Mistakes are great because you can learn so much from them. With that said, I would much rather learn from your mistake than mine. I love to talk about mistakes other investors are making so I can help you avoid them. In this article I am actually going to swallow my pride and tell you the top five mistakes I have made during my real estate investing career.
Last year we had an expert panel at our Denver Happy Hour. These are some of the best and most active investors in the area. All of them have done very, very well for themselves. The last question that I asked the panel was “what is the stupidest thing you have done as a real estate investor?” Charles Roberts, one of the current owners of Your Castle Real Estate and long time investor, said his biggest mistake was going over his budget on is first rehab by 600%. He than said he dared the audience to top that. That is pretty bad but check out my dumbest real estate moments:
My first short sale
I was just getting started learning as much as I could. I fell for a sales pitch at one of those seminars where the speakers promote their products. I purchased a short sale product which promised I would be rich in no time. The program taught me to get the seller to sign a deed putting the property in my name before I negotiated with the bank. The seller wanted $3,000 for title to his house so I asked my best friend for $2,000 and I did a cash advance for the $1,000 and I gave the seller the money. My friend and I started to clean up the property while I worked the short sale. Of course the short sale was not as easy as the home study course promised and the bank declined our offer and foreclosed. We obviously lost our time and money and I almost lost a friend.
Not screening a tenant
You may know that I got started in this business by moving out of the first house I owned to keep it as a rental. What you might not know my first tenant in that property is still the worst tenant I ever had. This mistake was before Stephanie was helping me with the business or we may have never gotten married. I was just so excited to have an application for my first rental property that I just approved them with no screening. The result was an ugly eviction, damage to the property and the worst roach infestation that I have ever seen. I had to use a line of credit to turn this property over which took me several years to pay off. I could have easily lost this property because of this mistake.
Goals set by number of houses
It is amazing that I stayed in the business after the first two mistakes but I did and here is what happened next. We are all taught to make goals and do everything we can to reach our goals. Well that is exactly what Steph and I did early in our career. Our goal was to do at least 12 deals a year. Not necessarily a bad goal but maybe we should have been more clear. Our goal should be 12 GOOD deals a year.
We were so motivated to build a large portfolio betting that they would appreciate that we took on deals with negative cash flow. We hit our goal year after year and were doing ok but you can probably already see where this story goes. I still have properties today that I lose money every month and now I am upside down. It will take years of appreciation if there is any hope of even breaking even (if that is even possible). If I was to sell them today I will lose as much as $50,000 on a single deal. Going forward we only buy for cash flow and don’t bet on things we cant control like appreciation. We also set much smarter goals.
The three year lease purchase
For purposes of this article I would like to separate a lease purchase and a lease option. In my opinion a lease purchase is an agreement where you agree to buy the house while a lease option gives you the right to buy the house or not buy the house. I will never promise to buy a house on a lease option again and I will never do a short term lease option. I think this was our third or forth lease option deal and it appeared to be a good deal with our diligence with one exception. The seller offered decent terms but wanted us to promise to buy the house after three years so that they did not have to pay capital gains taxes on the sale of their home. We agreed.
After three years the house went down in value and would not appraise. This was before appraiser independence so we were allowed to communicate with the appraiser. We promised to purchase this home so I was going to do whatever it took to live up to my obligation. I was able to locate some solid data and I worked with the appraiser to get the value higher enough to get my loan. I did have to purchase it for more than it was worth even with the higher appraisal so Steph and I brought a larger down payment than we should have needed to. After we purchased the home it continued to decline in value and rents went down. By the time the dust settled we lost more than $40,000.
This might be the dumbest thing we have ever done and I am embarrassed to say might top any of the panelists last month. We had partnered with Chris during our first year as an investor. We flipped a house together where we each made more than $17,000. In fact that $17,000 was my first profitable deal and is probably the reason I stayed in the business after my nightmare tenant and my failed short sale. We trusted Chris and he had proven he can make money in this business.
Several years after our success experience with him he asked us for help. He was hurting for money but we did not know it. He asked us to buy one of his rentals for him for top dollar and deed it back to him. He said he needed to get it off his credit report so he can buy more houses. To compensate us for this favor he paid us $10,000 (which we desperately needed). He had a tenant in place.
Well he stopped making payments on the loan and would not call us back. We started making the payment and collecting rent from the tenant in an effort to save our credit. The tenant got further and further behind but we could not kick him out because we knew the house needed more work than we had reserves to handle. It finally came to where the tenant took advantage of our lenience and stopped making payments completely. We had no choice but to evict.
Once he was out we tried to clean the place up but had no money. We worked on it ourselves but there were major issues. We also tried to do a rent to own as a handyman special since we did not have the money to make the repairs. No one wanted it and we could no longer make the payments. This deal put an amazing amount of strain on my relationship with Steph and we ended up losing that house.
I know that some of these mistakes are so dumb that you would probably never make them. My hope is that by sharing these with you, you can find a way to learn from them and becoming a better investor.