5 Things That Can Kill Your ARV
Real estate investment can be a tough nut to crack. While some thrive in the industry and rise to the top, others struggle to find success. But what is it that creates the difference between the two? Is it personal drive and tried experience? Is it contingent strictly on the health and vitality of the industry? Or is it simply a thing of chance?
This article will detail 15 of the most common mistakes made in real estate investing - from some of the top real estate experts - so you can avoid the most threatening real estate pitfalls and build a solid foundation for optimal success.
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1. Failing To Keep Digital Records While Flipping A Home
Home renovation - or “flipping” houses - has been a popular trend in 2015 and 2016. In fact, a report from RealtyTrac shows that in 2016, 6.6% of all single-family home and condo sales were flips.
Though this number is up 20% from 2015, experts predict that flipping houses will continue to grow as investors become more active and knowledgeable in the field.
Perhaps this percentage would be higher, however, if investors took care in keeping digital records of each and every home they flip. John Bodrozic from Homezada.com highlights the importance of tracking critical data, such as the upfront purchase price, date, and associate loan documentation.
“It is important to track budget, costs, receipts, warranties, owner’s manuals, etc. for each home remodel project they undertake, not only keep the investor on budget for each remodel, but also to keep track of the tax basis of the house (purchase price + total cost of completed projects) which will be needed when filling out their taxes in the upcoming sale of the property,” Bodrozic said.
Bodrozic also notes that if you plan on keeping the flipped house and renting it out, having critical documentation like a home maintenance schedule and detailed digital home inventory will help to ensure that, if there is any damage done to the home by the renters, you’re adequately prepared in case you need to file an insurance claim.
2. Not Knowing The Average Days On The Market
There are several factors you must take into consideration to be successful in the real estate market, but one of the most critical is average market time. Days On Market (DOM) statistics are, in fact, great representations of the market itself, as they indicate the market activity and vitality in a particular town or neighborhood. When the average DOM increases beyond normal levels, this is a good indication that the market is buyer-friendly, whereas below normal levels indicate a poor market state.
Take, for example, Dean Leonard from Wind River Development. Leonard admits that he made the critical mistake of investing in a home that had great numbers but, after closing on the sale, found that the average DOM in the particular neighborhood was more than 300. If he had investigated further into the state of the local market, perhaps Leonard would have thought twice before agreeing to the investment.
3. Failing To Implement An Exit Strategy
First off, you should have an exact idea of what you want to do with the property before you buy it to prevent wasting time and money as the investment moves forward. However, things don’t always work out as planned. An exit strategy is crucial if you intend on cashing out of an investment. By having a “Plan B” you’ll have options to help you make money in case your original plan doesn’t pan out accordingly.
“No matter how smart you are, you can still get it wrong,” said Kyle Alfriend from the Alfriend Group. “You must have an emergency exit strategy, which is basically to either rent it or dump it at fire sale pricing. You need to know those options, and purchase the property at a price that you can afford the worst case scenario.”
4.Not Working With The Right People
Mark Ferguson, of InvestFourMore.com, bought an old house built in the 1800’s that needed a lot of work. He had a project manager/contractor working for him at the time who said that renovating the home and building an addition would not be too big of a job. The contractor ended up tearing off the back of the home, gutting the interior, adding stairs that were not up to code, and quitting mid-project. After spending $25,000 on renovations, the house was ultimately worth less than Ferguson had originally bought it for. He had ten flips going at the time and decided to dump the investment instead of spending another $100,000 fixing it. Thankfully, the market improved greatly and he was able to sell it for $15,000 more than the original sale price, but he took a $20,000 loss after carrying, financing, and selling costs.
Ferguson’s unfortunate circumstances highlight the importance of partnering with reliable people when you’re working on or improving an investment property. Sadly, horror stories like Ferguson are not uncommon. You can avoid this, however, by carefully selecting who you choose to work with.
- Start at your local Real Estate Investment Club (REIC) meeting as ask for referrals of contractors from whom others have worked with and had good luck with in the past.
- Drive around the town or neighborhood and look for contractors working nearby. Strike up a conversation for a chance to see how they run their projects and what their work looks like in real life.
- Visit your local hardware store for mingling opportunities and manager recommendations.
- Search online for leads and follow up with phone and in-person interviews. Make sure to also ask for former clients who you can contact to talk about their experience with the contractor.
5. Being Short On Patience
Patience is one of the most important virtues of a well-rounded real-estate investor. Regardless of what type of real estate investment you’re involved in, even if it’s passive real estate investment, you have to know that it will take time and effort before your hard work pays off. One of the biggest mistakes of real estate investment is assuming that it is a get-rich-quick scheme.
“I didn’t exactly plan to ‘flip’ a house we bought for about $150,000 on the Central California Coast, but in five years we sold it for about $350,000 and a part of it was a rental so we made even more money there,” said Bill Seavey, a house-flipper from Cambria, California. “We did get lucky with the run-up in prices between 2001 and 2007 which really wasn’t our doing. So patience can be a virtue.”
6. Not Doing Your Due Diligence
One of the most important steps in the real estate investing process is due diligence. A common, monumental mistake that causes investors to crash and burn is when they fail to take all of the appropriate steps in performing a thorough due diligence analysis for their investment property.
“There are many variables to consider when executing a residential flip. ARV (After repair value), time on market (TOM) of comparable sales, market cycle/season-even marketing is worth consideration. Repair delays or budget overruns are common, and oftentimes latent defects are masked during acquisition. Inexperienced individuals are wise to develop a strong professional network before attempting a flip.” - Michael Kelczewski, a realtor with Brandywine Fine Properties Sotheby’s International Realty.
7. Neglecting To Use MLS
More than 90% of home buyers use online listings to find houses they are interested in. And while national listing sites like Zillow, Trulia, and Realtor.com are probably some of the first places you’ll consider listing your property, the most vital online site is your local multiple listing service (MLS). The MLS is a database of homes that’s maintained by real estate professionals and is the largest pool of properties for sale in the market. Without posting your listing on MLS, your investment may never be noticed.
Joanne Cleaver, of USRealty.com, recommends that you also consider covering all of the bases of property listing - not just online.
“Explore all of your alternatives for listing brokers. You have many more choices than the local full service, full-fee brokerage,” Cleaver said. “Now, there’s a spectrum of services, service levels and fees. When you take an a la carte approach to selling, you can buy only the services you need and ensure maximum return.”
8. Being An Unwelcome Sight In The Neighborhood
A quick way to crash and burn as a real estate investor is to build, flip, or update a house in a manner that creates an eyesore in the neighborhood. Melissa from Walnut Street Finance recommends sticking to neutral colors and finishes.
“For major exterior renovations, stay with the home style of the neighborhood. For interiors, choose classic and tasteful stone, tile and finishes,” Melissa said. “A recent flipper in Alexandria had a house sit on the market for more than a year because it turned out not many other people liked the look of a Turkish palace complete with fountain in a row of Craftsman homes. That extra year of carrying costs takes thousands away from any potential profit.”
9. Not Getting A Complete Budget Prior To Closing
“The biggest mistake that we’ve made over the years was not getting a complete budget prior to closing. It can make the difference between a profit and breakeven or loss,” said Jay Davis from TrendAtlanta.com.
Having a full, complete budget is critical if you plan to succeed. Before you even think about investing, you should create a long-term budget that will help you determine how much you can spend in the buying process, how much you can spend in the renovation process, and how much wiggle room you have throughout.
You also need to take into account the hidden costs that you might encounter. For example, consider the cost of taxes, insurance, utilities, and fees during the renovation/rental period. Though creating this budget may seem a bit excessive, you’ll thank yourself in the long run.
10. Relying On Professionals To Do All Of The Renovations
Hiring professional contractors to come in and do every square inch of renovation is one of the quickest ways to lose money and fail an investment.
“I’ve seen house flippers who decided that their time was just too valuable to waste on any of the work that needed to be done on their flips. This might seem reasonable at first, but when you see what it can cost to get a professional service to come out and clean the floors or do final cleanup after construction, you’ll think again,” said Christina El Moussa from Success Path & HGTV’s Flip or Flop. “For some things, it’s just best if you take a little bit of time and do them yourself, especially if you’re just getting started. You might be surprised at just how much more you can add to your profit margin if you’re willing to get your hands a little dirty now and then.”
Three quick and easy DIY ways you can save money on renovations and repairs include:
- Refresh the walls with new paint
- Revamp the kitchen by changing a few prominent details
- Add curb appeal by tidying up the front yard and driveway, adding landscaping, keeping windows clean, and having a regularly mowed lawn
11. Thinking You Can Get Away With Major Remodeling Without Permits
Juan Diaz, longtime real estate investor from Equity Track, emphasizes the importance of remodeling permits. Even though getting permit after permit for your remodeling project may seem excessive, operating without them is incredibly risky and could potentially throw a wrench in your entire investment if you’re caught. Say you didn’t obtain the proper permits; upon selling your property, buyers will likely inquire about permits for the basement remodel or the new kitchen layout. Not only will you have to answer honestly, but these buyers could go to your municipality and report you, forcing you to redo the project permitted before the house can be sold.
If your municipality catches wind that you have no permit while building, they will likely issue a stop-work order which is one of the quickest ways you can lose money. You’d then be required to follow every step to obtain the proper permits and pay any extra fees or penalties. Though you may think you can get away with doing unpermitted work, it’s simply safer to do the project properly the first time, every time.
12. Overpaying For The Property
“The biggest mistake I see novice real estate investors make is paying too much for the acquisition of the property,” said John Agostinelli, owner of Agostinelli Realty Group. “Often there are several mistakes made that allow this to occur. The after repair value that they use in their calculation is above the true market value. This is exacerbated by underestimating the costs of the improvements needed to maximize the return on investment.”
Agostinelli also notes that many real estate investors lack the skills necessary to manage the purchasing and contracting process. This inexperience makes it difficult to make the right decision about which improvements add value and which improvements end up costing more. Mistakes like this can also be made after the project is completed. In today’s market, accepting the highest offer is not always the best offer. Thus, you can save thousands of dollars if you understand the financial side of things like buyer conditions and lender pre-approval and know how to handle renegotiation post home inspection.
13. Focusing Too Much On A “Good Deal”
Jason Mitchell, from Jason Mitchell Real Estate, says that the worst investment mistake you can make is to focus too much on price-per-square-foot. This can get you caught up in what appears to be a great deal, but is actually a dud.
“What’s most important is activity and sales relative to inventory,” Mitchell said. “Look at the location and make sure that a buyer would pay a premium, rather than a discount due to things like busy roads and power lines. Good interior lots pay dividends.”
14. Underestimating Cash Flow
One of the most critical components to becoming a successful investor is to understand how to properly analyze the property’s cash flow. By knowing the cash flow, you can figure your return on your investment and determine if, in fact, the property is worth your time and money.
If your strategy is to buy, hold, and rent out properties, you need sufficient cashflow to cover maintenance.
“It’s not uncommon for a property to sit on the Houston market for 90 to 120 days before it’s leased,” said Laolu Davies-Yemitan in an article from Bankrate. “Meanwhile the owner has to pay the mortgage, the taxes, the insurance, the cost of advertising and homeowner or condo association dues. If the owner hasn’t budgeted for that, an asset can quickly become a liability.”
15. Over-Rehabbing To Make Up For Paying Too Much
“As it turns out, you can’t out-rehab the market. Houses in a given neighborhood are going to have a specific price range, and over-rehabbing yours won’t get you out of that price range,” said Christina El Moussa. “It’ll just eat up your rehab budget and leave you with a house that’s sitting on the market going stale.”
While having and sticking to a strict buying budget will help you avoid this common mistake, you also need to work on thoroughly analyzing the property and weighing the risks. If you have any inkling that the property isn’t worth what you’re bidding, back out immediately.
These 15 real estate investment mistakes can make you crash and burn as an investor. However, with experience and further education in real estate investing, you can become a smart, successful, and knowledgeable professional. With classes from Success Path, you can become a master at the components of house flipping, business planning, and goal setting. You’ll also learn about asset protection, funding acquisitions, and how to create an LLC. If you don’t believe us, read the many student Success Path reviews and see how we have helped boost their real estate investing careers!
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