as it is property set up and documented. In fact, many prefer it since it isolates the property from you personally.A well written offer to purchase will contain an “assignment clause." That way, if you decide that you don’t want to do the property yourself, you can sell your purchase contract to another investor for a few thousand dollars. You can usually find investors interested in these scenarios by going to your local investors association meetings. Note: Some banks and financial institutions will no longer accept assignment clauses in the offers so be prepared for that scenario. You can consult an attorney about using an LLC to write the offer and in some cases an investor has sold the entire LLC to another investor and as such the property under contract goes with it.
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