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The Six Risks of Risk Free Real Estate Investing Techniques

by Justin Pierce on July 12, 2009 · 2 comments

  

There seems to be a lot of talk lately about “no-risk” real estate investing techniques. I’ve heard this talk before but it seems much more abundant as of late. Maybe it’s the economy and all the fear the downturn has generated, or just the new flavor for the real estate guru’s. Regardless of its origins, I believe it is misleading and more importantly it is a very inhibiting mindset.

Real estate investors are in the business of risk.

Don’t be afraid of it. Don’t delude yourself otherwise. Embrace the pervasive presence of risk and set yourself free. Those who make the most money in this business take risks. Those who struggle often seek unreasonable assurances of a good deal. This notion of guarantees has our society paralyzed and shoveling out money for dubious warranties. I see it with home buyers all of the time. They want every assurance in the world that they will not loose their earnest money deposit if they don’t go through with a home purchase.

There are no guarantees in life, though so many of us struggle to secure assurances. How many people do you know that are miserable and making no money working in a government office but they do it for the “job security” and the retirement? Job security? I say it’s a job prison. The U.S. Government is no guarantee either, particularly the way we’re printing, spending, and borrowing money right now. A major reason why we bailed out AIG was because so many retirees had taken their life savings and set up annuities through that goliath insurance company that would never fall. How many people said you’re crazy for investing in real estate and instead pumped their hard earned money into “blue chip” stocks? Well, now, CITI and GM are no longer blue chip stocks.

Now, about those risk free investments. In most cases I’ve seen they’re talking about real estate wholesaling or some similar variation. Wholesaling in a nutshell is were you find a property that is just an amazing deal and you take it to another investor or end buyer who actually buys the house and pays you some version of a finders fee. It’s risk free because you never actually buy the property. So, using wholesaling as a general example . . .

Here are the 5 major things you’ll risk with so called risk free investing:

  1. Precious Time: Many of these gurus say real estate is a numbers game. They might tell you that you need to look at 100 houses. Of those 100 houses you might put offers in on five of them. Of those five offers you’ll hopefully get one contract. That takes a lot of time. You risk unrecoverable time with your friends and family. You risking time you could be relaxing and/or enjoying life. You risk looking at 100 houses and not making a deal.
  2. Opportunity: You risk missing out on other opportunities to make money doing something else. If you’re looking at all those houses and don’t find one or don’t find an end buyer you’ve lost the opportunity to work at a job that would have made you money. If it takes you 20 minutes to look at each house and you look at 100 houses that’s about 33 hours. Or, if you find a house with $50,000 in equity and you find a buyer who pays you a $5,000 finders fee you’re missing out on the opportunity to make an additional $45,000 if you were willing to take the risk and buy the home yourself.
  3. Enthusiasm and Motivation: You risk loosing interest and enthusiasm in one of the greatest industries ever. Once you start wholesaling it takes a massive commitment to get to the point where you can make a living. You have to spend a great deal of time finding legitimate buyers for your homes (a buyers list) and a great deal of time finding sources of homes. Its much easier and exciting, in my opinion, to take the risk and buy a home that’s a good deal. You’ll take more risk, but I believe you’ll generate much more enthusiasm and learn a great deal in the process. I’m not telling you not to wholesale. I’m just saying, be willing to actually put your name on the line and take some “risk” when the right deal comes along. In real estate you should be flexible, willing to do a range of different things when an opportunity presents itself. If you’re too risk averse you’ll be too inflexible to be successful in this business.
  4. Reputation: The local real estate scene is a small world. You might end up building a reputation as being too timid to pull the trigger on a good investment. In wholesaling if your buyer doesn’t come through then in the sellers mind you didn’t come through. You need to build a reputation as a go to person. Real estate professionals want to deal with people who are flexible, creative, willing to pounce on good deals, and able to pull deals together despite obstacles.
  5. Money: Yes, I said money. In most any case you’ll be putting some sort of money on the line. For example, our wholesaler will likely run newspaper ads, send out flyer’s and post signs. In many cases when you do find a home you may be asked to put a deposit on the property. If your end buyer doesn’t come through you could loose thousands of dollars.
  6. The Unknown: Anything can happen in real estate. I’ve had deals where things have come up, good and bad, that I never could have expected. There might be laws in your state that make it at least murky for you to receive a finder’s fee in real estate without being a licensed real estate broker. You might get a ticket for posting your “I buy houses” signs on the street corner. There are always liability issues in everything you do and if you’re not working for a company then you’re fully exposed; the buck starts and stops at you.

My point here is not to beat up on wholesalers. I have great respect for good wholesalers. Just make sure you know what you’re getting into. It is not an easy job. I’m merely using them as an example to illustrate my point.

The above list is applicable to other forms of investing as well. I also recommend wholesaling as a way to get going in real estate; however, you should keep clearly in mind the realities of real estate and life in general. No matter how you choose to invest you do have to be a little bit daring. There is risk with everything and the greater the risk the greater the reward. The worst thing you can do is to get complacent by telling yourself you’re not taking any risk.

Instead embrace risk and go into your real estate investing career with your eyes wide open. Do your due diligence, cover your bets as much as possible but eventually take the plunge. Move forward with the assurance that as long as you keep working hard and maintain your precious enthusiasm you’ll learn from every mistake and misfortune and then be confident your education will lead to greater fortune.

Photo Credit: Shawn Zlea

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{ 2 comments… read them below or add one }

Joshua Dorkin July 12, 2009 at 11:20 am

You nailed it, Justin! There is always risk involved, no matter what the gurus and others tell you.

Congrats on a fantastic first post contributing to the BiggerPockets.com Blog!

Reply

Marvin July 12, 2009 at 5:27 pm

There’s always a risk in every details we do.
Its not just a simple thing deal with…

Reply

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