Real estate investors and first-time home buyers face an uphill battle in a slow real estate market. When it comes to buying and selling properties, it is still possible to make money, but it won't be easy. However, avoiding some classic mistakes will help put you on the right track.(Considering jumping into the real estate market? Read Five Things Every Real Estate Investor Should Know first!)
Tutorial: Exploring Real Estate Investments
Mistake 1. Lack Of Research
Before most individuals buy a car or a television set they compare different models, ask a lot of questions and try to determine whether what they are about to purchase is indeed worth the money. The due diligence that goes into purchasing a home should be even more rigorous.
There are also research considerations for each type of real estate investor - whether a personal homeowner, a future landlord, a flipper or a land developer. (If you're flipping houses, check out Fix It And Flip It: The Value of Remodeling, Five Mistakes That Make House Flipping A Flop and Top 5 Must-Haves For Flipping Houses.)
Not only must the prospective buyer ask a lot of questions about the home, but he or she should also inquire about the area (neighborhood) in which it is located. (After all, what good is a nice home if just around the corner is a college frat house known for its all-night keg parties? Unless of course, you're attracting a student renter.)
The following is a list of questions that would-be investors should ask regarding the home in question:
- Is the property built in the vicinity of a commercial site, or will long-term construction be occurring in the near future?
- Does the property reside in a flood zone or in a problematic area, such as ones known for radon or termite problems?
- Does the house have foundation or permit "issues" that will need to be addressed?
- What is new in the house and what must be replaced?
- Why is the homeowner selling?
- What did he or she pay for the home and when?
- If you are moving into a new town, are there any problem areas in town?
Though the real estate bubble in North America ostensibly popped in 2007, there are still a large number of exotic mortgage options. The purpose of these mortgages is to allow buyers to get into certain homes that they might not otherwise have been able to afford using a more conventional, 25-year mortgage agreement. (Learn more about exotic mortgages in Choose Your Monthly Mortgage Payments.)
Unfortunately, many buyers who secure adjustable/variable loans or interest-only loans eventually pay the price when interest rates rise. The point is that home buyers should make sure that they have the financial flexibility to make the payments (if rates go up). Or they should have a back-up plan to convert to a more conventional fixed-rate mortgage down the line. (Find out more in Mortgages: How Much Can You Afford?)
Mistake 3: Doing Everything on Your Own
Many buyers think that they know it all, or that they can close a real estate transaction on their own. While they might have completed a number of deals in the past that went well, the process may not go as smoothly in a down market - and there is no one you can turn to if you want to fix an unfavorable real estate deal.
Real estate investors should tap every possible resource and befriend experts that can help them make the right purchase. A list of the potential experts should, at a minimum include a savvy real estate agent, a competent home inspector, a handyman, a good attorney and an insurance representative. These experts should be capable enough to alert the investor to any flaws in the home or neighborhood. Or, in the case of an attorney, he or she may be able to alert the home buyer to any defects in the title or easements that could come back to haunt them down the line. (For more, see The Benefits Of Using A Real Estate Attorney.)
Mistake 4: Overpaying
This issue is somewhat tied into the point about doing research. Searching for the right home can be a time-consuming and frustrating process. And when a prospective buyer finally finds a house that actually meets his or her needs/wants, the buyer is naturally anxious to have the seller accept the bid.
The problem with being anxious is that anxious buyers tend to overbid on properties. Overbidding on a house can have a waterfall effect of problems. Buyers may end up overextending themselves and taking on too much debt, creating higher payments than they can afford.; as a result, it may take years for the home buyer to recoup this investment.
Are You Overpaying?
To find out whether your dream investment has a high price tag, start by searching what other similar homes in the area have sold for in recent months. Any real estate broker should be able to provide this information with relative ease (particularly with their access to a multiple listing real estate agent database). But as a fallback, or if you are not using a realtor's services, simply look at comparable homes in the local newspaper, and see what they are being offered for. Logic should dictate that unless the home has unique characteristics that are likely to enhance its value over time, the buyer should try to keep any bids consistent with other home sales in the neighborhood.
Buyers should realize that there are always other opportunities out there, and that even if the negotiation process becomes bogged down or fails, the odds are in their favor that there is another home out there that will meet their needs. It's just a matter of being patient in the searching process.
Mistake 5: Underestimating Expenses
Every homeowner can attest to the fact that there is way more to owning a house than just making the mortgage payment. Unlike renting, there are maintenance expenses that go along with mowing the lawn, painting the shed and tending the garden. Then there are the costs associated with furnishing the house and keeping all of the appliances (such as the oven, washer/dryer, refrigerator and the furnace) running, not to mention the cost of installing a new roof, making structural changes to the house, or other little things like insurance and property taxes.
The point is that first-time investors tend to forget these costs when house hunting. Unfortunately, this is exactly why many new homeowners tend to be house poor and cash poor. (To learn more, see Five Mistakes That Make House Flipping A Flop and McMansion: A Closer Look At The Big House Trend.)
The best advice is to make a list of all of the monthly costs that are associated with running and maintaining a home (based upon estimates) before actually making a bid on one. Once those numbers are added up, you'll have a better idea of whether you can really afford a property.
Determining expenses prior to purchasing a property is even more important for house flippers and investors. That's because their profits are directly tied to the amount of time it takes them to purchase the home, improve it and resell it. In any case, investors should definitely form such a list. They should also pay particular attention to short-term financing costs, prepayment penalties and any cancellation fees (for insurance or utilities) that might be borne when the home is flipped in short order.
The reality is that if investing in real estate were easy, everybody would be doing it. Fortunately, many of the struggles that investors endure can be avoided with due diligence and proper planning before the contract is signed.
(To learn about the perks of real estate investing, see our Exploring Real Estate Investment Tutorial and Investing In Real Estate.)