2 Lessons From A Real Estate Investing True StoryApr 23, 2018
Here's a quick, true story about a younger gentleman (age 20) who came to me for real estate investing advice. I get into a little bit on flipping houses but this DIRECTLY applies to wholesaling real estate, as well!
This particular gentleman asking for feedback was raising capital for a property he was going to buy for $770,000. The agent he was working with told him that the property would sell at $1.2+ million all day after he put $100,000 of repairs into the property. Sounds like a sweet deal, right?
Well, thankfully, I met this gentleman at an open house for a property I was flipping at the time. He asked if I could take a second look at his particular deal before he went through with purchasing the property. He was 2 days away from removing his home inspection contingency, which would contractually force him to buy the property, or at the very least, lose his $10,000 deposit.
That night I analyzed the property for him and saw that the agent he was working with was drastically inflating what the property would sell at once it was renovated, and under inflating the amount of repairs it needed. After analyzing comparable properties in the area to find what the property would sell at in it’s renovated condition, I saw that the sales price would actually be about $900,000 once it was renovated, and that the repairs were about $150,000 total.
In the inflated scenario his agent gave him, he thought his numbers were going to be this:
- ARV (Sales Price): $1,200,000
- Repairs: $100,000
- Purchase Price: $770,000
- Net Profit: $180,364.67
- ROI: 20.42%
When instead, this was the reality of the numbers:
- ARV (Sales Price): $900,000
- Repairs: $150,000
- Purchase Price: $770,000
- Net Profit: NEGATIVE $158,968.67
- ROI: NEGATIVE -17.04%
I informed this beginner real estate investor of what the actual numbers were going to be. That same day he was able to cancel the contract, got his $10,000 deposit back, and never worked with the agent again who told him all of the wrong numbers. He thanked me for saving his butt because he was going to buy that property assuming he was going to be making $180,000+ of profit, when the reality of it was that he would have lost over $158,000 dollars. Let’s just say he was a little rattled.
However, he learned a couple of IMPORTANT real estate investing lessons without losing any money:
First Real Estate Investing Lesson:
Become a Pro at understanding the numbers for a real estate investment deal.
Do not SOLELY put your trust in a real estate agent who IS NOT a real estate investor by trade. The real estate agent only makes money if you BUY the deal. In this case, the agent was feeding this person B.S. so that he would buy the deal. This aspiring real estate investor was 20 years old at the time and this real estate agent almost led him to financial ruin if he would have bought the property in an attempt to make a profit. And the agent would have been laughing all the way to the bank collecting his commission check.
Second Real Estate Investing Lesson
There’s ALWAYS another deal around the corner.
Do not become emotionally invested into your real estate deals. When you are emotionally invested, you can become irrational in your analysis of the property (without even knowing it). This is when you can get into trouble. If you overestimate what the property will sell at once it is renovated, and if you underestimate the amount of repairs needed to go into the property, well, that is a recipe for disaster. That directly eats at the net profit of the deal. Focus on being rational. Only use the facts. Don’t speculate. Be conservative.
In conclusion, YOU have to be the one who understands the value of the property. YOU have to make sure your real estate investment analysis is correct. If you do not have all the knowledge necessary then ask for multiple third party opinions on the deal you are looking at. Ask other agents besides the one you are using for advice and a second opinion. Ask other friendly investors for advice and second opinions. Ask people who are familiar with the real estate market what their opinion is on the deal!
You will become extremely successful in real estate investing once you can accurately estimate the ARV (After Repair Value / Sales Price), the repairs needed to go into the property, and the purchase price are able to purchase the property at. Once you achieve this, it just becomes a “numbers” game.
Never stop learning! Cheers!