Many people expect to learn how to invest in real estate from seminars, books, videos, etc. but until you actually pull the trigger and go all in you will not know how to invest in real estate. Yes, you will learn the procedure and steps involved but those usually do not go as planned either. As Mike Tyson once said, “Everybody has a plan until they get punched in the mouth.” Well, real estate is no different.
I know you heard this a million times but if this was easy there would be more people doing it, successfully. The amount of people that attempt to invest in real estate has increased drastically in the last few years. Suddenly, overnight, everyone was able to “BUY HOUSES CASH.” It might be due to all the new television shows, new investment clubs, one year old gurus, a volatile stock market, etc. but whatever the reason more people are giving real estate investing a shot. The best thing you can do when investing in real estate is to pay attention to the details. This can be the difference between getting punched in the mouth and moving forward or giving up because it was too much.
First and foremost, you have to come to the realization that nothing will ever be perfect. This was my biggest challenge. The property may not close on time. The contractor may not show up one, two or more days. The buyer might decide to back out at the last minute. There are a million ways that a transaction and/or a renovation project can go wrong. However, you can be prepared and possibly dodge a few of these by paying attention to the details. The biggest detail you want to pay close attention to is the contract. When purchasing a property you want to have very little exposure. For example, you want to try your best to have as little earnest money and/or option money per contract. Could you imagine having 10 contracts with $1,000 earnest money and $100 option money each? This would require you to have $10,000 EM and $1,000 option exposed. Technically, while in option the $10,000 are still safe, you can kiss the $100 goodbye on any contract you do not close. Sometimes, even when a contract is cancelled within an option period the seller may refuse to sign the release of earnest money. Like I said, pay attention to the details. A great way to prevent a buyer from backing out of a contract for no reason is to take a non-refundable down payment. Many wholesalers already do this but if I receive a cash offer on a property I have renovated to sell I might request that part of the earnest money be non-refundable. This will make the buyer think twice before deciding to back out of a contract. One of the reasons I love real estate is the fact that everything is negotiable. One can be as creative as one likes, within the law. A book could be written on the amount of things that can go wrong in a real estate transaction but it would not be complete. The reality is that every transaction is different.
Here is a perfect example of paying attention to the contract details. About a week ago one of my agents contracted a mobile home for his buyer. The buyer agreed to use the listing agent’s lender because it was a mobile home and that particular lender already agreed to lend on the mobile home. While in the option/inspection period the inspection was completed. However, the buyer received a notice that he would be terminated by his employer at the end of the month. For this reason, the buyer had to cancel the contract. Keep in mind this was within his option period. When my agent broke the news to the listing agent she became defensive and claimed there was no option since the seller did not receive the option check within the 2 days stated in the contract. My agent did deliver both the earnest money and option money to the title company the day after executing the contract. He confirmed with the listing agent that this was acceptable with both her and her client. Regardless of this, she argued the seller did not have it in his possession within the 2 day because the title company delivered it on day three. Of course, my agent called me devastated that he may have just lost his buyer’s earnest money from an over sight but I assured him we would be okay. After verifying there was a third party finance addendum, I instructed my agent to let the listing agent know we expect the release of earnest money by the end of the day because the buyer would not be approved for financing without employment. The third party finance addendum states that if the buyer cannot qualify for financing within a certain amount of time their earnest money will be refunded. You guessed it, she then contacted her friend the lender, the one the buyer agreed to use, and asked if the buyer was approved. The lender had not heard of the buyer’s soon to be unemployment and stated he was approved. She wanted proof sent to the lender that the buyer was in fact going to be laid off. Later that day the earnest money release was signed and our client had his earnest money refunded. The difference was that I knew the details of the contract better than the other agent. I would bet that my agent will not make this mistake again.
As the saying goes, “The devil is in the details.” Once you actually contract your first property, close on your first project, sell your first investment, rent your first rental, etc. you will experience how big of a difference it makes to know the details. Even better, once you know the details to watch out for, you can use them to your buyer’s, your seller’s, your investor’s, and your advantage. Knowing these details can also assure there are win-win scenarios in all your transactions.