For me, real estate investing is fun.
I get to make all the decisions and don’t have anyone to answer to (other than the wife and kids). But with all this comes a high level of responsibility; the responsibility to do the right thing for the seller, your business, your family, and the responsibility to do the right thing for the buyer and neighborhood.
If you’re new to the business, you are in the learning phase, doing everything you can to avoid mistakes that could damage your new business. The question is - which mistakes will hurt you the most?
Here are 8 real estate investing mistakes that will quickly eat into your profit and reduce your bottom line.
Mistake #1 You're Paying Too Much
First, paying too much for a property will kill your deal every time. You make your money when you buy the property so the lower your purchase price, the more room you create for profit. Pay too much and your profit takes a hit. Purchase price determines everything, including how much work you can put into the property, what you have to list the property for, and how much you will make in the end.
Avoid paying too much for a property by evaluating the whole deal before you make your buying decision.
- Comps: determine the property’s current value and after repair value (ARV)
- Repairs: assess costs and estimate the project timeline
- Deal analysis: run the numbers to determine the viability of the deal. At a minimum, look at purchase price, holding costs, repairs, buying & selling transaction fees, as well as a conservative sales price
Mistake #2 You're Pulling Bad Comps
Comps exist to qualify offers. Bad comps will not only prevent you from qualifying the offer, it will indicate to the seller that you aren’t serious or haven’t done your homework.
When pulling comps, look at the following values to make sure that the properties you’re puling are truly comparable to your property:
- Distance from your property - 1 mile or less is best. If the property is in a development, pulling from the same development is ideal.
- Number of bedrooms
- Number of bathrooms
- Square footage
- Lot size
- Number of garages
The name of the game here is validation. Validate your offer with good comps and it will be much easier to negotiate and get your offer accepted.
Mistake #3 You're Underestimating Repairs Or Not Doing An Estimate At All!
It is critical to accurately estimate the repairs necessary to sell a property BEFORE you make your buying decision.
When you know how much you will need to spend on repairs before you can sell it, only then can you determine how much you can buy the property for. If you have no idea how much you’ll need to put into the property once you own it, you will end up paying too much and not being able to sell it for an amount that will make you a profit.
Not only are repair estimates going to help you craft the right offer, but they will also qualify the offer that you’re making. Your repair estimate is a key negotiating tool to use with sellers and lenders during the buying process, which is another reason why it’s so important to, not only do a repair estimate, but to do it completely and correctly the first time.
Mistake #4 You're Underestimating The Timeline
For every day that you hold onto a property you pay holding costs such as financing, interest, utilities, property taxes, and HOA fees to name a few. It doesn’t take long for these costs to add up and reduce your profit significantly.
If repairs are not accurately and completely estimated from the beginning, time and cost will increase - and this is time and cost that you didn’t budget for. The more time and cash put into the property, the less profit you get out at the end.
Mistake #5 You Aren’t Doing The Numbers
Play around with the numbers and you will quickly see where your purchase price needs to be in order to create a good deal. Doing a complete deal analysis before making your offer gives you a snapshot of what the deal could look like using several different buying, rehabbing, holding, and selling scenarios.
When you have your supporting materials and all your numbers, the analysis will give you a very good idea of where you will stand financially and the maximum amount that you can pay for the property.
The deal analysis is another key negotiating tool with sellers and lenders and you can never have too many supporting materials. Show them how you got to your number so they don’t misinterpret your offer as a lowball.
Mistake #6 You Are Over-Improving Your Properties
Don’t get emotionally attached to your properties. One of the biggest mistakes new investors make is over-improving a property. Improve properties with your head, not your heart.
There is a difference between rehabbing and over-improving. Once you cross the line between rehabbing and over-improving, you are throwing money away. Different markets, and even neighborhoods, call for different levels of repairs and materials when rehabbing a property. It’s your job to figure out how much you really need to do.
Common profit killers:
Granite countertops - Depending on the neighborhood granite countertops may be just a perk, and you won’t recoup that money, whereas in more upscale neighborhoods, granite countertops are expected and will help you resell the property for market value.
Custom closets - Yes, people love walking into a huge closet with lots of custom shelving, but it’s unnecessary and doesn’t add dollar for dollar value to the home. This is a perk that won’t recoup the expense of putting them in.
Carpet - New carpet is great and adds value, but putting in top of the line carpet doesn’t add more value than putting in the average stuff.
Hardwood - People love the look of hardwood, but don’t automatically go top of the line when choosing your materials.
Tile - Unless you’re in an upscale area or neighborhood that calls for porcelain tile, you can most likely get away with linoleum.
Appliances - Stainless steel looks great, but the neighborhood may not call for stainless steel and white or black will suffice and save you money.
Furnaces, Hot Water Heaters, AC Units - Replacing or upgrading furnaces, hot water heaters, and AC units that are currently functioning won’t add value, so save your money and have them serviced by a licensed HVAC professional whenever possible.
Over-styling - Keep it simple. Keep it neutral. Improve with your head, not your heart. Don’t improve a property based on what you like, improve it based on what the overall market likes. Remember, this property is an investment, not an extension of your personality.
Know your market and don’t go overboard during the rehab process. Spend money where it makes a difference. If you aren’t directly increasing the value of the property or impacting the buying decision - don't do it!
Mistake #7 You're Pricing Your Properties Too High
This is the worst mistake you can make and can cost you a LOT of money.
Overpricing your property means that you’re going to hold onto it for longer, increasing your projected holding costs and eating into your profit.
Here’s how to avoid overpricing:
1. Ditch the emotional attachment.
When sellers are emotionally attached, they have a hard time seeing the reality of the situation. If that sounds like you, bring in an objective party to help with the valuation.
Use your comps as your guide when pricing your property.
Recognize that the market determines how much your property is worth no matter how much blood, sweat, and tears you have put into it.
2. Ignore the realtor who says to list it at the highest price.
Some realtors will over-inflate their valuation to get your listing. This means you’ll end up holding on to the property for longer and miss out on potential buyers.
Have several realtors look at the house and tell you what they would list it for.
When a realtor does give you a number, ask them to how they got to that number. A good realtor will show you comps, the rest will try and dance around the topic.
Choose the one that gives you a solid number backed by actual data. They should also have a plan on how they are going to market the property for you.
3. Don’t increase the price to cover additional expenses you incurred on the rehab. Just because you put more money into the property during the rehab phase than you anticipated doesn’t mean you should adjust your sales price to cover the additional expense. Unless you added an additional garage or significant square footage to the property, the comps are what you need to pay attention to when pricing your property for sale.
Once it sits on the market for too long, buyers start to think that there must be something wrong with it, even if the price has been reduced. You're always better off listing at market value, or below, for a quick sale.
Understand that you will never sell an overpriced property.
Mistake #8 Buying In A Bad Location
Know your market. The saying is “location, location, location” for a reason. Think long and hard when determining the areas where you want to invest.
We’ve said it before and we’ll say it again: RUN COMPS. Drive through neighborhoods. Do your research and find out how long properties are taking to sell in different areas that you’re investigating.
Don’t get sold on an “up-and-coming” neighborhood without doing your research first. Find out what is happening right now to improve the area and make it more valuable. Is it a market that people will be flocking to in a year or 10 years? Be clear on what is really happening in that market.
You may be able to buy a property for $25k in an unsavory part of town, but then what?
- How much can you resell it for?
- How much work does it need?
- How quickly are properties selling in that area?
- Will you want to drive to that area multiple times to work on the deal?
Conversely, never buy a property that’s going to be the most expensive house on the street - the comps will kill you every time as buyers will fear that it will be tough for the value to increase.
These are all questions that you must answer before buying a property. If there’s a doubt about being able to resell a property because of its location, don’t buy it! There will always be more deals to choose from.
The real estate market is a great place to be right now. Interest rates are incredibly low and buyers are taking advantage of it. Inventory is low, and homes that are priced right are selling fast.
Are there any deal killing mistakes that you've made in the past and vowed never to make again? Please share them with us by leaving a comment below.