The best questions to create the best real estate investments
This post is going to sound like the introduction to a gross joke. Bare with me (no pun intended).
I am at the airport with time to burn so I made a trip to the rest rooms and thought now would be a great time to write this week’s post. As I start wandering off I cannot help but notice that everywhere we go (Yes Including the rest rooms) has advertising telling us everything sellers want us to know about the benefits of their products.
These advertisements remind me of many conversations I have with investors who are often saying things like “If Only I knew….. Before I bought that property.” Yes, people are often sold things based on the benefits of owning a product, when of course the negatives of buying their product is never identified. This is where you are expected to be a savvy investor and ask many great questions to identify the non-benefits of a property.
It is said that people spend more time planning their vacation than they actually spend doing diligence on their largest investments.
Let’s see if we can offer a little assistance to creating great questions to ask when investing in your next investment.
Listen for what they DON’T tell you
Sellers will always tell you what they think you want to know, sales people will tell you what THEY want you to know. Everything you are being told is geared toward selling you. However often it is what they are NOT telling you that tells the story.
It is up to you the consumer to know what great questions to ask.
Most all investors at one time or another has been excited about a property. Often when a property sounds great you will be quick to move forward with excitement before the property gets snatched up by the next investor. Your fear of losing out may prompt you to miss some key important diligence steps.
To be a savvy investor you want to have your due diligence criteria on a checklist so you do not miss anything when making quick decisions. Yes the best deals do sell quickly so making sure they indeed are great deals you want to be able to quickly and concisely perform your diligence. Most people automatically know to ask questions to create a good pro-forma and identify a good basic structure but there are often those missed pieces of diligence you want to make sure you get identified.
Common overlooked items when buying investment property
Have you ever evaluated an investment property and were very excited about the purchase.; everything looks great on paper, the property looks good and a talk of hurry before it is gone prompts you to make an uneducated decision. I hope you are shaking your head no here. Having worked in this industry for many years and attending many investor club meetings, I hear many people who resonate with this sentiment. If I had a dime for stories that begin with “If I only knew...”
Here are some of the comments I regularly hear from frustrated buyers
If I only knew the property was on well and septic and I would be assessed thousands of dollars within a year of buying the property I could have avoided the negative cash flow.
If I only knew the HOA on these townhomes (or Condos) were operating in the black and I would be assessed big time to make the HOA solvent, I could have avoided the negative cash flow.
If I only knew the population and jobs were disappearing from the area and that I would soon be struggling to find tenants I would have thought differently about making this purchase.
If I only knew they were making a four lane road out the back door of my new purchase I never would have purchased the property
If I only knew the house had thousands of dollars’ worth of hidden termite damage I would have passed on this property.
If I only knew this local market was overvalued and home prices were stagnant (or worse yet falling) I would have chosen a different market.
If I only knew I bought the property in the midst of a sellers’ market I could have avoided the being stuck in a situation where I am forced to reduce rents just to keep the darn unit occupied.
Hint: you can make a checklist from this:
Often my investor clients will express concern about these items they want to avoid falling into the same challenges. I simply say, as long as you are aware of these challenges you can easily avoid them. simply make a checklist and do not be swayed or discouraged from these peoples struggles. I suggest you to be empowered by having identified what struggles can be made when you focus more on the projected returns of a property than the sustainability of a properties returns. I always suggest to investor that you want to focus all your due diligence on the sustainability of the returns and the sustainability of potential appreciation. When this becomes your top focus you will do the proper diligence and ask the right questions. I suggested that there are three ways of thinking.
How the Seller thinks
When a person goes to sell you a property they of course tell you everything good about the property and the local market. All the great things they tell you may very well be true. They will tell you everything you want to hear which is all the reasons you want to buy the house and the great ROI the property will generate.
How a buyer thinks
Often the buyers are enlightened to this great stuff they want to hear and forget about finding the things they need to hear. Every day, people ask me about a property or a particular market. I ask why they chose that property and why they chose that market so I can understand what is propelling their decisions in that direction. Typically a person is propelled to make an investment based on all the great things they hear about a property and its market and of course the lure of the great returns.
How seasoned investors think
They think Locations and long term sustainability. Emotions are typically replaced with logical based decisions. The process is very simple to them as they have their criteria and checklist they wish the investment to accommodate. They compare property investments against others and seek out the best deals then negotiate the best deal. If a deal that is offered to them is substantially better than others in the area they understand there is probably a logical reason why and they seek to find out why rather than be lured by attractive returns (sustainability is always the key focus).
I continue to see people so motivated by the great ROI that they fail to inquire about the sustainability of an investment property. They fail to compare the investment to others in the area. Indeed you want a great deal but if the deal offered is substantially better than others you want to know that, as that is the red flag that will propel you into deeper diligence, because it is what they do not tell you that tells the story.
See sustainably investments