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Seven Deadly Sins of Investing in Real Estate

03/07/2010

Seven Deadly Sins Of Investing in Real Estate

The First Deadly Sin of investing in real estate is buying a house without seeing it in person – or having your trusted adviser see it. Think this is crazy talk? Well it’s not A guy called me this morning wanting to know if I could sell his house. I asked him if he lived in the house. No, he lives out west and bought the house sight unseen yesterday. Hmmm.

Me: How much did you pay for the house?
He: $30,000. The second deadly sin of investing is paying too much.

Me: I see. Is this your first investment property? He: Yes.

Me: How did you buy this house? Was it at auction? Did you have an agent help you? He: Oh no, I bought it on line through XXX make-me-a-millionaire. (not the real name) I know this neighborhood. I suspect he is an inexperienced investor and
have a bad feeling. The third deadly sin of investing is believing everything you see on the internet or late night infomercials.

Me: Does anyone live in the house? Where can I get a key to look at the house?

He: Well, I just want a basic BPO. Can you just tell me the numbers? The fourth deadly sin of investing in real estate is asking your trusted adviser for a BPO or CMA after you make an offer.

Me: Tell you what, I’ll drive by the house and run the numbers when I get back to the office, okay?

He: Yes, that would be great!

So, I drive by the house. The first two houses on the block have boards over the windows. There are young men with pants down around their knees conducting some sort of transaction on the corner. Several homes on the block have 6 foot black metal fences with ‘Keep Out’ signs posted. Bars on the windows. Some of the homes are nice and well cared for but about a third of the houses are in bad shape.

I pull to a stop in front of the subject property. The door is standing open. The downstairs windows are boarded up. The grass is high in this yard and the yard next door. No, I don’t go in that house alone – and in my good clothes!

Back at the office, I find that the highest price paid for a house in that neighborhood is $9,000. This is not one of the areas of Kansas City which has maintained value. This is not a neighborhood with a strong HOA. Pride left this neighborhood a long time ago. I call the young man and give him the news. I cannot sell this house for two or three times what he paid for it; I cannot sell it for 1/3 of what he paid for it.

He is shocked. But I saw the pictures on the XXX website! The house looks fine! The fifth deadly sin of investing in real estate is not having your own representation when buying a home.

Yes, this is a novice investor who found some site on the psychic internet where he could buy a house and sell it for twice what he paid for it. That may be true at some point in the future but today he would be lucky to sell the house he bought for 1/6 of what he paid for it.

He: Well how much would it cost to repair? Me: 10-25,000 maybe – I can’t really tell without going inside. It needs windows and paint. It may need plumbing, electric, HVAC, toilet, sinks, floors – who knows? The sixth deadly sin of investing in real estate is estimating the cost of repairs after negotiating the contract.

He: Well how much could I rent it for? Me: Between $600 and 700/month. The seventh deadly sin of investing in real estate is figuring your return after buying the house.

There is more to this story. He is scheduled to close next Thursday. I advised him to contact an attorney.

I don’t know what the final outcome will be but I know that if he had called me before signing a contract, I could have advised him on an appropriate offer – or a different house. There are plenty of houses in Kansas City he could buy, rehab and rent for $35,000 or less that would produce income of $600–900/month.

Why don’t people call me to help them when they are first thinking about buying a house?

Maria Morton 816.560.3758 begin_of_the_skype_highlighting              816.560.3758      end_of_the_skype_highlighting Kansas City Real Estate Agent
Prudential Kansas City Realty ♦ 435 Nichols Rd 3rd Floor ♦ Kansas City MO 64112
www.MariaSellsKC.com© 2010 Maria Morton All Rights Reserved *Seven Deadly Sins of Investing in Real Estate*

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