When learning of the term “security theater” recently, I felt this phrase was a “cute” description to a potentially serious problem. As real estate investors, we also face decisions daily and weekly that ultimately shape our businesses’ security as a whole. Sometimes it may be hard to see our business’s vulnerable gaps/weaknesses from within the proverbial forest.
The definition of security theater according to Wikipedia is the practice of investing in countermeasures intended to provide the feeling of improved security while doing little or nothing to achieve it.
This leads to the question, “In what ways are real estate investors subject to over confidence in our safely and security?”
Here are 5 examples of security theater while real estate investing.
5 Examples of Security Theater in Real Estate Investing
1. Less-Than-Thorough Inspections
Having more experience before making a financial or rehab decision is oftentimes better than having less experience. Having more clarity simply allows us to make safer and easier choices. If your real estate investment property requires unexpected repairs, the blame does not fall on the seller; the blame falls on you. Make certain to always know what you are purchasing before you buy any property. Never feel bullied or rushed into purchasing a home. Real estate inspectors are plentiful and respond in a matter of hours if you pay them accordingly.
Why this issue may start? Too trusting. Oftentimes as real estate investors, we are too trusting that sellers will be upfront and honest about all the repairs needed on the property. Occasionally, we may become overconfident in our abilities to estimate and accurately judge repair costs, too.
Pro Tip: Ask your inspector to follow him or her around the property to see exactly what he/she looks for and how hands-on they get with this inspection. You can follow this example in the future.
2. Subpar Contracts and Agreements
Where did you find or purchase your real estate contracts, forms, and agreements? As long as your paperwork and forms are legal and written to favor the investor, there may be no concern needed. However, if you are unsure of the validity of your contracts and paperwork, it may only take one lawsuit to convince you to entirely redo your paperwork from scratch.
Why this issue may start? Ignorance. When starting out many of us investors use a mix-and-match of paperwork and contracts, we create from local sources and real estate courses we’ve picked up along the way.
Pro Tip: If you have never had another investor look over your paperwork, ask a trusted and very experienced investor to review your documents. A real estate attorney is also a wise idea; however, be aware of whether this attorney is simply trying to sell you their goods and services.
3. Not Clarifying Real Problems
While investing in mobile homes, I had three bad experiences in a row transporting doublewide mobile homes from one location to another. The mobile homes would be moved and set up in perfect condition. For a bit of background, most doublewide mobile homes must be split apart into two sections, moved separately, and rejoined at the destination location. Months would go by without any problem and then eventually the main-seam along the middle of the entire length of the home would start to leak from rain.
Due to these headaches, costs, and leaky seams, I swore off moving doublewide mobile homes completely, unless brand-new. I mistakenly labeled the problem and cause as being the doublewide mobile homes themselves. I eliminated an entire class of mobile home, when the real problem was the poor quality of workmanship with the different mobile home transportation companies performing the work. Since hiring qualified mobile home movers, this problem has been nonexistent concerning moving and leaks.
Pro Tip: Eliminate emotions from your investing. Whenever you feel emotions arising take a few deep breaths. Aim to understand the true root-cause of each mistake you make. Ask other people you trust as a soundboard and for their honest positive criticisms.
4. Not Properly Vetting Handymen or Contractors
You may puff out your chest or demand a handyman fills out your four-page application; however, if you do not verify references, licenses, and/or insurances, you are leaving yourself wide open to risk, lawsuits, and/or simply dealing with a liar.
Pro Tip: Demand at least three current references of similar work performed by this handyman or contractor before moving forward. Ask to see this work if possible. Additionally, make sure to call and verify active insurances, worker’s comp, permits, and other licenses required. You may also want to grade on honesty. If your prospective handyman or contractor lies about having any of these qualifications when he/she really does not, this is not a good way to start the relationship. Verifying this does take a small amount of effort, but this process will become routine and make you a more confident real estate investor.
Why this issue may start? Speaking personally, for years I did not verify handymen or contractors references. I told myself this was due to me being too trusting and happy with the price, but it was truly out of fear of what I might learn and laziness of having to find another handyman.
5. Over-Improving a Property
Over-improving an investment home happens when an investor make specific repairs that will not add to the net profit or salability of a property. In fact, certain repairs may only delay placing the home on the market for resale or rent.
We repair homes to add equity and value to our real estate investments. However, it is important to understand exactly who your buyers are and what they’re looking for. Having a clear exit strategy with experienced eyes helping you can be crucial to spotting upcoming mistakes and hurdles. A local real estate agent or seasoned investor may be helpful. Use this website’s networking features to search and befriend local experienced investors near you.
What examples would you add to this list?
Be sure to leave your comments below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.