March 2011 Issue --> Business Article
Five Mistakes To Avoid When Making Your First Real Estate Investment
By: Kurt Wells


  1. Know Your Market: You will need to know what properties are actually selling for. Any of the online databases can give you this information. You can sign up for twenty five to fifty dollars a month. Most of them will give you a free period to try it out. ALWAYS use only actual closed, recent sales for your comparables (the last thirty to ninety days if preferable, but for sure nothing over six months). Do not make the mistake of buying at last year's values. For that matter, don't plan on paying the actual current market value. You are a real estate investor, even if this is your first investment. You buy below market value.
  2. Don't Buy Without Getting an Inspection: An inspection can reveal problems that you can not see or have even thought about. If there are not so obvious issues as foundation problems, system wiring or plumbing problems, wouldn't you want to know that before closing on that property? Of course. And the inspection may indicate that the property you are interested in purchasing has only minor issues and is a worthwhile project. Be sure you attend when the inspection is made. You are going to pay several hundred dollars for the service. You will definitely learn some things about construction and renovation if you just listen and observe.
  3. Don't Use Just Any Attorney or Title Company: Get a referral from someone in the business that has been through the process before. Not every attorney is capable of handling a closing well. They may be licensed, but not necessarily competent in the field of closing real estate transactions. Take some time before you start looking for properties to interview several real estate attorneys or title companies. Ask them about common closing costs when buying and selling in your area. You will need to know for your own good, but having this knowledge will make you more professional in the eyes of your potential sellers. You can also ask about using their conference rooms for an occasional meeting with a seller.
  4. Don't Wait to Get Your Financing Lined Up: How you plan to finance the property should be figured out before the purchase and sale agreement is signed. If you are planning on using bank financing, know the limits of how much that bank will lend on a property like the one you would like to buy. Have several banks in mind but get pre-approved at the one whose terms you like the best. That does not mean you have to use them. If you are using a hard money lender, you will need to know how much money down (skin in the game) they are requiring, know how many points interest they charge, what the rate is and when they expect to have their loan repaid. If you have not already done so, visit any of the local Real Estate Investors Associations (R.E.I.A.s) in the area. You can attend as a guest without joining for a small admission fee at the door. Make some new friends and ask them about any hard money lenders they may have knowledge of. Sometimes knowing who NOT to do business with is just as important as whom you should use. If you meet any of the hard money lenders at the meetings, listen carefully to what they say when you speak with them. Many of them are investors with a lot of experience. Avoid anyone that seems to be short on ethics. You will find many honest and helpful people that will be willing to provide some guidance in return for a long term business relationship. Those are the business contacts that help you avoid pitfalls early, and may turn out to become business associates and friends you can build your business with.
  5. Don't Buy Without an Exit Strategy in Place: Your exit strategy is what you plan to do with the property. Actually, there should be a plan, a back up plan and a back up to the back up plan. Really. What are you going to do with the property when you get it? Fix it and sell it (flip it)? Fix it and rent it out? Fix it and lease option it to and renter/end buyer? If you are planning to sell it, how do you plan to do so? Will you use a broker? Sell it your self? If renting it, will the rent cover the mortgage payment, taxes, and insurance? Did you plan for repairs and upkeep? And don't forget to add in a cash flow (monthly profit) for yourself.
Forethought and planning will not prevent you from having any challenges, but it may greatly reduce the number and severity of any problems you might face. Remember, life always has it challenges. Dealing with them is easier if you have done some preparation.

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