3 Real Estate Myths That Can Turn Potential Profits Into Huge Loss

by | BiggerPockets.com

Real estate myths are abundant on the internet. It’s important to discern the facts from clickbait and content written by people trying to establish themselves as experts in an area they’re unfamiliar with. Some articles legitimately debunk real estate myths. The biggest obstacle is misleading titles that claim to debunk myths, but actually perpetuate them.

Incorrect information usually comes from one-sided reporting by people sharing a personal experience with a given situation. Unfortunately, following bad advice can plunge you into a downward spiral, depleting every ounce of financial security you have. One major financial mistake can drain your savings, force you to live on credit cards, and cause debt which will affect your ability to continue investing.

Hopefully, you’ve got a bigger savings account than the 69% of Americans who have a stash of under $1,000—or the 34% who don’t have any savings at all. If you don’t have enough savings to cover a large loss, it’s especially important to discern fact from myth and learn from experienced investors.

Relying on the following myths as absolutes can quickly turn your profits into loss.

3 Real Estate Myths That Can Turn Potential Profits Into Huge Loss

Myth #1: Listing above market value will always give you more profit.

At first glance, it seems like good advice to list above market value. Real estate agents know prices are negotiable, and it seems advantageous to negotiate from a higher starting point. Every investor wants their property to be one that sells above asking price, and starting higher seems like a good strategy to make that happen.

For instance, an inexperienced investor might list and sell a property for $200k above market value, and write an advice piece urging other investors to list above market price. An experienced investor knows listing above market value is a strategy to be used in specific circumstances only. A new investor doesn’t have enough buying and selling experience to differentiate what those circumstances are.

Listing above market value can work in cities like Seattle, San Francisco and the Silicon Valley area where homes routinely sell for more than asking price. In 2013, 67% of homes in San Francisco sold for $41,000 above the listed price. In 2017, a quarter of all U.S. homes sold for 3.1% above listing price.

In 2014, two Palo Alto homes sold for over a million dollars despite being in total disrepair. Despite one of those Palo Alto homes being steps away from noisy Caltrain tracks, it’s a few blocks from a lively downtown area. Also, when parking is scarce, homes with garages sell for more. It’s all about location, and apparently parking.

Attempting to list above market value outside of high-demand cities (or circumstances) can get your listing ignored. You can reduce the price when you don’t get any bites, but according to Nela Richardson, Chief Economist for the brokerage Redfin, if your home stays on the market for more than a few weeks, buyers will become suspicious.

Myth #2: You’ll get a better deal as a buyer without a real estate agent.

When a house is listed with a real estate agent, the entire sales commission is included in the price. When a buyer doesn’t have an agent, the seller’s agent receives the entire commission. In other words, a percentage of the sale price is designated as a sales commission. You don’t get a discount when you buy without an agent.

Myth #3: A small profit on a bad deal isn’t a big problem.

A small profit can become a big loss when you were counting on the deal going through for much more. It takes time, effort, and money to salvage a deal gone wrong. This is a lesson Dave Scherer knows well. As the Principal and Co-Founder at a top-ranked commercial real estate investment firm, Scherer knows his game. Like anyone, though, he isn’t immune to a bad deal. His firm entered into a JV deal that looked great on paper, but turned out to be the company’s smallest profit in 11 years.

Scherer’s firm bought a student housing complex for $14.4 million, but their partner failed to reveal that leasing was down, and he hired his own companies to work on the property without telling anyone.

After investing time and money into maintenance, capital improvements, marketing, and leasing out extra space, they eventually sold the property after owning it a little over a year. Their efforts to revive the situation strained their resources, and their JV partner became a hindrance to their attempts to revive the situation.

Scrutinize All Advice

Take all advice with a grain of salt. Look for the context people may not be sharing. Know the circumstances that make your situation similar or different from the success stories you read about. Property investment advice rarely applies to every situation all the time.

What would you add to this list?

Comment below!

About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

4 Comments

  1. Curt Smith

    Tnx Larry! BTW your freebe comment at the end, Scrutinize advice IMHO view as a leader in a REIA is extremely important. Tooo (just toooo) many “Gurus” giving generic advice like “start out wholesaling” that given the context and facts re the advice receiver may be bad, ok, good or of no value advice.

    Questions i suggest everyone ask, but especially new folks of advice givers:

    – When was the last time you did that deal type? If more then 6 mo ago, be suspect that it still works.
    – Where did you do that deal type? If not in YOUR zip or identical scenario, price range etc, then that advice may not work for you.
    – What pre requisites are necessary to do that deal type? This is where new folks fall short as well, with too little knowledge, issues, and resources to pull it off.

    The worst advice I hear from new folks, Guru XYZ selling training said I should start in wholesaling to build up my cash,,, he training is $995 for a weekend (where folks are offered $10k access to the inner-circle. Terrible.

    ========== Back to your 3 points.

    #2 I strongly disagree with this point. I’m experienced, bought >40 rentals, work with many new and expereinced investors. Its very VERY rare in the flipping world that a very VERY seasoned buyers agent has connections into a neighborhood and gets good deals that she channels to her select buyers. Very rare. More generally a new person gets hooked up with a new agent (un benounced to the the investor) and nothing good comes of the over priced listed deals she channels to the new buyer.

    The best deals happen when you contact the listing agent directly, strike up a relationship, credential yourself as a professional investor who closes many deals in this area fast, never backing out…. I have had listing agents tell me crazy things, the current bid price, why the seller is selling and what dates are important to the seller, give me preference over other buyers because I credentialed myself and reminded that taking my offer she gets 6%, which 6% of my lower offer still nets much more than 3% of higher offers… She called me with a nudge to raise my offer to be “high” bidder. All this is ONLY possible by building a relationship with the listing agent directly, one on one, phone calls direct. NEVER will the 10′ pole via a buyers agent get you the kind of info I get direct, NEVER!!!!!

    No one will ever be believable to me if they try to say having a “top” buyers agent will get you better deals. First of all, how does a new person find a top buyers agent? And why would a top buyers agent work with a new person? Its too improbable even if a far fetched theory of a good buyers agent will get you better deals!

    Bottom line for new folks,,,, find the listing agent on realtor.com / zillow.com ad “presented by” agent and verify “are you the listing agent for 123 main st??” Hang up or ask to be transfered until you get the genuine listing agent.

    True some listing agents will be off-ish, try to not to work with you. I agere with that too, why work direct to a PIA new investor? I solve this problem by credentialing myself as “experienced”, I show that I close quick, no inspection, $3k earnest, and offer $500 bonus to the listing agent (this is more of a humor gesture, I’ve never had an agent take me up). I assure the listing agent, I just need 20 minutes to walk the property and then I’ll make a strong offer, no inspection, high earnest, quick close offer. They always end up saying ok ok, I’ll show you the house, and take your offer (they are thinking 6%! yah!) 🙂 🙂 🙂

    • Dumitru Anton

      Curt,

      I’m following your posts and threads for approximately 2 years and,
      You never seize to amaze me.
      This post is pure gold.

      Thank you for giving back knowledge

      P.S. how do you deal with the “boogieman”: termite inspection and blue foam?

      Tony

  2. John K.

    I disagree with #2. This is certainly not always the case. I hear that often repeated by agents, but every case stands on it’s own. Plenty of examples of being able to negotiate better deals taking out an agent. I’m not saying this is the right thing to do for everyone. I’m saying the myth isn’t necessarily false. You can get better deals.

  3. Rob Cook

    Agree with Curt Smith re agents. I have been licensed, starting in 1978 and have an active brokerage even now, just for my own portfolio listings.

    I was an earlier pioneer in Buyer Brokering with Remax and other firms. Have a law degree, and am a residential remodeling construction company owner for over 25 years. Have over 60 rental units currently, having bought 20 more in 2018 alone.

    All of that is just to establish credibility and a foundation upon which my comments should be weighed.

    I ALWAYS prefer to deal directly with sellers, even when the property is listed with an agent. I do NOT often need any inter-mediation or professional detachment in my deals. My skills and experience are usually orders of magnitude beyond most Listing Agents as to negotiations, property valuations, rental potential, repair and rehab costs and just plain selling ability. So why the heck would I want a relative “idiot” between me and the seller? I DO have a very good and smart active Broker friend and business associate who funnels me deals regularly, but he has earned his respect from/with me, and I trust him to act as the intermediary most agency provides. But, often the listing agent is still a pain as discussed above, and I have to work with the deal and seller indirectly. But that is never my first choice.

    Another thought your post made me think about, is that one of the most common “myths” investors fall into, is counting on appreciation (both in future price and rent increases). I buy a lot of properties from failed investors who bought a razor thin cash flowing property, predicated on unrealistic expectations of future price appreciation and rising rents to bail them out. Not a good idea, generally. And a big trap usually. Underestimating renovation costs, repairs and maintenance and vacancy expenses is very closely related to overestimating future rent prices and property values.

    As to your #1 point, listing too high, this has always been a big blind-spot in our business. Agents play games with telling the sellers what they want to hear, and sell out to get the listing, planning on later reducing the price once the seller gets educated. This not only screws the seller ultimately, but also all the more honest agents who were “bidding” for the listing and had the integrity to stick to the indicated market value instead of giving a ridiculously high valuation to the seller to induce seller to list with them. As a selling agent, I can attest that an aged listing, one that started out too highly priced, and then reduced, almost gets blacklisted by the local selling agents, because they may have competed for the listing too, and were outbid by an unscrupulous or stupid agent who is the current listing agent. Also, selling agents with ready willing and able buyers do not want to attempt to do business with stupid agents or greedy sellers who listed too high – it wastes our time.

    Finally, and closely related to my first point above, I believe it is ALWAYS critically important to find or create and only buy, discounted deals. And I mean, at a true discount to the current market value. If a property, by MY analysis, is worth $200K, and the seller would have a good realistic chance of getting that in a 3 month listing period on the MLS, then I would NEVER pay more than, perhaps $160K for it. That is 80% of the actual FMV, or a 20% discount to current FMV. Yes, I would therefore not “win” a lot of those offers, but so what. I buy more than I can handle, with that discount requirement and always have, so it works. This is pretty much like the old saying, “you make your money going in, or when you buy.” In most cases, you will find yourself quite happy that you did not pay full price, once all the costly surprises arise after you bought. IReal Estate investing is a business, and the business is about making money, not taking risks or helping sellers get the most for their houses! Their gain is your loss in that situation. Paying full price has only worked out for me when appreciation and low vacancy, etc later “made me right.” Luck in other words.

    So, I would add to your list that believing you can MAKE a bad deal a good one after you purchase it, is a big losing approach, generally. Gambling on appreciation is the usual mental error. Planning on perfection is another (low vacancy, no repairs or capex expenses, or in a flip, being able to exit in 3 months holding period when it actually takes 8 months you did not budget for in interest/taxes/utilities etc during marketing).

    I am very conservative in my realty acquisitions. I want multiple exit plans if I have to bail on it sooner than planned. I will not buy a flip, which I would not be willing and able to keep as a rental, for one example. I buy at a big enough discount, to “dump” it fast if I have to and at least break even on the deal. I add to that, usually, the potential for sweat equity – meaning, in addition to requiring a large discount, I also want to be able to force some appreciation right away, by doing fixup work. This creates “instant” equity which gives me even MORE buffer in case I need to bail out of the property for any reason.

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