So I met a newbie investor (let's call him Joe) through BP this week and went and looked at a property that Joe had just closed on. I was excited for Joe because hopefully, this will be first of his many, many properties.
Joe had told me a little bit about the property history on the phone a day or two before I went and looked at it, like list price, purchase price and some general property condition. When Joe told me about the purchase price (which was over asking) in what I would consider a D area, I was a little concerned, because I wouldn't have paid more than 50-60% of asking in that area. But I was hoping that this was a real steal and I was wrong in my assumption.
So I went and looked at the property and I was shocked to find the condition of the property. I could not stand for more than 5 minutes in the "finished" basement because of how much mold is down there. The roof had been leaking for a VERY long time (now there is a new roof) and had caused the floor to buckle at least 6 inches in one of the bedrooms and living room and 2nd bedroom floor was in very bad condition also. The kitchen cabinets are at least 3 different kinds. There is no furnace, no hot water heater, no plumbing, no electric that I could see, garage had a huge hole in the floor (I didn't see it, but the investor told me about this). The windows are all shot, I mean every single one.
I have done over 150 deals since I started and I wouldn't have even touched that property for free because there are so many other better deals out there. In the area Joe bought the property, he will be now lucky to make the 2% rule for this property and I wouldn't buy anything for less than 4% rule in that area if I was buying anything that needed work.
Also, Joe lives about 80 miles (90 minutes to 2 hours) away from the property.
So why did Joe bought the place?
Because Joe fell in love with the property.
I could tell that when I first spoke with Joe on the phone and during our first meeting that Joe was in love with the property. He wasn't looking at it as an investment to get the best ROI but he was more emotionally attached to the property. My GUESS is that Joe has seen some shows on TV like Rehab Addict, Property Brothers, etc. where they restore some older homes and Joe wanted to do the same thing. Joe was talking about refinishing the windows, keeping the character of the house when they all needed to be replaced, because it will be a less expensive and smarter decision in the long term.
What Joe did wrong was WAYYY overpaid for a house. Once you have overpaid for a house, you are stuck. You can't go back to the seller for a discount, you can't cut your rehab budget because you have to get things done in a proper manner otherwise you will have later on with selling or renting. The only thing you can do is learn from it and not repeat the same mistakes again.
People (at least smart ones) eventually learn from their own mistakes and correct the course, but if you can learn from the mistakes that other people have already made for you, you will be WAYYYY ahead of the other newbie investors. You just don't want to leverage money in RE, you want to leverage other people's experience also as much as you can. It doesn't cost anything at all do that. Doing that saves you so, so, so much time, effort, headache in both the short and long term. I genuinely believe that is one of the main purposes/benefits of BP that newbie investor can come on here and read and network with other investors and learn from their experience. That's how I got started.
Anyway, in short, please do not overpay for a house.
@Sharad M. *Very* good post and a good warning!
Do you find that even experienced investors still occasionally "fall in love" with a property and make a "buy" when they really shouldn't of?
Since newbie Joe has closed on the property, he's now stuck with it. If he were say a newbie wholesaler, he would of been able to back out prior to close because he either, 1) would not of found a buyer and learned a lesson or 2) wholesaled it to a newbie investor who didn't know what he/she was doing. But, he would not be stuck with it and hopefully learned a lesson.
Thus, and this is just my personal opinion, newbie Joe's out there are better off starting off wholesaling and/or partnering up with an experienced local investor such as yourself right off the bat so as to learn the business and what's a good deal or not before getting locked into and closing on such a deal.
I am reminded of the 2 rules of investing in real estate. Rule #1 You never fall in love with the property you fall in love with the numbers. Rule #2 NEVER forget Rule #1.
Numbers don't lie people do.
@Sharad M. thanks for posting. The story made my stomach drop a little, but being a newbie myself, I'm going to remember this.
I have never been able to "leverage other people's experience" other than vicariously through the interwebz, books, and especially BP. However I have been successful despite that.
I will say the only very bad investment I ever made was based on a similar mistake as to what Sharad posted here; I became emotionally attached to a property. That's a mistake I will try to be diligent to NEVER make again.
houses to me (even my personal) are like shirts. if it looks good on me, i wear it. if not, i toss it away.
btw, 2% is still great. and he will learn a lot. so i dont think it's a mistake. it's just an expensive lesson, that's all. cheaper than paying a guru.
As a newbie, I appreciate this post.
I've been waiting and wanting to get into flipping for so long, I know that I get very excited about the potential of a property sometimes. I'll definately keep this in mind.
Thanks for sharing! I am curious what does newbie Joe intend to do with the property? What are his exit strategies? What would you do if you had bought this property as your first property not knowing what you know now after 100+ deals???
@Account Closed To me leveraging other people's experience just means that learning from their experience and not repeating the mistakes that they have made. It's great to hear that you are achieving great success!! Best wishes for your continued success.
As one new to investing I admit I have watched a lot of the tv shows. But rather than coming away seeing the "romance" of renovating a pile of junk old house I see it as "wow...that's a lot of work!"...and then make mental notes of the "uh-oh" stuff they always come across as well as the way they analyze what needs to be done. Overall I think I keep a pretty good head on my shoulders and constantly remind myself to not get emotionally involved in a deal. I'm always ready to walk away if it's not right. (That is getting a little more difficult as I'm getting impatient for my first deal.) At this point I'd say that my experience with "the biggest mistake" was with our current home. We were young and didn't have a lot of money. My sister was a real estate agent and wanted badly for us to have our own home so we ended up buying a house when we had no business doing so (no cash reserves for repairs, so-so credit, three kids under 3yrs old and property needed some cleaning up). Now, twelve years, three more kids, two layoffs, a career change and a cash-out refi (to pay off some credit cards) later we're about $15k underwater on a house that needs about $15k in updating and deferred maintenance that I'm working through as time allows (now that our finances are getting back on-track). Long story short, I'm in no hurry to repeat THAT mistake and am looking forward to accelerating my exit from that hole via REI.
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