You’re about to discover what NOT to do when investing in real estate. So often, creative real estate investors and educators share their positive experiences. But there are a ton of pitfalls in the world of real estate, too. In fact, I would argue that more people fail than succeed in this business.
So rather than focus on what to do, you’re going to learn what NOT to do.
Why am I qualified to share with you what NOT to do? First, I am a regular contributor on this blog, and from the comments I receive, it would appear that y’all recognize me as an authority on this subject of creative real estate investing.
Second, as a real estate mentor, coach, and trainer, who has worked with thousands of real estate investors on thousands of deals, I have been exposed to a gigantic number of “real world” situations.
Third, I buy distressed real estate, and the owners of those types of properties usually have a story to tell of what went wrong.
When you combine all of this, it becomes obvious that I have been exposed to more real estate deals (both good and bad) than most people will ever have the opportunity to experience in an entire lifetime.
Here’s what NOT to do when investing in real estate…
Do Not Get Involved in Deals You Don’t Fully Understand
Real estate is not like other investments.
Let’s take stocks, for example. If you buy stocks the traditional way, the worst that can happen is you lose the money you invested, right?
However, what’s the worst case scenario with buying real estate the traditional way? You could not only lose all the money you put into the deal, but you can also sustain additional loses if you borrowed money and some of that borrowed money was lost.
Plus, real estate requires consistent, ongoing oversight on your part. As the owner, you have ongoing responsibilities, even if you hire a property manager. New problems you never expected appear and decisions have to be made. Therefore, a bad real estate investment can cost you more than just your original investment. You can go into additional debt if the loses exceeded what you put into the deal and the whole ordeal could take up a ton of your time!
NOTE: This article is not intended to frighten you, but this is the real world here and we might as well get real with this!
Deals You Don’t Fully Understand
It’s like burning money!
If you don’t know what’s the worst that can happen if a deal goes sour, you don’t fully understand a deal. The list of investors who have fallen into this category is long and distinguished. Classic examples include:
- Developers who take on projects that sustain gigantic loses and cause them to lose everything.
- Turn key property buyers who have purchased pre-rented, already managed rental properties half way across the country
- Landlords who own barely cash flow positive properties who get a bad tenant who lives for free for several months
- Rehab projects that end up half done because a contractor walked out on them, or a building inspector required work be ripped down and done over.
- Tax lien investors who discover that getting the property back at the tax deed sale was not all it was cracked up to be and now they are stuck with a basically unsellable property and have to pay property taxes.
And that’s just the beginning of such a list of situations where the investor did not truly understand what they were getting themselves into when they got involved in a deal.
“Getting Involved” in Deals by Using Your Own Cash or Credit
By “getting involved in deals,” I am specifically referring to when you put your own money or credit into a deal. If you invest creatively, and avoid putting any of your own cash or credit, and you have no personal liability in the deal, if things go bad, you have very little downside risk.
For beginners (and even seasoned professionals), creative, low risk investing is a terrific way to avoid getting too involved in any one deal. However, most people are not truly educated on how to invest creatively so they put their own money, their own credit, their personal signature, or all of the above on the line.
The Danger of Getting Lucky
A hidden danger lurks when an investor gets involved in deals that they don’t fully understand but still manage to end up making money. I call that, “getting lucky.” And I have seen how dangerous it can be because the investor gets a false sense of reality.
What can happen is the investor pushes his/her luck by going bigger on the next deal, and that’s when things can come crashing down. This happened to many part-time real estate investors in the mid 2000s. They were not fully aware that they were in the midst of the biggest real estate bubble in history. They started off good, but with each new bigger deal, they didn’t realize they were inching closer and closer to disaster.
When the market collapsed, these unfortunate folks not only lost their original investment but, in many cases, their properties went to foreclosure or short sale and (in some states) created deficiency judgments.
If you are one of those people, my heart goes out to you, and I hope that it doesn’t scar you for life because it can be an expensive, but very valuable learning lesson.
There is hope! You can avoid investing in real estate unwisely…
Investing in Real Estate Wisely
Investing in real estate wisely can be done in one of two ways.
- Get involved in deals that you fully understand. That requires education.
- Avoid using your own cash, credit, and personal guarantee.
Even if you don’t fully understand the deal, you’re only big lose would be your time. However, that approach to investing requires education, too. So no matter how you slice it, if you truly want to invest wisely, you have to educate yourself. And to educate yourself, you need to read, watch, and listen to trainings, as you are doing right now.
Certainly stay connected to CREonline.com because there is always new and fabulous education on creative real estate. But you are also going to have to apply what you learn and try it out in the real world. A ship may be safe in the harbor, but it wasn’t built to stay docked at port.
Share Your Real Estate “War” Stories
Using the power of this wonderful and varied audience of readers, let’s all learn from each other! Please share examples of real estate deals that have gone really bad.
Comment below. The more extreme, the better! We can all gain from hearing real estate war stories because there are always great lessons in them. Let’s hear some stories of what NOT to do when investing in real estate!
Article is informative! Please write about reasons why land developers make losses!
There are a ton of reasons why land developers can have deals go south. Maybe the market tanks and builders don’t want to buy the lots anymore. Maybe the actual development runs into problems that overrun budget. Maybe an endangered species is discovered on the land and the EPA requires you to make all sorts of changes or flat out shuts down the development. Maybe the city won’t approve your plans. And on and on and on. One of my earliest real estate advisrrs was a land developer of 50 years. He went through some really good and bad times. One time he sold lots that ended up being in a quasi-flood zone and after the builders had built the subdivision, the whole thing flooded. That was a bad time for him. Then, during the mid 2000s, he made a killing. Then, the market collapsed and he lost a ton. A commercial land development family I am acquainted with was in the business for decades, slowly building up their empire, had a $3M sport fishing yacht, beach house, etc, but after the real estate collapse several years ago, they are back to square one. Like most developers, it’s high cotton or its not…there’s usually no in between.
Hello Phil.
Im new to the Real Estate investing. Im all green and need ways to understand as you have placed here on what to do and NOT to do. Ive been played too much by my questions on certain things not being answered about real estate taxes, how much money to put aside, how do I get in on that Oher peoples money, grants, and what cash money you actually keep for yourself.. Not everyone can read a book. Im a hands on, visual type worker. I can build a home from the foundation to the roof. I want to just buy and sell real estate and have a retirement since I dont have one and Im 46. Any advice Phil??
Thanks, Thomas
If you are restricted from being able to read books, articles, videos, trainings and altogether educate yourself, the other two options is a.) Get a mentor willing teach you everything by phone or in person or b.) Just go do some deals, skin your knees up and learn the lessons the hard way. (this option is not recommended but it works)
We just bought two seasoned properties and land from a company at the Buying Summit last weekend. Was that a bad thing? Now I’m worried.
If you bought right, there is no need to worry. But if you got involved in a deal (or deals) that you didn’t fully understand, now would be a good time to better understand what it is you just got involved in 🙂
I have had more real estate deals go south than I have had success. In 2007/2008 I was a victim of a pump-and-dump scheme. The realtor sold me a spec home (along with 20 other investors in the same neighborhood), and made all her money and took off to another country leaving me(and 20 others) with a home valued 3 times its actual worth–eventually leading to a foreclosure in my name. My second deal was done with friends. I helped a friend out by taking over her mortgage payments and bringing her payments current. Well, my partner, who was less experienced than I was (and this was only my 2nd deal after the first failed one), decided that our hard-money lender should be the same person who does the repairs to the house. The rehab took months and months and the real estate market just crashed (2008), so we were stuck with a property that was over-valued. We re-fied and put the loan in his wife’s name–still can’t sell the property.
One more–we just bought 2 houses from an investor. We closed as buyers and made repairs to the property for a flip. We were about to close with new buyers but it turns out that the deeds were fraudulent–NOW we are in litigation and the money is costing us 12%.
Believe it or not–I’m still at this stuff!! Insanity–maybe 😉
Jamie, my heart goes out to you but you have certainly learned some valuable lessons the hard way. For all readers of this blog, you can learn these tens, if not, hundreds of thousands in lessons by reading my recap of the lessons you can learn from her experiences:
Lesson from Jamie’s Bad Experience # 1: Know how to value real estate yourself so that you aren’t relying on real estate agents, appraisers, or anyone else as your eyes and ears as to the value of the property. Certainly they can help to confirm your assessment, but you HAVE to know exactly how real estate is valued so that you know if you are getting a good deal or not independent of anyone else.
Lesson from Jamie’s Bad Experience # 2: One of the biggest places where investors have problems is in getting rehab work done economically efficiently. Get 3 bids from highly recommended, great reviews contractors, and then for the one you hire, only pay them as work is completed. Put everything in writing. Build in financial penalties if they don’t complete the work on time. Stick to the written agreement, even when the contractor makes up tons of stories on why things didn’t work out as planned when the agreement was first written. If the contractor doesn’t follow the agreement, fire them and hire one of the other three you had originally interviewed. Or, better yet, skip dealing with contractors altogether and just flip the property to another investor because oftentimes a quick nickel beats a slow dime.
Lesson from Jamie’s Bad Experience # 3: If you are going to put your own cash, credit, or both into a deal, always pay for title insurance. That way, if the Deed is done fraudulently, your title insurance will cover it (or maybe they would have caught it before it ever closed.)
This info is good, but not completely on track. There are markets and times and situations that you must use your own credit/money/etc. Hard money isn’t the way to go, and private lenders/investors talk the game but most act like hard money lenders or just don’t do the deals, GOOD deals that make sense. So, most often investors whether seasoned or new must use their own money even to do any deal at all. Been in the business for over 15yrs, lots of deals in our track record. Seen the good, bad, ugly. We avoided the ugly except for the first yr we did this. Found alot of R.E. experts say alot, but when it comes to the funding side, their alot of bunk. Just our experience.
How is this article “not completely on track”? Are you saying that it is a good idea to put your own cash or credit or both into a deal that you don’t fully understand? If so, please share some examples of success stories of deals that you got involved in with your own cash or credit that you didn’t understand when you got started but in the end, it turned out well for you. Meanwhile, the theme I see from these comments are, the deals that have gone bad for people are those where they got involved in deals they didn’t fully understand. As the article suggests, it’s fine to get involved in deals with your own cash or credit so long as you fully understand what you are getting yourself into.
I too was not paying attention to “the business” in 2007 when I was wholesaling over 10-properties a month, things seemed so good then. I was in the middle of rehabbing three houses and when the bust hit, I not only lost money on the houses when I sold them due to falling prices but also found myself in debt, the business dried up, and was forced to file bankruptcy.
I am still an active investor trying to rebuild, and hopefully I have learned from some very hard lessons!
Good info on this site. I’m a 22-year developer/builder/rehabber/Realtor. Pretty much done it all at some point. Started small time rehabbing in 1990 and slowly built up to doing subdivisions and condo developments. But the only way my corporation could access the necessary credit was if I and my spouse personally guaranteed the loans.
So when the bubble burst in 2008 we were smack in the middle of what HAD been a very successful $1.3 mil project. Left holding over 30 buildabale lots (now worth a fortune) with no way to build them out. Even banks that wanted to loan construction funds were not allowed to by the regional FED auditors. Being honest folk, we kept paying the $6K monthly interest carry longer than we should have. That was stupid. Lost everything. So did a lot of other good people who had absolutely nothing to do with creating the crisis. I personally know of 4 who committed suicide. IMO, the politicians who blocked reform efforts at Fannie Mae have blood on their hands.
We are just now starting to get some modest traction in rebuilding our business and lives. I will never trust banks again, but it’s impossible to play big-league real estate without access to credit. I may stay in the minor leagues where you can make just as much money if you are super-selective on your deals.
My first RI project was too good to be true. Everything seemed right at first. I bought the house for 17.5k cash. No prob! The plan was to fix it up myself because of my high level of expertise in old homes. I would use part of my income from construction jobs to put towards materials and some hired help. It didn’t happen that way. After completing the demolition (those three 40 yd dumpsters were expensive!) and making numerous payments to have the lawn maintained, property taxes and the electricity bill, a year and a half had gone by. I became very concerned about sinking tens of thousands more into a house in an undesirable location with low resale values. Considering the amount of work needing to be done with the structure, foundation and a complete drywall installation, not to mention a full kitchen redo with 1.5 bath, I decided to get out while I could and sold the property at a $8500 loss not including my sweat equity. Lesson learned: don’t bite off more than you can chew, Check the comps before you buy! Location, location, location! I hope this helps.
I am just getting started and really appreciate the info on this site. Please don’t stop providing the help.
Phil, I love that you advocate not using your own money! Or at least as little as possible. It’s so crazy to me why people don’t understand that idea. So many people preach about just paying cash to stay “safer”…what in the world is safer about that? Nothing!
You may be the first blogger I’ve seen to say this. You nailed it.