Amateur Investors

J Philip Faranda May 28, 2011

J Philip Real EstateI have written before that I do not recruit or solicit first-time investors. Real estate mistakes are expensive, they can ruin you, and I don't want to go head to head with a newbie who won't take my advice, gets hurt,  but still reserves the right to blame me. Not my idea of fun. 

There is a home that is in the final stages of renovation in my marketplace that I am well familiar with; I looked at it when it was on sale in 2007, and I showed it as a bank-owned foreclosure last year. The investors I showed it to passed on it. 

A Lesson for Would Be Investors: If the home is listed on the MLS for 30 days or more, then the savvy investors who flip or rehab and re-sell deemed it not such a great bargain. Most amazing bargains never make it to the open market. 

So the home sold to a first-time investor, and I was referred to the person as a possible listing broker. They interviewed two other agents, and wanted my price quote. They did not like my number. It didn't give them the profit margin they were shooting for. 

A lesson for Would Be Investors: The buying public does care a lick about what you want or need. 

There were some emotions about our meeting. The folks are personally invested and subjective about their property, and that bias clouds their judgment. They don't see that time is their enemy, or how a stale listing can doom their investment if it does not sell in an expedient fashion. 

A Lesson for Would Be Investors: Never get emotionally attached to an asset you are buying and re selling. The property is not your friend. The numbers are. Math should dictate your actions, not personal bias. 

The people have done a fabulous restoration of the home. It is a credit to the neighborhood. They should rightly be proud of what they have accomplished. And they should make a profit. But how much profit? I'll give you a hint: Not as much as they'd "like." Only what the buying public will pay. 

A Lesson for Would be Investors: "Pigs get fat. Hogs get slaughtered." -Scott Forcino

If the house goes on the market overpriced and they chase the market, these folks will see their carrying costs pile up while the buying public watches the house sit unsold, asking what is wrong with the place that it won't sell. In a war of attrition, the buyers win. It costs them nothing to sit and watch. 

A Lesson for Would Be Investors: Time is your enemy. 

My fear is that if this project becomes unprofitable or stresses them out over a long period of time, their real estate investing career will be short. And that will happen if they don't price it right from the start.  Great effort will be squandered, and the mind boggles at the financial damage. 

A Lesson for Would Be Real Estate Investors: High bidder gets the house-including the current owner. 

My choice is simple. Take the listing priced right, or tell them to use another broker if they aren't going to take my advice. 

And that, my friends, is why I do not recruit first-time real estate investors. Westchester is expensive, and mistakes cost dearly. I want graduates of the school of hard knocks as clients, not freshmen. 

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