Investing in real estate is not all rosy—despite what the social media highlight reel will have you believe. As I look back on my real estate investing career, at some points, I would have welcomed the three Ts (tenants, toilets, and termites) over what I actually had to deal with.
When you are in the game long enough, it’s not a matter of if a nightmarish situation that will shake your investing confidence will happen but rather a matter of when will it happen.
How will you handle it? How will you be a better investor because of it?
Personally, I appreciate the ugly stories about investors’ hardships. Why? Well, I can shorten my path to growth by side-stepping a few landmines along the way!
And you learn that nearly any challenge has an opportunity within it.
Below are a few problems I’ve dealt with over my investing career. Some issues were cringe-worthy mistakes. Others are lumps that I tried my best to mitigate but ended up with the short end of the stick. Then, there are a couple of “holy crap did that just happen?” situations.
I’ll share with you how I got in these situations, how I dealt with them, and how my investing is better for it today.
My Top 10 Worst Real Estate Nightmares
Two years ago we had an eviction at our first out-of-state rental. We rented to an engaged couple, who on paper appeared solid. However, the wheels came off right after—she moved her father in, then she lost her job, and then her finance skipped town.
We did our best to work with the tenant on a payment plan, then offered cash for keys to avoid an eviction and help her get into her next property. However, after two months of non-payment, nothing worked and we started the eviction process.
What I learned: Now, I fully enforce every lease down to the letter. It’s not because I don’t have a heart and want to keep the tenant’s deposit or don’t want to work with people. I do it to honor the legal relationship we entered into with the tenants. We are in a mutual contact together.
Ask any investor, and I bet they have a toilet story to share. The most common scenario is probably a slow leak that caused considerable flooring and drywall damage (maybe even mold). My toilet story is a little different.
Simply, the toilet was not installed correctly during the rehab and the flap was left wide open—a $50, 10-minute fix. However, the home sat vacant for four months during the rehab and winter season. To compound the issue, the utility company transferred over utilities to the wrong owner.
Unfortunately, it took four months to discover the transfer issue and that the leak was happening before it was turned off. Imagine my shock receiving a water bill for over $5,000!
What I learned: Now, I call the water company immediately after close to verify the transfer of the account and register each home for the local alert program. This way if there is an issue, the utility company has owner permission to shut off utilities immediately, and I can pass the alert to the property manager quickly, so they can work through the process.
I also now know that most municipalities have a one-time “hall pass” for a scenario like this and will help reduce your bill substantially (just don’t expect the process to go fast). This comes in handy when you have that slow leak your tenant never reports.
I picked up a BRRRR project that was infested with raccoons (which is what made it such a steal!). The previous rehabber didn’t know how (or didn’t want to pay) to mitigate the furry little guys. My team knew how to handle them.
However, as David Greene puts it, “Raccoons love to party.” So, when my roofer left the soffit off the eave of the roof because he was in a hurry during a rainstorm, the raccoons saw that as a welcome invitation to party in the attic for two days over the weekend (damaging the newly remodeled master bedroom).
What I learned: Now, I request the general contractor walk the property at the end of the week to cure problems like this. This very step of accountability prompts the construction team to remedy issues that could cause problems. I also get a copy of the contractor’s insurance, so it’s easy to make a claim if issues arise.
4. Natural Disaster
Two years ago, parts of Kansas City experienced an incredible amount of street flooding due to heavy rains. This was compounded by the city’s aging water drainage infrastructure, resulting in basement drainage backups in four of my homes at once.
What I learned: While there wasn’t much I could have done to prevent this situation (aside from not buying the homes), I now have a step in my due diligence checklist to investigate city drainage issues and carry additional insurance on properties that might be affected.
Additionally, I do not convert the basement space into living space in these homes in order to limit property damage. Also, I ensure my property manager is collecting and maintaining current renter’s policies for all tenants.
Last year, I closed on a property and did a rent-back to the seller for 72 hours to give them the weekend to move out. On the last day of their rent-back, a major ice storm hit, and the tree in the backyard snapped under the weight of ice and landed on the neighbor’s shed.
Unfortunately, the way the rent-back was structured, I did not have access to the property in any form or fashion until they moved out. My mistake!
What I learned: After being stung three times on rent-backs (this one being the worst), I now offer flexible closings and quick settlements to keep the seller’s homeowner’s insurance policy intact until possession. If I were to do a rent-back, I would ensure I have 100 percent immediate access to the property post-close to begin outside repairs and address any major health and safety concerns.
6. Flood Zoning
Last year, I was selling one of my Indianapolis properties. During the title search, it was discovered that the home was now zoned in a flood zone. I was baffled!
I couldn’t have possibly gotten conventional lending if it were in a flood zone… right? Sure enough, I went back to my original purchase paperwork and found that the seller had requested an exemption to the FEMA flood program, allowing them to remove the flood certification on the home. It was one sentence buried in a multi-page legal document that required a magnifying glass to read.
That exemption, however, expired or did not transfer to me. What made this a nightmare is I had two rental property closings lined up just a few days after this sale.
What I learned: Fortunately, I was able to reinstate the exemption and sell the property without the flood designation. Now, I request all closing documents three days ahead of time, so I can read all of the boring legal paperwork (even the minute stuff) and interrogate everything.
Also, I learned you can petition FEMA to remove the flood designation on a home.
7. Bad Contractor
At some point in time in your investing career, you are bound to run across bad actors—whether it’s your contractor, wholesaler, or your property manager. Where it can sneak up on you is when someone who used to do amazing work for you now lets their work go downhill.
The breaking point for me came with a general contractor my old property manager regularly used. Long, sordid story short, out of the $30K rehab on the property, I’ve had to redo nearly $15K of the work, as we discovered outlets, plumbing, and cosmetic finishes installed incorrectly (or not at all).
The last straw was when we found that the new roof was improperly installed and caused a leak that took out the HVAC unit. Did I ask them to warranty their work? Of course! Did they? No.
My property manager’s inspection system had failed him (and so had mine).
What I learned: In real estate, construction and property management are two vital areas that will make or break your investment. Now, I have switched up property management teams (hire slow, fire fast). While I still work through my property manager to handle most construction on my projects, I now also vet the general contractor directly.
I also ask for a copy of their insurance to have on file, so it’s easy to file a claim if I need to.
8. Losing Money
Last year, I partnered on a high-end flip (something out of my normal investing wheelhouse). Our joint venture agreement was rock solid, and we split everything 50/50 (which made the math super easy). That part we did right.
Our mistake is we didn’t evaluate our competition in the neighborhood to really understand where to invest our construction budget to drive top dollar. Our big “miss” was a simple one… which way to orient the kitchen in the home.
What I learned: Once we hit the sales market and realized our mistake, we had a few options:
- Redo the kitchen to our competition’s standard and inflate our budget $40K, extend our construction timeline, and hope we broke even during the current sales season.
- Cut our losses and find a buyer who wanted to do that work themselves.
- Keep with our current plan and hope that someone loved it like it was.
The words of J Scott resonated in my head: “Where flippers get into trouble is they choose to ride the wave down.”
With the summer sales season approaching the end and sales on high-end assets being soft, we opted for option No. 2, as it was our shortest timeline out of the project and we could keep our investors happy by making them whole on time. Even though we both lost a little money, we gained a wealth of knowledge, and this exit plan allowed us both to move into other projects where we more than made up the difference.
9. & 10. The Unforeseeable
Then, there are just random things in life you can’t imagine will happen to you—like a death on your property (in my case it was a natural death) or a bus falling into the roof of your property (happy to tell you over a beer or tea sometime).
What I learned: Since I’ve already talked on BiggerPockets about these two nightmare scenarios here and here, my takeaway is simple: Real estate is a team sport. You cannot possibly do everything yourself. Nor should you try!
If you are trying to control for everything that could go wrong, that F-E-A-R will keep you from moving forward.
And while you can’t possibly control for every nightmare situation that will come up real estate, there are a few things you can do right now to mitigate your downside:
- Have systems in place to implement what you’ve learned and prevent you from repeating the same mistakes. Keep in mind, checklists (like due diligence checklists) are systems!
- Invest to preserve capital and create cash flow, so you aren’t forced to sell.
- Have cash reserves set aside for the crazy things that you can’t foresee.
- Build a great team to help you navigate every situation (and maintain strong relationships with them). This team should include:
- Property manager (that can handle or contract out construction)
- Real estate agent/wholesaler (in case you have to move a property fast)
- Insurance agent/broker (well… for when that tree or bus falls on your property)
- Lender (to help you find options to get in or out of deals)
- Lawyer (letters from lawyers can work wonders)
- CPA (to help you look at “losses” as a new opportunity)
What are your worst real estate nightmares? What got you into the situation, how did you deal with it, and what system or person do you have in place now to keep it from happening again?