Five Beginner Mistakes to Avoid in Real Estate
By JD Esajian on February 11, 2019
There is a lot to learn as you enter the world of real estate investing. Between understanding numbers, decoding formulas and deciding which market is best things can quickly become overwhelming. While you can’t be expected to know everything there are a few red flags you need to avoid at all cost.
What you do in your first year in the business often sets the tone for everything else that happens. Just one bad decision, either on a deal or in your business, can put you behind the eight ball for the foreseeable future. Instead of being motivated and interested in real estate, you will sour on it, without giving it a fair shot. Every investor makes mistakes, but mistakes are more damaging early on in your career. Here are five beginner mistakes you should avoid at all cost.
- Buying on Hope. You never want everything to break right for you to make a profit. You should have a pretty good idea of where you stand well before your offer is accepted. If you need to roll sevens throughout the process, the property simply has too much risk and you need to pass. There is no question that things can be frustrating as you are looking to secure your first deal. That doesn’t mean you should reach just to get something under your belt. Sure, there are risks with every deal, but deep down you should know where to draw the line. Banking on appreciation or using the highest comp as your barometer is a recipe for disaster. Unfortunately, you may not realize this until you are weeks, even months, in the process. At that point it is too late to back out and fate may be sealed. Never get involved with a property that relies too much on hope and luck to be successful.
- Not Offering Your Number. As much as new investors understand the importance of getting the property at their number, there is always a bit of hesitation. They don’t want to insult the seller and scare them away. What typically happens is they end up offering somewhere in the middle and the offer gets accepted. While this is great, it doesn’t leave you with much room to make a profit. It is essential that you run your numbers and offer the price you feel comfortable with on every deal. It is rare that your offer is low enough that the seller will not even counter. The more likely scenario is that they will either entertain your offer or counter somewhere in the middle. This doesn’t mean you have to accept it, but you can’t be afraid to face rejection. In real estate your offers will be rejected far more than they will be accepted. You had better get used to this now, before you get too far in the business. The only way you will find out what a seller will take is by offering your number and waiting for a response.
- Buying on Emotion. You can’t fall in love with every new property that comes your way. The goal of any investment is to realize a return at some point in the future. You may love the location, layout and feel of a property, but if the numbers don’t work you have to let it go. Regardless if you watched the property from a far for months or were the first person to make an offer. If the numbers aren’t solid, there are better deals for you to entertain. When you buy on emotion you stop looking objectively at a property. You offer more than you know you should and ultimately reduce the value of the investment. You are left with a property with marginal profits and limited appeal to do much of anything with.
- No Exit Strategy. Before you make an offer, you should have a firm idea of what you want to do with the property. It is not enough to get the contract and hope for the best. You are not judged on how many accepted offers you can get, but rather what you can do with them. What you will find in real estate is that things often change on a dime. Your strategy with the property may have been great on paper, but reality tells a different story. At this point you need to be able to pivot to your plan B, without skipping a beat. If you don’t have multiple exit strategies, you will scramble around and be forced to make decisions on the fly. This is difficult for seasoned investors and can be a real struggle without the aid of experience to guide you.
- Lack of Investing Team. As cliché as it sounds, you are only as good as the people around you. This is even more the case as you are just starting out. It is essential that you have a team in place before making your first offer. Not only will they help ease the transition, but they will guide you on which deals to avoid and tips to get your offer accepted. They will allow you follow a budget and turn the property over as quickly as possible. You need a real estate agent, mortgage broker, contractor and attorney in place well before you even think about making an offer.
As important as learning from mistakes can be, you also don’t want to cripple your business right out of the gate either. Avoid these five beginner mistakes as you are just getting going in real estate.