The Five Biggest Mistakes that Investors Make

You see it on the news and in the papers, the real estate bubble is about to bust. Perhaps this would be a good time to evaluate the top five mistakes investors make when buying and selling properties for profit.

Greed

We work with several investors who sometimes fail to recognize when enough is enough. Case in point, one of our investors bought a home in the Memorial area that needed some serious rehabbing – and because the previous owner was trying to sell it off himself, he got it at a fantastic price. After going through the rehab process, the home was worth nearly double what he paid for it.

But then a funny thing happened, prices in the neighborhood started to decline. He figured he’d ride the market and wait till prices came back up. You can probably guess what happened next.

Recognizing the flow and ebb of the real estate market is a key skill that most investors master through painful experience. Greed is a bad thing; it blinds you to reality. Had this investor sold his property early on when the market was shifting his profit margin would have been much higher. Nothing frustrates investors more than seeing marginal returns for the amount of work involved in this sort of investment.

Investors who purchase near the top of the market simply get greedy often times forgetting that no market will go up forever. What goes up, must come down. We learned it as kids, but seem to have forgotten it as adults.

Ignoring the Numbers

With the advent of television channels like HGTV and TLC, not to mention the late night infomercials promising fame and fortune, it’s hard not to get swept up in the emotion of buying and selling homes for profit. For folks in California, Florida, and New York it’s even worse because they’re seeing such incredible increases in value, even if it is just fluff.

The problem most new investors face is ignoring the numbers. Numbers don’t lie – they tell you when a deal is a good one, or one that you should walk away from. Ignoring the numbers is fatal for thousands of potential investors every year. Always keep your eye on the bottom line.

Leading with the heart, not the mind

All too often, potential investors go into these kinds of projects leading with the hearts. They love this home, or what it could be rather than what it represents in black and white at the end of the day. Successful investors don’t buy a home because they feel connected to it, they buy it because it can make them money.

The fact that it WILL be pretty or that it DOES have great flow is merely the means to an end: getting it rehabbed and back on the market quickly. And these means lead to a quicker sale, which in turn means more profit.

Learning from History

There’s an old saying, “Those who ignore history are doomed to repeat it.” By refusing to learn from the mistakes of others as well as ourselves we are setting ourselves up to fail. History always repeats itself… especially in the real estate market. Let’s not forget that the dotcom bubble in the stock market took place less than a decade ago.

People lost their pensions, retirement, homes and jobs and yet five years later the gas industry followed suit. The encouraging thing to remember though is that both markets have recovered today.

Desperation

Someone once said, “Desperation is like stealing from the Mafia; you stand a good chance of attracting the wrong attention”. Desperation leads people to do stupid things, and by stupid I mean buying without performing your due diligence. Don’t get caught in the madness when markets climb; fear that you’re missing the boat should never be an agent for irrational purchases. Do your homework, evaluate the numbers, and make sure you can be as excited about the sale of the property as you are with the purchase. Slow and steady wins the race.