The Single Biggest Mistake Real Estate Investors Make
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.