You are a new investor or maybe a seasoned one who just happens to really like this house. It is in a great neighborhood. The comps show that 2 years ago, this house sold for well above the tax value. Maybe the area is in the part of town that is historical and turning around like crazy. Sure, it needs a lot of work, but you will lose this deal if you don’t take it quickly. You don’t have time for a survey or an inspection for that foundation but it looks good and seems like such a good deal. You offer the asking price so you can clinch the deal.
Now it yours! Okay, all the piers under the house are crumbling and sinking. And yes the recently added garage is encroaching on the neighbor’s yard. Alright, you did pay a little more that the 70% rule based on the 2-year old appraisal, but the neighborhood is really coming around; it’s all over the papers.
Now, the house is repaired at a much higher price tag then originally thought and much later in your time frame than you originally planned. Still, you are ready to sell or refinance so you order an appraisal. When it comes back it is 10 to 20k lower than the one done 2 years ago! How can that be? Now you cannot sell it for what you have in it, should you refi? In most cases you can only get a rate and term for a property less than 12 months owned at 80-85% of the value. Here you are paying a high interest, hard money loan or maybe you have sunk all of your cash into it. All of a sudden, your real estate business has come to a complete stop with nowhere to go but down. You ask yourself the questions: 1) How did this happen? 2) What could I have done to avoid this? 3) What am I going to do now?
This scenario happens all too often. These stories are real, I see people caught in them everyday. Real Estate investing is so exhilarating. Just about anyone in almost any situation can be successful at it. And there are so many good seminars, associations, boot camps and experienced successful Real Estate Investors who are willing to help you learn. These problems tend to happen most when people are running on emotion and want to do a deal just to “get started” and make some quick cash rather than using their brains, the skills they have learned and doing the necessary homework. The key to success is steady plodding. When you have a deal that you don’t want to lose and you have no time for an appraisal (3 days or less) or you really could not get a look see underneath the house for some reason, or you see that the survey is over 40 years old, maybe you should just walk away. Let someone else take that risk. If the seller or bank allows no time for inspections, be very cautious. This big deal maker could be your career breaker. Especially, if you are a new investor. DO YOUR HOMEWORK!
It is not completely unusual for property values to drop in new neighborhoods or older neighborhoods. Be careful when pulling your own comps off the tax information. Prices may have been inflated due to previous fraud or maybe two properties purchased were recorded at the same time for that buyer. (the Charlotte area is #2 in the nation for loan fraud) I hear stories weekly about people who buy houses that encroach on a neighbor, banks foreclosing on the wrong house and people buying half a house (Larry Goins); no one knew it was in the middle of two lots and the bank foreclosed on just one of them.
You can be successful buying houses quickly; even the most seasoned investors get caught by some of the things I’ve mentioned. You can avoid most of them by doing your homework, allowing time for inspections, getting a subject to appraisal and checking out current surveys. Finally, always use the 70% rule. One mistake can put you out of business. Call me and we can walk through your scenarios. I will be happy to teach you how to shoot holes in it. Learn from others’ mistakes. Why reinvent the wheel? Be smart and you will be successful!