A Few Horror Stories

To maintain the spirit of the season (Halloween) I thought I would tell you about a few of the mistakes that I have made in the real estate business and share the lessons with you.

Know the value of something before you buy it!

My first mistake was to pay way too much for my first deal. It was a duplex. The numbers worked as far as cash flow was concerned but I never researched my comparable sales in the area. I paid twice what everyone else had bought duplexes for. It cash flowed so I was able to operate but that killed any exit strategy of selling or refinancing. Cash flow is great but you must always have an exit strategy before you buy. Make that a part of your deal analysis.

If something is cheap… there is probably a reason.

I have bought some tough properties in some tough areas. I have been successful with them but I also managed them myself. Learning the art of management has been great but it has also been a tough road and has kept me from buying more deals sometimes. What I have learned is that if you want to a reposition a deal you need to make sure it is in a good area. Most of the repositions I have done were in areas of town that were not so great. When you see an apartment complex that is selling for a good price you need to analyze the deal with your eyes wide open. Sometimes properties are selling at a discount because they need physical repair and sometimes they are selling cheap because they need repair and are in bad area. When looking at reposition deals pay close attention to the demographics of the area the deal is in. Look at the median income of the area. Is there job growth? What is the vacancy of the other properties in the area that are like yours? Look at the rent roll in the delinquency column. Are they actually collecting rent? You don’t want to do reposition deals in marginal areas even if you can buy them cheap. Your property is only as strong as the tenants you can rent to. No matter how much work you do to the property…if you can’t collect the rent it’s not a good deal.

Money first or deal first?

I remember when I first started to raise private money for my deals I always felt like I was jumping from foot to foot. I would find a deal and have no money. Then I would raise some money but have no deal. After a while I realized this is just how it works. If you keep at it, it will come together all at once. It does come together if you stay at it. I recommend looking for money and deals at the same time. What I have found is that most people are confident about looking for a deal or raising money but not usually both so they make an excuse for themselves by saying “I will find a deal first then raise money” or “Once I have a great deal I will start talking to investors”. You do need a great deal to raise money but people rarely invest with strangers just because they have a deal. People do business with people they like and trust. Sometimes that takes time to build that relationship. Start networking now so when you do find the deal the money relationship will be there. If you wait until you put a deal under contract you will not likely have time to build enough relationships to get the money in time and then you have to back out of the contract or lose earnest money…and that is scary anytime of the year!

There is no such thing as “bad management”.

I truly believe there is no such thing as bad management only bad owners. This next mistake was not mine but an owner that I know. I did make a bunch of money from his mistake though so I guess it has a happy ending!

I took over a property from an owner with a master lease option. The manager had been paying themselves first each month when the rent was collected. They would then begin to pay the bills for the property. Once the money ran out they would put the remaining invoices in a drawer. After a few months of not paying some of the invoices the total amount really started to add up. $50,000 to be exact! The manager called the owner and told him to send them a check so they could pay all of the back debt to the various contractors.

Needless to say the owner flipped out! Not only was he not cash flowing, he just found out he was in the hole $50K! The reason I tell you this is that the owner should have been more involved with this property and managers. No one will run your company for you. Property management is an extension of you. They will only run your property as well as you manage them. Some management is certainly better than others but you must be involved. They just do the heavy lifting but the strategic plan comes from you.

Good luck!

Bill Ham