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Want to Be An Investor?
December 9th, 2006 categories: Foreclosure, Fraud, Investor, Real Estate, Real Estate News, Real Estate Tips, Sacramento
Investing in Real Estate as an Investor “ Great idea but never to be taken lightly. There are some important factors that you need to consider before ever jumping in to the Big Girls game of investing. If you dont know what you are doing or wish to admit it, be sure to be represented by an experienced Realtor who can help direct you, correctly. In order to show you how to invest, its important to view how NOT to invest. Once you gain that knowledge it will be easy to make the right choices.
In a previous blog entitled Fraud in Real Estate I mentioned a young man who lives in Sacramento, Serin who got caught up in purchasing Real Estate property in order to flip which became a flop. After attending get rich quick seminars (you know the ones I’m talking about)…there on TV, written books etc. Serin wanted to make quick money fast and unfortunately it back fired. Some of the mistakes that he made, as an uninformed investor need to help educate others so that this type of gut wrenching episode doesnt happen again.
Serins Top 10 Mistakes
- Filling out his loan application for stated income with incorrect income level, making it look good and increasing his income level “ FRAUD then, lying to the Lender to get a better interest rate and indicating that he would live in the property “ FRAUD
- Over paying on a property “ who does that? In Serins case not only did he do that but then when the property needed repairing, this caused Serin to take out a loan on an already overpriced property.
- Not having enough cash in reserve to take care of paying the payment or the difference between what a renter and the mortgage was. As an investor, it is imperative that if you do not have the ability cash wise to cover the mortgage payment for a minimum of 6 months, you shouldnt be an investor. Serin didnt have any liquid cash. BIG problem.
- Quitting a job that brings income when you are an investor is not only risky but stupid. Don’t quit your day job. If things go upside down, how do you plan on covering not only your own living expenses but also all your mortgages? Serin lied to himself thinking that he was quite the investor since he was pulling money from recent sales transactions on the houses that he was buying never seemingly looking back so he quit his job to devote more time to his reckless adventure in being an investor with the idea of flipping. During this time, he made yet another error, he purchased property in another state. No way to personally take care of or look after the property without spending more money. If you can’t drive to your properties, you are taking a risk. Only very qualified, experienced investors can get away with this and even they keep an eye on the market and visit the properties on a semi annual basis at least.
- Hiring an unlicensed Contractor is a no-no. Remember, you get what you pay for. Theres a reason the contractor is not licensed. Serin not only did this, but he also purchased property from a wholesaler that he paid a fee to for a house that the wholesaler did not fully disclose all the issues that the house had. And of course the house was not within driving distance this was all over the Internet. BIG mistake.
- Buying Sight Unseen never a good idea. He buyes yet another. Who are you listening to someone who doesnt give you the full scoop? Its not their money, its yours! HELLO. You dont even want to know that this property was in Utah. The house had more in repairs than Serin anticipated.
- Buying out of State we already discussed this problem which Serin managed to do several times. Remember that you cant expect others to watch over your property in the same manner that you would. And you probably are not keeping up-to-date with the market in that State much less that specific area.
- Buying Too Many Properties Too Fast even seasoned investors dont do this. Serin was using equity from the properties that he bought at a low price which now made them no longer a low price and he was using money from the sellers that he asked at close of escrow to credit him. He was robbing from Peter to pay Paul. Juggle here and juggle there until everything is in the air and falling all at the same time.
Do you think he ever thought about whether or not he could pay the payments for all of these investments which totaled 7 by now if he didnt sell them as quickly or rent them? I think not!
- Underestimating Remodeling Costs this was not the first time Serin had underestimated the remodeling costs. This one cost him twice what he thought and again he bought it sight unseen in another state and through a wholesaler. The cost of traveling to some of the properties after purchasing them, was also eating up any of the money that he was juggling.
- Poor Exit Strategy is poor planning from the beginning. Serin tried auctioning a property off which gave him a very small profit and another one that didnt work at all when he tried to auction it. What did he do next? You guessed it, he lied and tried to obtain another property in another state hoping to juggle once again since he was now out of money and living on credit cards.
This was Serin’s last time, Serin was caught. The loan was rejected and he now had a monthly debt of $20,000 and owed $140,000 with five houses facing foreclosure. With all this looming, Serin is renting, still unemployed last I heard. I hope the young man has realized that if it sounds too good to be true, it is. There is no Rich Quick scheme that I know of that works. I hope this has taught Serin a valuable and moral lesson. Serin is a very lucky young man, not sure how he has escaped charges of Fraud, so far he has managed to skid over that.
So, what did you learn from this? You could say, well Gena, the market changed and he got the short end of the stick. No, the answer is not that the market changed that was just a caveat. The real problem here is that if you cant afford something, dont buy it. If you have to lie on applications, dont buy. If you are buying multiple properties and you cant afford to pay the mortgage for six months on each of them at the same time, dont buy. If you cant easily inspect the property and check on the property regularly, then dont buy.
Thats good sound advice and I hope that anyone out there who is considering making a killing on flipping or purchasing Real Estate as an investment will take the time to read this since awareness is empowerment that is my wish for you.
Related Articles:
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2007 Where Knowledge is Power in Real Estate
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