Am I an investor or speculator?

By
Real Estate Broker/Owner with Steelbridge Realty LLC
Am I an investor or speculator?
The path to wealth comes down to doing the right thing for the right reasons. The first question to ask yourself. Am I an investor or speculator? You should never be a speculator.
There are two times not to speculate. When you can afford to and when you can't.
Speculation is gambling pure and simple. Cognizant Real Estate Investors use competent analysis to take the speculation out of the deal. You should invest with a margin of safety. The key to this is knowing what questions to ask. This is a very detail oriented game. By not asking the right question's you put yourself at risk. Thorough due diligence is the order of the day.
Emotion is your enemy. Logic and numbers are your best friend. When ever, I get excited about a deal. I take a step back. Emotion will cause you to out step your business plan causing you to fail. The market is driven by 2 basic emotions Pessimism and Optimism. More on that later.
By speculation you put yourself and your investment at risk. The Foreclosure wave of 2006 and 2007 are a result of over speculation and bad market timing. These people will live to fight another day, no matter how bad is seems during the process.
Real world example here: Two very successful investors in South West Florida. Bought a house. Got a great deal. They should have called the county to check for code violations. Turns out the house was scheduled for demolition. In the end they bought a really expensive lot in a bad neiborhood. Always check with code enforcement.
I recently made a mistake of calling the wrong code enforcement agency. Got a clean bill of health. Bought the house. We got tied up for 6 months with code violations. We bought the house with a clear exit. We had a signed contract for the resale. The code violations slowed the rehab down so much we had to scrap that exit. Once we are done rebuilding the house, we will see what the market has for us. Should have read the bottom of the tax bill better!
Here is a short list of questions to ask
1. Are there open code liens
2. Does the owner have clear title to sell
3. Is this property going to be insurable
4. Is the property able to obtain conventional financing
5. Is the market, stable? Declining? Upward trending?
6. Am I competing with production builders for buyers?
7. Do I have an accurate walk thru inspection with proper rehab estimates?
8. If the house is in foreclosure, is there a sale date set?
9. How much is this house worth? Really Worth? In some markets sellers are forced to give concessions to sell the house. These concessions are built into the purchase price. Subtract these from the purchase price to find the "true" price. Do not be fooled into thinking that 70,000 sale was a true sale. That investor could have netted 60,000 after closing costs and down payment assistance. 10,000 might be your projected profit. In that case you got out of bed for the knowledge. Knowledge is great, profits are better. Check your comps. Sellers and agents will try and provide you with comps to help you make the choice. Get a second opinion. Love everyone, trust no one.
10. What is the average "days on the market" (DOM) for this property? Always factor in holding time.
11. Last but not least what is my exit? What are you going to do with it? In the good old days we just bought houses. We would then figure out what to do with them. Please don't do this. Walk in the closing table, with a primary exit, and if that does not work this is what I will do.
When it comes to question asking, ask people who do not expect to profit from your purchase. Never ask the barber if you need a haircut. Unless you are planning on getting one.
Every Investor should have a "Power Team". This should consist of a Real Estate Agent, Mortgage Banker and a Mortgage Broker (they live in different worlds, trust me I have been both), Appraiser, Title Company, Home Inspector with Contracting experience, Insurance agent, attorney, CPA and last but not least handyman/General Contractor. These peoples job is to save you from yourself!

Comments (2)

K C
Independent Leadership & Financial Fitness Consultant - Pleasant Grove, UT
great tips on investing, thank...
Oct 23, 2007 11:00 AM
Don Eichler
Eichler Properties - Granbury, TX

 

Great post I am sure that every investor makes the little mistakes that turn out to be very large.  I have always in my investor business stated that you make you profit on the purchase not the sale.  If you buy the property at x dollars and resale it at appraised price, comps etc. you better make your money up front.

Don

Oct 23, 2007 01:20 PM