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Common Mistakes That Real Estate Investors Make

Aug 17, 2007
Real estate investing requires long term considerations as it is neither easy to purchase nor easy to sell profitable properties quickly. As a result the impact of mistakes can be devastating on the personal finances of the investor. Since most real estate is funded with loans, mistakes can leave an investor responsible for significantly larger amounts of money due than their entire investment. As a result even professional real estate investors tend to specialize in properties and markets they understand and almost all of them use attorneys, realtors and tax advisors to help them evaluate the potential investment. In addition to these experts, real estate investors tend to develop a close working relationship with bankers to ensure their contracts are funded with pre-commitments when ever possible.

It is important to evaluate financial risks associated with real estate investing to avoid mistakes. Mistakes are magnified by the borrowing that typically goes along with investments. Here are some that people commonly make:

Leaving part of the agreement off the document

It is of critical importance to have everything related to the deal in writing. The services of an attorney are required to make this happen. Due to the investment size and durability of the investment it is necessary to include all warranties and representations possible.

Not performing complete due diligence on property history

Sellers are not required by law to be forthcoming on the history of the property they are selling. However they are not allowed to misrepresent or leave out details when requested. A good realtor is important to ensure that the property issues are evaluated before purchase.

Getting an inadequate title insurance and not surveying the land

Land is a fundamental component of any real estate transaction. Even when purchasing a condominium, an investor can be exposed to risk relating to land. It is necessary to ensure that the title and use of land is appropriate and correctly recorded in the municipal records.

Waiting too long to accumulate the equity investment that will be required

Real estate deals are typically done on a timeline established by the purchase contract. There is a closing date by which funds must be deposited and if the purchase contract is violated the investor is exposed to substantial risk. It is therefore critical to make sure that all sources of funds are available on the closing date. A good escrow company can help ensure this.

Not using professionals to guide the purchase

Real estate investing is a complex investment strategy. It is typically longer term than any other investment and has broader ramifications on the investor than most other investment vehicles. Therefore its important to use experts to guide the process safely.

Not hiring professional management for the property

Property management requires expertise and time. When investors who have no experience try to become property managers it exposes them to cash flow and property damage risks.

Taking it all too lightly

Real estate is a long term investment. Depending on market conditions investors should be prepared to hold the property long enough to generate a return on investment.
About the Author
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