Seeking Biggest Mistakes and Lessons Learned Stories (Again!)

Seeking Biggest Mistakes and Lessons Learned Stories (Again!)

Investor · Tabernash, CO · Member since 2012 · 11 posts · 237 votes

Hello BP Members! I write a regular column for BiggerPockets Wealth Magazine on people's "Biggest Mistakes" in real estate. Do you have a "mistake" story and lessons you learned from it? I'd love to hear it! (Thanks to everyone who has already sent in stories!)

If you have a story to share, please post it here in the forum, or DM me or email me at melanie @ biggerpockets.com.

Thanks in advance for taking the time to share your stories!

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Justin R.Pro Member
Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 votes
5y

I lost a lot a large chunk of money (over six figures) on a wire at closing time. I high level criminal hacked into my agents email and was able to place email filters on the agent, the closing attorney, and myself. The criminal then created a "relationship" of communication with both the agent and attorney as they thought it way me. During the wire day the criminal intercepted the wire instructions, and changed the account numbers utilizing the same company format, design and logo. This was not some low end group you would expect, with bad grammar and an account in India. This was a high level group and they paid a "mule" to open a account at a local bank branch.  I always contact the wire recipient upon sending, and ask them to notify me upon receipt, this wasn't enough.

By the time everyone realized something was weird and everyones stories didn't add up, it was 8 hours after the wire was sent. I immediately called the criminals receiving bank (Wells Fargo) and they confirmed they had received the wire from my account. I let them know what happened, but unfortunately they had to back their "client" and couldn't place a hold on the funds. I watched my money disappear within the next 48 hours as the criminal was paying "mules" again to make cash withdraws. The FBI was involved in this case and said this is now the new sophisticated "bank robber." Due to my case and a many others within a few month timeframe, new consumer protection laws have been passed. Unfortuanlty many agents/title companies/closing attorneys still do not follow best practices to this day.

Here is how I now send a wire EVERY time.

1. Receive wire instructions through email (secure source if available)

2. Print out the instructions, yes PRINT a hard copy

3. Call the recipient, ensure its the same person and phone number you have had some form of previous contact with.

4. While looking at your printed copy of instructions, have them read you the account and routing number live over the phone. Yes, THEY read to you. If you read to them they can be lazy and just say "thats correct." This has happened.

5. Request the contact you immediately after the funds hit their bank on a "pending" status.

See this reply in the discussion

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  • Lender · Oceanside, CA · Member since 2014 · 39 posts · 50 votes
    5y

    I have seen this mistake hurt borrowers and private lenders and it is a simple one to avoid. As in most states, each California city has different zoning laws. I have seen flippers acquire a distressed SFR of which they thought was at a steep discount to the market, take out a high leverage point loan from a private lender and then simply can not move the property. Turns out this property is an SFR but zoned commercial. Some cities are ok with the use, will classify it as legal nonconforming, but an important question to ask the city directly is, "What happens if my property gets destroyed by more than 50%? Can you rebuild it as an SFR?"


    Some cities will say yes while others will say "No", it needs to be rebuilt per the current zoning code.


    This not only creates some potential insurance issues if this is missed by everyone but just as bad, there are huge property value swings. In the situation described above, if the building were to be damaged by more than 50%, it would need to be rebuilt into an office space "with no room for parking" which is required by the city. The resulting building would need to be smaller than the current layout. The value difference went from $650,000 as an SFR to $450,000 as a storefront retail. Borrower lost the property and the lender ended up having no protective equity.


    This huge miss could be avoided by simply pulling a property profile to check the zoning.  If the zoning does not match the current use, further work is needed.  Some cities in CA will issue a "rebuild letter".  Basically indicates what the building is allowed to be rebuilt as if destroyed by more than 50%.

  • Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes
    5y

    Thank you @Travis Watts for explaining the roles of a limited partner and the team in multifamily syndications. Thanks for sharing your experience with us. 

  • Investor · San Francisco, CA · Member since 2017 · 24 posts · 2 votes
    5y

    Hello all.  This is not exactly answering the original question but is useful and kind of topical.

    The book "Real Estate Investing Gone Bad" has about two dozen stories: https://www.audible.com/pd/Rea...

  • Real Estate Agent · Las Vegas, NV · Member since 2016 · 32 posts · 31 votes
    5y

    @Melanie Stephens

    Hmmm. Shall I tell the tree roots in the sewer line story, or the squirrels in the attic story, or the Harley in the living room story, or the no insulation AT ALL in the attic story, or the tree fell on the house story, or the story about my four big mistakes? How about the last one... at one point, I had 11 properties, and decided to buy 4 more around mid-2007. The 11 properties were cash-flowing fairly decent, and I should have stopped the purchasing frenzy right there. But, NO... I listened to folks within the REIA who said the market will continue to rise (Shame on me). I bought the last 4 properties at the top of the market. So when the crash started, those four properties led the way down like a full-on steam engine. They actually led the crash in a very spectacular fashion. There might as well have been lights and sirens. My portfolio was down half a mil due to those four mistakes alone. Oops.

    Lessons learned.

  • Rental Property Investor · Philadelphia, PA · Member since 2020 · 116 posts · 23 votes
    5y

    @Terri Haley interested in the tree fell on house story

  • Real Estate Agent · Las Vegas, NV · Member since 2016 · 32 posts · 31 votes
    5y

    @Marita Jojo

    I owned a SFH in Houston, TX in 2006 until a tree fell on it in Sept. 2009. Had an unwelcomed visitor name Ike... Hurricane Ike. I was working a temporary assignment in San Jose, CA when I received a call from my tenant in Houston, TX. Tenant: "Terri...uuhh you're not going to like this" Me: "oh boy, just tell me" Tenant: "You know that big tree at the back of the house?" Me: "That really big oak tree?" Tenant: "Well, it's in the house now". At this point, in 2009, I was losing the properties anyway, so I asked if he had somewhere to go. He said they were moving into another house already. I told him thanks for being such a great tenant and thanked him for being so patient and understanding with the tree root issue the previous year (different tree--same house. I had bought the house from an investor as a flip --mistake #359).

  • Member since 2019 · 7k+ posts · 4k+ votes
    5y

    @Terri Haley is all your 2007 property located in TX ? the rental income can't pay for debt service?

  • Rental Property Investor · Philadelphia, PA · Member since 2020 · 116 posts · 23 votes
    5y

    @Terri Haley Thanks for sharing the story. I asked because there is a big tree in front of a property we are renting and I keep going back and forth if to leave it (environmentalist in me) or get rid when it is not too late. It is a pretty strong tree but close to the house and going all the way to the 3rd floor.

  • Real Estate Agent · Las Vegas, NV · Member since 2016 · 32 posts · 31 votes
    5y

    @Carlos Ptriawan

    My rental portfolio spanned Nevada, Arizona, New Mexico and Texas. In Texas, the properties were in Taylor, Texas City and Houston. Those cash-flowed "ok"... but I should have bought them at a higher percentage below market. The hazard insurance and home warranty (which I carried on ALL the props) cost DOUBLE than the other areas, so that cut into the NOI a bit.

  • Justin R.Pro Member
    Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 votes
    5y
    Originally posted by @Account Closed:

    In a recent flip we did, we hired a contractor to install granite countertops who stated he had never done it before but thought he would be ok. We decided to let him give it a go. 

    When he went to adhere the slabs of granite together, he paced them on the floor on top of cardboard when applying the resin. It bled through to the top of the granite and adhered the cardboard to the granite. 

    Him and his friends installed the countertop and left the cardboard stuck to it and we never heard from him since. 

    This resulted in us having to purchase a whole new granite countertop.

    Lesson learned!

     Did you already pay him?

    Because if so, this leads to another mistake. Don't pay your contractor (especially one you haven't previously worked with) the final payment until ALL work is complete. Once you make the final payment there is zero incentive for them to return.

  • Investor · WI · Member since 2020 · 22 posts · 23 votes
    5y

    @Justin R.

    No, we had not paid him.

  • Member since 2020 · 6 posts · 1 vote
    5y

    Very interested stories. Have learnt a lot. Just hope I can apply at the right time.

  • Specialist · Huntsville, AL · Member since 2020 · 96 posts · 35 votes
    5y

    I had a client in the past who turned down a loan that no one else would finance over 1% origination. It was $4250 to save $860,000 property that all we were doing was paying off $250,000 and getting them $200,000 cash out. They tried going to other lenders right at the maturity date of the balloon and they could not get it financed. And we were ready to close 60 days before the balloon payment was due. They lost the property. lender set the origination not us. They were still getting 5.25%.

    We’ve been able to close another loan with them and it went real smooth.

  • Flipper/Rehabber · Phoenix, AZ · Member since 2016 · 254 posts · 100 votes
    5y

    My wife and I are currently on the tail end of our live in flip. All things considered, things have been pretty smooth but one mistake was very costly in time AND money. I represented us as our agent in the deal and should have know that these tract style homes built in the 90's have a high probability of polybutylene plumbing. We did the typical inspection, which turned up nothing as the stubs were all copper. The seller filled out the disclosure stating they were unaware of what type of plumbing it was. Being an agent, I always have these types of things in mind for my clients and inform them about PB plumbing and similar issues whenever in neighborhoods known to have used PB. With everything going on, it just slipped my mind and I didn't look into it any further as there were already so many other repairs we were thinking about. After investigating what we thought was a small roof leak ended up being a pipe leak and BAM, there was the big, ugly grey piping staring me in the face. So roughly $8,000 to replumb the entire house and have all the drywall and paint fixed (after we were already done with drywall and paint) plus right in the middle of COVID, pushed us weeks back on a lot of the progress we were making. Insult to injury, nothing will kill your budget more than not having a kitchen, and having to eat out for almost every meal.

    Needless to say, I will always be digging through attic insulation to try and find what kind of piping was used in the future lol.

  • Rental Property Investor · Boston, MA · Member since 2019 · 134 posts · 50 votes
    5y

    @Terri Haley feel free to tell the roots in sewer story -I’m actually in the beginning of this with my property and hoping the city will pay for it

  • Developer · Portland, OR · Member since 2016 · 5 posts · 12 votes
    5y

    Building a 14 unit apartment building, I once made the mistake of paying a plumber for the entire 14 unit project up front. I'd submitted a construction draw for half the contract but the lender didn't look carefully at the draw and sent a check for the entire contract. Meanwhile the plumber had refused to continue work on that or the other two projects he was working on until he got paid his deposit for the new one, which he'd bought some supplies for on credit and so all three jobs were just sitting for two weeks while we waited endlessly for the lender to process the draw. 

    Our hard money lender was a very prickly lawyer who had never built anything and nickle and dimed us over absolutely everything and wanted way more progress reports and monthly budget updates and all this stuff than anyone else we worked with, and he was a total jerk any time you had to ask him for anything. So I get this check for $204k for the plumber and rather than get the lender to cut the check again for the right amount, I made the call to go ahead and give the plumber the check, since we still had a fair bit left to pay on the other two projects, so I thought we'd have some leverage there. Nope! He worked for like another few weeks, screwed up his rough in, got pissy with the project manager when he was told to fix it, and finally walked off the incomplete job. He also never paid his supplier, who wound up liening all three properties for a total of $36k. We had to get a new guy to do $24k of repairs that the first guy screwed up and then $60k+ to finish the job. 

    All in all, between the $120k in plumbing overruns and going over on excavation and permits and a few other items, we were like $180k over budget by the time we were ready for finishes. So what did the lender do? They made us pay $180k out of pocket, refusing to issue any more draws until the loan reserves were enough to bring the project to completion, which is something that took us completely by surprise. That was almost four months of contractors getting increasingly pissed and work slowing to a crawl while we scrambled to use what cash we had on hand to keep the project moving forward. We sold a couple other completed projects and were eventually able to see things through completion, lease up, and finally a fairly decent profit, but yeah, it took a lot of juggling and some tight months to bring that project to a successful close, even if it wasn't as successful as we'd hoped. Our no money down project wound up being like $300k out of pocket by the end but we still made a good return so it could have been worse.

    Don't borrow money from jerks. Those rates may look good and you might not have anything else as good lined up but a bad lender can kill your project. Watch out for the details in the loan documents, the easygoing guy you negotiated the loan with might not be the guy managing the loan and if you agree to onerous terms you should expect them to be enforced, even if it kills your project. It's not common, but some lenders want you to fail so they can foreclose, and they will attempt to do so if you give them any opportunity. We easily could have lost the property if we'd had fewer resources at the time.

    Don't give a low bidder a second large project until they've successfully finished the first, and never ever pay anyone in full before the work is done. 

    Don't skimp on your proforma. Sure, most lenders won't hold you to your budget and it's easier to get a loan with optimistic construction costs and you can always pay a few contractors out of pocket and a few when you close your refi at completion, but sometimes it really bites you in the ***.

  • Member since 2020 · 14 posts · 15 votes
    5y

    Don't let your guard down.

    I own a home that used to be a section 8 rental unit that had a great tenant in it. She regularly passed her inspections with flying colors for over 4 years.  She had a handy man come around bi-annually to take care of this and that and generally left the home well maintained.  So much so that I eventually began to put too much trust into the relationship and let my guard down for the remaining 2 years.  The very last year was very much the opposite of what I would have expected.  If the neighbors knew how to get in touch with me I imagine I would have been notified much sooner but in the beginning of 2020 I decided to drive by and check up on the home.  I arrived 3 days after a large drug bust had occurred at the home.  Neighbors said that there had been scary suspicious activity in the home for most all of 2019.  There were 11 vehicles parked on my lawn, the door was wide open, and a sign posted on the wall next to the door read "hazardous chemicals have been removed from this home."  Law enforcement suspected methamphetamine was being manufactured there although I later found out that it was in fact DMT.  Regardless, the home was a wreck and I had to undergo certain regulated processes for suspicion of Methamphetamine Manufacturing that I would not have if they had known it was DMT to begin with.  Today the home is cleared, remodeled, and with no damage against the title.  In hindsight, I most definitely could have avoided this had I not let my guard down. 

  • Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
    5y
    Originally posted by @Nate Sanow:

    @Melanie Stephens

    Where do I start...

    1. Don’t listen to a certain financial expert who preaches “always put 20% down and have a 6 month emergency fund.”

    That held me back for a few years and the opportunity cost was significant in retrospect.

    2. Don’t be afraid of a chicken scratch contract on an off market duplex that would have cash flowed + appreciated at a strong clip from the get

    3. Buy that freaking house. You know the one. (I’m

    Talking to myself.) I had an inside scoop on an area of massive development coming and literally this purchase 5x’d in value for the actual buyers.

    4. Trust but verify contractors or similar vendors. Look for nice people you can work with and begin to trust.... but permanent trust is earned not given. Always verify. Along with that: know that forgiving is healthy and positive but you don’t HAVE to trust again. Let go of that grudge for yourself, not them, but don’t trust again.

    5. Always get advise and wise counsel in at least a group of 3. Aka 3 agents, 3 contractors, etc. There is a proverb that says “with a multitude of counselors your plans will succeed.”

    I could keep going. And going. And going. Sadly. I’ve had a rough middle stretch in my investing and am ready to bounce back again! Ramping back up after these lessons I’ve learned. Thanks for asking, made me take a look at myself.

     The emergency fund I highly recommend right now is the one that gets you out of high after an ice storm! Tulsa get hit like we did in OKC?

    Forrest Faulconer

  • Rental Property Investor · Cincinnati, OH · Member since 2020 · 380 posts · 588 votes
    5y

    @Melanie StephensI did not screen tenants on my first property. Long story short, now I always screen tenants.

  • Investor · San Diego · Member since 2020 · 22 posts · 31 votes
    5y

    Mario here from Orange Box...Real Estate investing can be really exciting and of course profitable! And in an effort to close quickly when you get a smoking hot deal you may be tempted to cut corners and save money. I did this exact thing, thinking I was going to lose the deal if I didn't close that day. And wanting to increase my margins by not using a title company. So dumb me purchased a home in Colorado Springs Colorado for $27,000 cash, no title company. The seller was really on the fence about the price so I brought up doing a quit claim deed. I did the calculations on what I would save on title fees and the seller seemed confident she owned the home free and clear. Well it bit me in the A! She had 3 liens (not mortgages) from the county and HOA. I ended up having to pay this out of my pocket when I went to resell the home. My margins were gone, I couldn't negotiate out of it and I wasted 3 months of my time and thousands of dollars!!

    DON'T CUT CORNERS

    ALWASY USE A TITLE COMPANY OR ATTORNEY 

    Have fun out there!

    Mario 

    The ORANGE Box Project 

  • Real Estate Investor · Colorado Springs, CO · Member since 2009 · 40 posts · 24 votes
    5y

    We purchased a property in a nice neighborhood that we knew needed an extensive rehab.  We got this property by diligently continue to follow it even after we had been outbid for the property by an all-cash buyer.  The cash apparently fell through, so we put in an offer immediately that was reluctantly accepted.

    This property needed a new roof, new siding, furnace, all new flooring, paint, all doors and windows replaced, new lighting, electrical work, and plumbing.  The kitchen, all bathrooms, and deck had to be completely replaced, which included removing walls and moving plumbing.  In other words, the house was a disaster, but we knew that going in.  Once we started work on the house, neighbors would come by and tell us how happy they were that we had bought the house and were improving it because it had been a blight on the neighborhood for many years.

    Shortly after we bought the property and began the renovation work, that area of the city was hit by a huge hail storm with 2" hail that did a huge amount of damage to the areas that were affected including this newly purchased property.  To our surprise the insurance company covered the cost to replace the roof, siding, and some of the windows and doors.

    Normally, my family and I do all of our renovation work ourselves, but hired a contractor to replace the roof and stucco the house, which was a nice upgrade thanks to the insurance covering the siding.  The contractor we hired was an acquaintance who was referred to us by a few good friends, so we didn't perform our typical due diligence.  He was the friend of a couple of our close friends, and a very nice, so what could possible go wrong?

    He required 1/2 down, which is not uncommon here, so we wrote a large check to cover half the roof, deck, and siding.  The plan was for him to start right away, which didn't happen.  Delays turned into weeks with excuses ranging from work trucks getting stolen to the crew breaking down on the interstate.  When workers did show up they were extremely unprofessional and obviously not competent to perform the task at hand.  We affectionately referred to as "Weedy" since he would smoke marijuana in his car during breaks from working on the deck.  The first day he showed up to work on the deck, he asked to borrow my level because he didn't have one to work on a deck!  Needless to say, he wasn't on the project long.  When your crew needs rehab more than your rehab, you know you have big problems.

    The stucco crew was great, but they walked off the job after the first coat of stucco because they had note been paid and told us they would file a lien on the property if we didn't pay them immediately.  We were told that they had already been paid by our contractor, which he later confessed that they had not been paid.  It was clear that we couldn't trust anything he said and the point where I did some investigation into this contractor.

    Things went downhill quickly at that point.  He continually missed meetings we would setup with him.  Then there were three way calls with us, our contractor, and his subcontractor screaming at him on the phone for not being paid for our project and prior projects they had been engaged in.  The call from a big box store telling us our material was on hold because they hadn't been paid and that they had just called the police on our contractor for taking a shopping cart full of tools without paying for them.

    It turns out that shortly before we paid our contact for half the cost of the roof, stucco, and deck, his Ponzi scheme began to fall apart.  He was taking the down payment on new projects to complete previous projects, but he was so far behind that he could begin to complete everything and now nothing was happening on any projects.  There were a number of complaints on the BBB website as well as the local building department's website.  Our contractor was having trouble finding people to work for him because he had a bad reputation for not paying his contractors.

    In the end, a number of people in the community had been scammed by our contractor to the point where he was on the local news.  He was then arrested and spent two years in prison.

    We were able to work out things with the stucco contractor, the big box store (gave us the material), and get the deck and roof finished with competent contractors (work done at cost).  Despite our contractor and being way over budget, the house turned out beautifully and provides nice cash flow as a rental property in a nice and growing area of the city.  We were able to work out things with the stucco contractor, the big box store, and get the deck and roof finished with competition contractors.  

    One of obvious lessons learned is to do all of your due diligence when checking out a contractor.  Check reviews online, the BBB website, and the building department website as well as references.  I also learned that half down at the start of a project is common but not required and can be negotiated.  A big thing that saved this project from becoming an even bigger disaster was our cash reserve, which we had to tap. Without the cash reserve, we would have really been scrambling for funds to complete the project.  Lastly, I found that having a supportive spouse (she is fully involved and all in) is crucial.  I think it is one thing to get through a difficult situation like this on your own, but would have been far worse if my wife wasn't fully committed. 

  • Rental Property Investor · Pittsburgh, PA · Member since 2011 · 56 posts · 13 votes
    5y

    @Melanie Stephens I bought a large 4 bedroom house subject to in a part of town known for student housing. I thought I’d fix it up and rent it out to college students. The parking situation was an absolute nightmare, and I didn’t know enough about managing a GC on a large renovation like this one. I got a $35k rehab loan and the renovation ended up costing more like $75k. I was all in at 100% of the houses value and then I couldn’t find anyone to rent it because of the parking. Luckily I knew how to sell on land contract and eventually found someone willing to buy it that way, but I had to offer very favorable terms. It’s now been 3 years of receiving monthly payments. I’ve paid off my renovation loan. But at best this is a very long term break even deal. At least if/when my buyer cashes me out I’ll have some equity and a little “pay day”.

  • Investor · Gilbert, AZ · Member since 2015 · 6 posts · 5 votes
    5y

    I had a property that was sitting vacant for three plus months and was really happy when an interested renter came along. He was willing to give me 2 months rent up front in addition to a deposit, in cash, but he wanted to move in right there and then without a credit check. I always do some type of check and should have seen this one coming, but I was just so happy to get a nibble on this property that I took the cash and handed over the keys.

    As you might expect, it was a nightmare! We're talking police involvement and extensive property damage.

    A vacancy is always better than a bad tenant, lesson learned!

  • Specialist · Huntsville, AL · Member since 2020 · 200 posts · 105 votes
    5y

    @Justin R. Wow sorry to hear your story,but grateful for the lesson. Hopefully you have made more than enough since to cover that loss. Thanks for sharing

  • Flipper/Rehabber · Salt Lake City, UT · Member since 2015 · 8 posts · 7 votes
    5y

    @Tanvir Sattar this made me laugh out loud. Would love to hear the story behind this comment!

    @Melanie Stephens My story is about one of my early flip homes a couple years ago -- it had a large, beautiful detached workshop/garage on the property that looked like a second house. I had a joint venture partner on this one and he liked to flip cars and boats on the side by having them fixed up. He asked if he could have these cars and boats on the property while they were being worked on and I said "yes!" because there was a lot of parking there and for some reason I felt like the cars and boats would make the property look like someone lived there (I was super stressed about these vacant homes getting broken into back then). 

    Anyway, a mechanic was there doing something on a boat parked in this detached garage and the entire thing went up in flames. I'm guessing he was smoking in there or something and that doesn't mix well with a LACQUERED BOAT in a confined space. The local fire station showed up to put the flames out and it was all over the news. Luckily it was raining that day and the fire didn't jump to the main house! The mechanic ran off and was never seen or heard from again and for some reason I didn't file an insurance claim on my vacant policy -- I wrote that idea off immediately. I was worried that I'd file a claim, it would get denied due to these crazy circumstances, and no one would ever insure me again. And maybe that would have happened, I don't know, but maybe I should have looked into it more! 

    We ended up marketing the home with this insanely large concrete pad with its own driveway with nothing on it as a home with a "basketball court." Ended up taking a year from purchase to finally sell it. Amazingly enough I still made $20k on that deal even with my partner and our profit split. He felt terrible about the whole thing too. And he lost that boat and two of his other cars in front of the garage got super damaged from the heat. Was a learning experience, but I definitely don't allow any cars or boats being worked on at my properties anymore! And I probably still need to learn more about my vacant policies and making claims haha!

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