Real estate mistakes can be humbling and costly. I have made my share of mistakes in real estate and they have cost me plenty. Mistakes can be largely avoided if you will do your due diligence and then listen to the facts and data that you discover. Use that information to make the intelligent decision.
I have a friend who a few years ago heard repeatedly that residential land and residential real estate were in a bubble. He didn't do his research to see if there was any truth to that claim or any reason to exercise caution. Instead, trusting to his smarts alone, he bought a large piece of real estate at the very top of the real estate market's bubble. He paid an inflated price for the land. He felt that he would be able to subdivide the property and sell the lots off at a nice profit. He told himself and others, "I'm a smart guy; I can do this; it's easy." He was inexperienced in real estate development, didn't understand real estate markets, didn't understand the economy, and didn't know what he didn't know. He further exacerbated the problem by putting in many thousands of dollars of improvements before it began to dawn on him that nobody was buying the lots. He continued to pour money into the development even after it began to be apparent that the real estate bubble had popped. The demand for his product was gone almost over night.
As time went by, the monthly payments on the ~$2 Million loan on the property began to eat his cash. He listened to the realtors say, "This market will turn around". They didn't know what they were talking about. He was listening to the wrong voices, the wrong advisers. Eventually he reached a point of near insolvency. He had to liquidate other assets to keep the property afloat. He eventually sold his big home and left town, embarrassed by his failure. He moved to a smaller town and downsized his lifestyle. All of this pain and embarrassment and loss could have been avoided if he had investigated the warnings he received. Rather than do that, he was informed by his pride. He would have been better advised to be humble in the face of his inexperience. Pride goeth before destruction. The pain of that bad real estate decision will be with him for decades to come. We should all act in humility and take time to examine the market, the deal, the terms, the property, the development costs, the economy and our personal financial situation before taking a leap into a big project. A mistake like that can take decades to recover from. It has been years since he bought the land. Still nary a lot has been sold in the development. How the mighty have fallen.
Real estate investment often requires that we take some risk. In the uncertain economy we find ourselves in today it is prudent to carefully manage the risk. My brother always says, "Better a little caution than a great regret."
There are things that can be done to manage risk. Some are:
1) Minimize the leverage that you use. Even a good deal can get in trouble with too much debt.
2) Buy established properties with long term established incomes.
3) Use the best advisers you can find.
4) Never do a deal that you don't understand.
5) Do your homework. Get a list of due diligence items to pursue and complete the work required. Research, research, research.
6) Avoid partners, or know them very well. Even trusted partners can find themselves in difficult circumstances and make bad decisions that will effect you negatively.
7) Negotiate hard on the purchase price, the financing, and any contracts surrounding the deal or the partnership or the formation and operating agreement of the company that will own the property.
8) Be certain you have the money to stay in the game if the going gets tough.
Years ago I sold a large property in Oregon. I was anxious to do a 1031 Exchange so I leapt into another property. It was in a high growth area so I felt safe. I planned to complete the 1031 exchange in order to avoid the long term capital gains tax. In the end, I made a commitment to buy the property before completing my due diligence since I was acting under a deadline and I thought I was too busy to complete my homework (though I did some). I relied too much on the seller for information. Later I found that the area was overbuilt, rents were 30% lower than I'd been lead to believe, property taxes were 300% higher than I had expected, and operating expenses on the project were much higher than I'd anticipated. The return on my investment was paltry for several years. I should have done my homework. I trusted the seller/builder too much. I should not have listened to him, but should have completed my own research. I tried to take a short cut and it didn't work out. Always do your homework and always do your own research. This mistake has cost me tens of thousands of dollars and continues to do so.
After selling a piece of land at a great profit some friends of mine acted in haste under the deadlines of a 1031 Exchange. They fooled themselves into thinking the project they were looking at would be better than paying the long term capital gains tax. They actually did their homework on the target property. From their research they knew that the office property had a location problem as it was on a dead end road and had no traffic. They also knew that buying this office building was a risk because the county it was in was terribly overbuilt for office space and more office space was soon coming on line. They also knew the country was falling into an economic recession/depression that threatened to go global. They reasoned that it was such a nice building, and that the road would get punched through, so things would firm up in the face of a falling economy, despite the less than desirable location, and despite an overbuilt sector. They were wrong on all counts. They ignored their own research. Consequently they have paid a huge price for doing so. The property ran negative numbers for the first three years. It has fallen significantly in value from the price they paid for it. Even when rents did firm up, they were receiving an embarrassing 2.5% return on equity. The lesson? Don't ignore your own research. Don't talk yourself into a bad situation. Listen to that voice that says, "this is a bad or mediocre deal."
It is good to always learn something from your mistakes. Learn to do your homework, to listen to your research, to be humble about your lack of experience, to give an ear to warnings, and to not talk yourself into a deal that has huge red flags. Be lead by humility rather than pride. Humility will drive you to do your homework and to seek good advice from experienced advisers rather than to say, "I'm a smart guy; I can do this; it's easy." Be careful from whom you take advice whenever there is risk involved (advice from someone on the other side of the table should be accepted with caution). Listen to your own gut. Have the courage to say no if the risks look too high. Take the time to ask yourself and others, "What steps can I take to manage risk in this situation?" Always, always, always do YOUR OWN homework before making a big, life altering commitment.
Investing in stocks, real estate, and precious metals is risky and could result in losing money. I am offering ideas for your consideration and education. I am not offering financial advice. Please do your own due diligence. I am not an investment adviser. Precious metals is not for everyone. I promote precious metals. You should do your own due diligence when making investment decisions of any kind. You should consult your own financial advisers before making any investment decision. I make no guarantees that by following any advice or suggestion I might make that you will realize any return. Beware, all commodity markets and other markets carry risk of loss.