The Single Biggest Mistake For Real Estate Investors

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Before you even think about becoming the next real estate tycoon, you’ve got to be disciplined to learn the basics. What you’re about to read may come as a surprise to you, but there is a single mistake among real estate investors, especially new investors that literally can cost you thousands of dollars and could even potentially put you out of business for good. Now, I am certainly not trying to scare you, I simply want to make you aware of the number one potential pitfall to investing in real estate because it is totally avoidable. And contrary to popular opinion, this isn’t something you can pick up from watching late night television or at a weekend seminar. The one common mistake that I’ve seen that puts investors out of business revolves totally around doing their due diligence or lack of due diligence.

As your just starting out and sometimes even after you’ve completed several deals, your adrenaline is pumping every time you look at a deal. You’re hungry, maybe even a little desperate to get a deal done. Your hearts pumping from the excitement to make that offer, and all you can think about is buying this property. And as a result of your eagerness, you tend to slip up and make mistakes. The one critical mistake that will cost you your business comes from simply over valuing a property. You analyze the deal’s numbers, slightly exaggerating the property’s “as is” value and it’s true potential. In other words, you appraise the property value for more than what you’ll ever be able to sell it for.

Now, there’s some good news to all this: I can show you exactly how to keep from making this one critical mistake. This is not information that is optional; it’s vital to your business that you get this right.

So, here are three bulletproof ways to evaluating properties to keep your property values in line:

1. The tax accessed value. For every piece of real estate, there is a tax parcel id that reveals the tax value of the property. The owners pay tax every year based on the current value of the property shown at the tax assessor’s office. This information is freely available to the public in every market. In some areas, tax assessors only access property every three or four years, therefore these values can be drastically off from fair market value. You’ll need to find out when the latest assessment was performed in your area. You can go to http://www.netronline.com for a list of all the county recorder’s offices and tax assessors.

2. Comparable Sales. This is exactly what licensed appraisers use when evaluating a property’s value. They will look at the property; it’s current features, and the condition. Next, they will go to the MLS (this is the listing service most commonly used by real estate professionals) to pull all real estate sales surrounding the home within the last three to six months usually within a half a mile of the subject property. You can perform the same exact exercise with the help of a realtor. Simply call a realtor and ask them for the listings and homes sold for that compare to the house that you are looking at. Now, you want to get a list of the homes sold and the ones that are on the market. After all, you’ll want to know who your competition is when you start marketing the property for sale. You’ll want to compare the square footage, the age, the roof’s age, and all the features that are available. How does your property stand up to the market? Does it have more or less to offer for the money? Also, pay attention to how long the properties are sitting on the market before they sell.

3. Drive By. That’s right, get off your butt, get out there and drive to learn your current market. The fact is that there is no better way to learn your current market conditions than getting out to look at what the market has to offer. Currently, there are tons of websites that you can subscribe to that will give you comparables, however, knowing your market from simply going neighborhood to neighborhood is priceless. Buy yourself a cheap map with a yellow highlighter. Now, start in one area of your market driving the neighborhoods and you’ll work your way until you’ve looked at every neighborhood in your market, highlighting the areas you want to work. When you are driving these neighborhoods, you’ll want to record every house for sale and collect every flyer that is advertising a home for sale. Next, make some observations about each house. Look at the structure, at the rooflines, whether the houses are in good shape. On every property, guess the age, the square footage, and the price, recording all of this information. Then compare your answers with the information you collect from the real estate agents, the seller themselves, or the flyers that you collect. This method alone will get you totally familiar with your market in a very short time frame.

You must understand how significant this one step is in evaluating your deals; otherwise misjudging one property value can take you out of business for good sending you back working for that dumb-dumb of a boss of what some call a job. Your goal is to learn everything about your market so that when you get a lead, you’ll have a good estimate of what the house values in the area are before you ever leave the house. Start today using these three methods to evaluate your market and you’ll build your business on a solid foundation avoiding the common mistake of over valuing properties that many investors make.

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4 Comments

  1. Hi Derek,

    Enjoying the articles and website. I plan on visting oftern. Do you plan on putting up forum/message board in the furture?

    Hugh

  2. Hugh

    Thanks for the comments.

    I will give it some thought and may put up a forum in the near future if I have lot of requests.

    For right now, feel free to comment on this blog

    Derek

  3. Derek,
    Thanks for taking the time to post your articles sharing your insights with folks like me. I am a Homemaker and beginning investor who has read several books, articles; listened to CDs, teleconferences on various avenues into RE Investing; attended RE seminars, conferences and workshops. Last year, we “lost” nearly $3K in a “Coaching course,” yet we are still on that learning curve without our first deal. I use quotes around “lost” because we did learn from our mistakes.

    But that kind of learning is too expensive in this day and time. My family and I are reviewing and updating our plan to begin raising capital through R.E. deals by this Spring.

    If you have any thoughts to share on pitfalls to avoid in doing “Subject-To” deals, and also about when to make the transition to setting up an LLC, I would be interested in reading them.

    I appreciate your clear, plain-spoken and well-informed, down-to-earth articles. This is refreshing. I too will visit again.

    With appreciation,
    Pat

  4. Derek:

    I have learned in life that if you do well to people with no interest you will receive double of good things in life.

    I really appreciate the good advice share to beginners like me that is convince that is going to work for me and is afraid to give the first step.

    Once again thanks for sending me the email and I will look forward to read more of your advices.

    Best Regards
    Margaret

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