Mistakes and Lessons Learned; The School of Hard Knocks
I was talking with someone last week that was a brand new real estate investor. By brand new I mean she and her husband had only been investing a few months. After reading a lot of books, joining their local REIA and talking with a few folks in the business, they bought a package of 3 properties from another real estate investor. This was their first purchase, and they were very excited.
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These properties were wholesale deals that each needed $8,000 to $10,000 in work to make them rentable. While these houses were in their hometown, they were in an area that they were not really familiar with. After closing on the properties they put an ad on Craigslist for the asking price the investor had told them that they were worth. When they didn’t get even a single call, they made up a flier and took it to their next REIA meeting with the full expectation that they would find a buyer within that group. It was the same story again. No one called about the properties.
What have we done?
By this time, the couple had figured out that they had made a mistake. They weren’t sure if it was the neighborhood or the price, but they knew something was wrong. They also didn’t know that not all real estate investors are on the “up and up”. Every now and then you will run across one that is just a shady character that preys on newbies.
Finally they called a friend that was a Realtor and told him about their situation. The agent pulled comps on the properties and as you might have guessed, they had paid too much for the houses and the area was an undesirable location; not an area that many real estate investors were interested in.
When they were first told that they could buy all 3 properties for $20,000 they took all of their savings for this purchase. This couple was planning to wholesale the houses, so they didn’t have the cash needed to rehab them to sell or to rent. Now they were faced with the possibility of losing all or part of their money.
These guys just knew that they had to find a buyer for the properties. I told them that if it were me, I would try to find out who owned property in the immediate area — someone that might be interested in buying more property in the same neighborhood. They could do this by putting out some handwritten bandit signs that said “cheap houses for sale”, by looking on the local tax assessor’s site for property owners in the area, and they could also drive around and call landlords that had “for rent” signs in the yard. If they did this, they might just get lucky and find someone willing to pay them what they had paid for the houses. Forget about making money and recouping their closing costs. If they could just get back their original $20,000 that would be a cheap lesson they had learned.
That is exactly what they did. The very next day they hung up a couple of signs in the neighborhood. After that they drove around the area taking down the phone numbers on for rent signs, and they called every one of them. Much to their surprise, an older gentleman called back the same day and he was interested to hear about the houses. He was an experienced landlord that had a lot of property.
They told him very honestly what they had done; what a mistake they had made. This gentleman told them to let him think it over and see if he could come up with a solution. The next day he called and said that he would buy the houses for what they had paid under these conditions:
He would pay them off in 12 equal payments. This would allow him to use his capital for repairing the property, and they would get paid back in part from future rents. They were so happy to know that they would be getting all their money back even though it would take 12 months, they jumped at the offer.
I’m sure you are wondering why the experienced investor did this. The answer is quite simple. He said that he too had made some serious mistakes when he was first starting out, and he remembered one person that had helped him out much in a similar way. The details were different, but it was basically the same situation. He was simply paying it forward
A Year for Learning
Without any money left to invest, the couple decided to use the next 12 months as a learning period. They also volunteered to help their new friend in his business in exchange for some much needed education and mentoring. It turned out to be a “win-win for everyone”.