COMMON MISTAKES NEW (AND EXPERIENCED!)
GETTING TOO EMOTIONAL ABOUT A DEAL
All too often, clients will let emotion take over and confuse major red flags of a deal as “ negotiating points”. Remember there is a reason the seller is selling the property. Some are valid reasons, such as:
- Downsizing a portfolio
- Change of life plans
NOT ORDERING SUFFICIENT THIRD PARTY REPORTS (APPRAISALS & PROPERTY INSPECTIONS) WHEN UTILIZING SELLER FINANCING
It is important to bring in professionals to inspect & value the property in order to protect your investment. Lenders require these reports for a reason… you should, too!
OVERLOOKING THE EXIT STRATEGY WHEN USING SELLER FINANCING
Many investors are willing to pay slightly more for a property if the seller is willing to finance some or all of the financing of a property. When utilizing seller financing it is important NOT to “ Over-leverage” Pay close attention to the LTV you will need to refinance out of that note. EX: If your seller offers you 90% LTV Financing on a 2 year note, the property will need appreciate by a minimum of 20% in order to refinance at a 75% LTV. Note that 80% is best case scenario and it is never healthy to plan on “Best Case Scenario”
FOCUSING ON THE LENDERS’ “MINIMUM REQUIREMENTS”
Remember: When Rates are low, credit standards are higher i.e. Cheap money is tight money! If your loan request is just meeting the minimum qualifications, you will most likely not get approved. Investors need to set their standards ABOVE that of the lenders!
DIALING-IN INACCURATE FINANCING TERMS
It is never good to put a good faith deposit down and structure your investor group under certain financing expectations only to find out the actual loan terms available is much less attractive than what you estimated. Always understand the financing available for your specific property, market & loan amount. All this characteristics will make a difference in the available financing.
JUMPING INTO MARKETS WITHOUT REALLY UNDERSTANDING THEM
When the opportunity to jump into markets that offer substantial cash flows with little investments, there’s a lot of appeal. If you understood all the dynamics, strengths and weaknesses of that market, it might be a good idea to invest. However, when you don’t understand the drivers in that market, you could have a misunderstanding of something that may be overpriced.
FAILING TO GET STARTED
Because of all the moving parts of making an investment, it’s common for beginning investors to fear getting started. They may worry they don’t know enough. They may be afraid of overpaying. They may worry that the market will take another down turn. At some point, you have to take a leap and go for it. However, by researching the market you’re looking into and starting with smaller investments, you can minimize the initial risk.
BAD DEALS AND BAD PARTNERS
We’re human. We’re going to make mistakes from time to time. We’re going to invest in properties that don’t perform, or jump in the market just as it turns down, or get stuck with something we don’t like. While it’s good to see investments through minor setbacks, it’s also critical to know when to pull out and move on. Sometimes, the problem lies with the people, not the property. Things can get tricky if you’re in a deal with a friend or relative. If you don’t have a buy/sell arrangement in your partnership agreement, make one. This will protect both of you should things go sour.
FAILING TO MAKE GOOD CONNECTIONS
There’s a lot to know in commercial lending. It helps considerably to find good connections and resources that can help facilitate acquiring good investments (like Lender Language!). Good connections and good information can give you all the tools you need to get started successfully. Good connections can help you with finding financing or evaluating the investment to determine if it’s sound. Other people can help you with getting a clean title.
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The list of common mistakes above is just the tip of the iceberg.
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