How To Turn Every Deal Into A Learning Experience
Real estate investing is a numbers game for a reason. Regardless of how well run your business is, deals will fall out from time to time. The more deals you have in the pipeline the easier it is to withstand the occasional lost deal. What can never happen is making the same mistake twice. Anyone can fall victim to a mistake or an oversight on a given transaction. When the same mistakes are repeated you will have nobody to blame but yourself. If you can take something from every lost deal, you will at least get something of value out of it. Some of the best learning experiences will be ones you make yourself, and never make again. Here are five common mistakes that should serve as a learning experience for any investor.
- Not doing your own due diligence. There is a lot of work that goes into every successful transaction. What you don’t see on TV are the hours of due diligence prior to finding the right property and making an offer. This can be a very frustrating practice at times. There are several deals that you will put plenty of time in, only to have fall through the cracks for a variety of reasons. As frustrating as this is, it shouldn’t prevent you from repeating the process on the next deal. The minute you get lazy with your diligence or take a seller at their word is when you will find yourself in trouble. A seller, wholesaler or real estate agent may have good intentions, but it doesn’t mean their data is always accurate. You still need to do your homework and come up with your own conclusions. If not, you have nobody to blame but yourself if the taxes are more than you thought or if the town doesn’t approval a change you had in mind.
- Not knowing the market. The market often determines the strength of a deal. There may be times you are presented with opportunities in markets outside of your primary investing area. Your instinct is to look at the asking price and base your interest off that. Obviously, price is always important, but it should never be the sole reason you pursue a deal. Getting a good deal on a property in a poor market is simply taking someone else’s problem. You can do all the work you want but you will never get the price you anticipate. All you will end up doing is wasting time, and money, eventually just trying to break even. Regardless of the asking price or the time sensitive nature of the deal you need to know the market you are buying into. If there is any doubt you should pass and wait for the next one. If a deal is too good too be true there is a good chance that it is. Instead of speculating on a market you aren’t 100% sure about wait for deal with much less downside.
- Over improving a rehab property. There are several things you can learn from watching your favorite rehab and house flipping show on TV. However, one of the areas that is often overblown is the amount of work put into certain properties. It is important to recognize that not every rehab needs to be the top of the line. Dumping money into a property and over improving for the market doesn’t positively impact your end sales price. Adding more doesn’t necessarily mean more. In fact, in some markets it will have the exact opposite effect. Buyers aren’t willing to pay above market price on items they don’t really want or need. Custom finishes and marble countertops should be reserved for high end markets with high end buyers. This doesn’t mean you should go cheap on every rehab, but you should upgrade according to the market. If not, you will waste money and be left disappointed with your returns.
- Not having systems and formulas. Even though every property and scenario are a little different it is still important to follow strict systems and formulas. Your systems will guide you throughout the process and help dictate your actions. Without systems in place you will bounce from deal to deal in various markets without really knowing what you are chasing after. Although you can find holes in various formulas they act as a good starting point for your financial due diligence. Knowing the cap rate on a rental or the 2% rule for a purchase helps you know where to dig a little deeper. You don’t need to be robotic in how you run your business, but you should have something that will deter you from a deal. If not, you will constantly chase your tail looking for deals.
- Not forming a quality team. Many new investors are intimidated at the prospects of reaching out and forming a team. They don’t think they have the experience or resume to initiate a conversation and get the ball rolling. The realty is that when you are just starting out it is even more important to get on board with a quality team. There are several people that will make or break your success. You real estate agent, mortgage broker, attorney, contractor and property manager all play a role and help shape your business. Every day you should spend finding, enhancing or developing your team. What you will find is that you will lean on them for more than you think.
Avoiding the pitfalls of the business is a big part of success. Making mistakes is part of the business, but it should be the exception and not the norm. Learn from these five common investing mistakes.