3 Signs of Immaturity in Real Estate Investors

My kid is in the 5th grade, and the school wants to teach him about puberty. I recently attended an in-school seminar about precisely what they will be covering. There wasn’t much stuff about “the birds and the bees” – that part was delegated to the parents – but a lot of talk about how their bodies are changing and how to deal with it. It went along these lines. “You might notice that you are becoming more smelly – it’s time to use a deodorant.” “You might be getting pimples all over your face. It’s OK, but consider washing your face twice a day.” I must admit that after a while, my mind drifted to other subjects. As a hard money lender, I’ve started to think about the signs of maturity – or immaturity – for real estate investors instead.

When it comes to real estate investing, what distinguishes seasoned professionals from newcomers? What are the key indicators that an investor is on the right track, consistently turning a profit, versus someone who may be chasing an unrealistic dream? Understanding these signs can be enlightening and help novice real estate investors prepare for success. Here are some key indicators of an immature real estate investor:

Basing Your Price on the Highest Sale in the Neighborhood:

“I will make money if I sell at the highest price in the neighborhood.” Or worse yet, “I will make money because, by the time I am done with the renovation, the home prices in the neighborhood will increase.” No lender wants to hear such scenarios. No experienced investor will ever think like that. You must base your rehab’s after-repair value on the current sales in the immediate neighborhood. Those sales need to be of a similar size, style, and condition to your subject. Choose the three most relevant sales and average them to come up with a realistic price for your property. Better yet, base your price on the lowest of the three and see if you are still making money.

Unrealistic Assessment of Rehab Costs:

Here is another scenario that no mature investor should rely on. “I will keep my costs down by hiring my uncle, best friend, patron saint, etc., to help me with renovations. He will do it at half price.” Let’s assume for a minute that you found someone willing to undercut his labor so you can profit. If this is the only way to make money on your rehab, it’s time to face the truth: you are not getting a good deal.

Falling in Love with Your Investment Property:

It’s generally recommended to keep emotions out of real estate. However, if you have to fall in love with the house, do it with your primary residence. Enjoy its feng shui, your man cave, your short commute to work – whatever you love about it. However, your investment property has only one goal: to make you money. No matter how perfect it looked initially or how much you want to jump in and start working on the project, keep your cool. If you find new information about your property that might affect its price, rehab costs, or marketability, factor them in. Do not count on the best scenario and alignment of all stars – walk away if you have doubts. To avoid emotions and base your investment decisions strictly on the profit potential, use our hard money calculator.

Not Listening to Lender’s Advice:

As a hard money lender, we look at several scenarios each and every day.When we feel a borrower has a decent chance to profit from the transaction, we lend our funds. When we feel that the transaction is too risky, we pass. We closely monitor the loans we funded, including how long it took the borrower to repay our loan, whether they’ve stayed within their rehab budget, and whether their final resale price exceeded the estimated after-repair value or fell below it. To make a long story short, after doing it almost for two decades, we’ve developed a good knack for figuring out what real estate transactions can work out and what do not.

The best thing about a lender like New Funding Resouces is that we openly share our expertise. If we have concerns, we will tell you what they are and, if possible, how to overcome them. However, it’s up to the borrower to heed the advice. 

The ones who have common sense will pause and listen. They will understand that, just like them, we are in this business to make money. There are no reasons for us to turn down deals with solid profit potential. But just like them, we stand to lose money and incur significant headaches if the deal blows up. In fact, our interests are aligned. The higher our borrower’s potential profit, the more secure our loan is.

The immature investors are not ready for honest discussion. If the lender is not enthusiastic about their deal, they take it personally. The conversation deteriorates from the evaluation of a potential deal (including any red flags) to personal accusations and dissatisfaction. Instead of benefiting from free advice offered sincerely and with good intentions, an immature real estate investor just got into a dead-end debate with an experienced lender. There are better ways to start a conversation with a private lender.

As a hard money lender, we evaluate a property purely on its money-making potential. So should any mature investor. If you have a property you are interested in, but aren’t sure about the deal, call us at 240.436.2340 or fill in our online app. I can’t guarantee we will like (and fund) every deal, but I promise we will thoroughly analyze each opportunity that comes your way.