Mistakes real estate investors should avoid
Real estate investors and first-time home buyers face an uphill battle in a complex real estate market. When it comes to buying and selling properties, it was possible to make money, but it won't be easy going forward. However, avoiding mistakes will help put you on the right track.
1. Lack of research
When the family buys a car or a television set they compare different models, ask a lot of questions and try to determine whether what they are about to purchase is indeed worth the money. The due diligence that goes into purchasing a home should be even more rigorous.
There are also research considerations for each type of real estate investor - whether primary residence, home for renting out, short term investment like booking on launch of project and flip it before possession or a real estate developer.
Not only must the prospective buyer ask a lot of questions about the home, but he or she should also inquire about the area (neighborhood) in which it is located as well next door in the same floor. (After all, what good is a nice home if just around the corner is a college, tuition classes, Restaurant, Bar (with late night music & other nuisance) ?
The following is a list of questions that would-be investors should ask regarding the home in question:
a. Is the property built in the vicinity of a commercial site, or will long-term construction be occurring in the near future for such use that could disturb peace & tranquility
b. Does the property reside in a flood zone or in a problematic area, such as ones known for radon or termite problems?
c. Does the house have foundation or municipal approval "issues" that will need to be addressed?
d. What is new in the house and what must be replaced? What are facilities & amenities available and what is missing?
e. Why is the current homeowner (2nd Sale) selling? Is it due to happy reasons or bad reasons?
f. What did he or she (current homeowner) pay for the home and when?
g. If you are moving into a new town, are there any problem areas in town?
2. Getting unfavorable financing
You seek financing from particular Home Finance Co. /Bank because they required minimal documentation without realising certain basic problematic issues such as:
a) Heavy prepayment penalty or unfavorable terms discouraging pre mature closure of Mortgage.
b) Service quality of Institution is very bad
c) Staff at service center is totally non-cooperative
d) You are unable to receive back Title & other Property documents after full refund of Loan.
e) In a market where Interest rates are dropping, many Home Financers are offering floating rate on old loans where as your Financers do not offer such facility.
f) Most Home Financers have their Centralized location (like Chennai or Secundrabad) and all documents are stored and major decisions are made by them and local team can’t attend to your issue.
2. Doing everything on your own but not consulting respective Experts Many times buyers think that they know it all, or that they can close a real estate transaction on their own. While they might have completed a number of deals in the past that went well, the process may not go as smoothly in a down market - and there is no one you can turn to if you want to fix an unfavorable real estate deal.
Real estate investors should tap every possible resource and befriend experts that can help them make the right purchase. A list of the potential experts should, at a minimum include a savvy real estate agent, a competent Interior expert, a structural expert, a good property lawyer and Vastu Expert. These experts should be capable enough to alert the investor to any flaws in the home or neighborhood. Or, in the case of a Lawyer, he or she may be able to alert the home buyer to any defects in the title or easements that could come back to haunt them down the line.
This issue is somewhat tied into the point about doing research. Searching for the right home can be a time-consuming and frustrating process. And when a prospective buyer finally finds a house that actually meets his or her needs/wants, the buyer is naturally anxious to have the seller accept the bid.
The problem with being anxious is that anxious buyers tend to overbid on properties. Overbidding on a house can have a waterfall effect of problems. Buyers may end up overextending themselves and taking on too much debt, creating higher payments than they can ill afford. as a result, it may take years for the home buyer to recoup this investment.
To find out whether your dream investment has a high price tag, start by searching what other similar homes in the area have sold for in recent months. Any real estate broker should be able to provide this information with relative ease (particularly with their access to as Insider). But as a fallback, or if you are not using a realtor's services, simply look at comparable homes in the local newspaper, and see what they are being offered for. Logic should dictate that unless the home has unique characteristics that are likely to enhance its value over time, the buyer should try to keep any bids consistent with other home sales in the neighborhood. Another strategy could be behaving as Seller in your enquiries instead as a buyer and Local broker is likely quote lower price as compared to market price due to various reasons that he knows as a local “Insider”.
Buyers should realise that there are always other opportunities out there, and that even if the negotiation process becomes bogged down or fails, the odds are in their favour that there is another home out there that will meet their needs. It's just a matter of being patient in the searching process.
4. Underestimating expenses
Every homeowner can attest to the fact that there is way more to owning a house than just making the mortgage payment. Unlike renting, there are property taxes, Society or Association’s maintenance expenses that go along with identified services such as Service Charges for Entertainment or Festivals, Compulsory contribution to local religious functions such as Puja, Gnpati etc., Garage Rent 9when most of the time that is free), cost of many Standing Consultants, who are not required etc. . Then there are the costs associated with furnishing the house and keeping all of the appliances (such as the oven, washer/dryer, refrigerator and the furnace) running, not to mention the cost of making structural changes to the house (only after obtaining necessary permissions from Society and Local Authorities), or other little things like property taxes including pending dues.
The point is that first-time investors tend to forget these costs when house hunting. Unfortunately, this is exactly why many new homeowners tend to be house poor and cash poor. The best advice is to make a list of all of the monthly costs that are associated with running and maintaining a home (based upon estimates) before actually making a bid on one. Once those numbers are added up, you'll have a better idea of whether you can really afford a property.
Determining expenses prior to purchasing a property is even more important for house flippers and investors. That's because their profits are directly tied to the amount of time it takes them to purchase the home, improve it and resell it. In any case, investors should definitely form such a list. They should also pay particular attention to short-term financing costs, prepayment penalties and any cancellation fees (for insurance or utilities) that might be borne when the home is flipped in short order.
5. Not preparing Cash Flow: Before taking on future liability of servicing EMI, prepare your Cash Flow as to how you are going to service this debt. Work out this taking in to account all eventualities like loss of job, transfer of job (and you have to now pay rent over and above EMI), unexpected Illness, Family emergencies etc. Consult your Chartered Accountant or Financial Planner for this.
6. Not opting for a reputed developer.
7. Buying the Property at the peak of Real Estate Boom
8. Rushing The Deal – One very popular error when it comes to real estate is jumping the gun. While it is understandable that investors are in a hurry to sign the dotted line, rushing it can have its own consequences. Staying calm and patient while executing a deal is of utmost importance as this added time can help you uncover a better deal or find more relevant information regarding a property.
9. Ignoring Paperwork – We often come across multiple cases wherein people are cheated off their property by giving them fake documents. Documentation is perhaps THE Most Important factor to consider while buying a property. There is a possibility for people to ignore documents, failing to read the contract in its entirety, which could result in them losing both their money and the property. Scrutinizing the documents to check if they are legitimate and up to date must be made a habit before buying a property.
10. High Expectations – We all wish to make the most money out of our investments, but harbouring dreams which are too far-fetched can lead to disappointment. Investors should have realistic expectations when they buy real estate, for having unexpectedly high expectations can see you ignoring other investment options, relying solely on real estate, which could be a mistake in the future.
11. Overlook Small Details – Buying real estate can be a long and tedious affair, involving a lot of paperwork. It is possible to skip certain details in a bid to fast-track the investment process. Overlooking small details in the contract can have disastrous consequences, with builders often having certain clauses, which could lead to long drawn legal hassles in the future. It is best to have an expert look at the contract before signing it.
12. Not Factoring Risks – Real estate investments are typically viewed as safe, but there are certain risk factors associated with it. Ignoring the risk involved and purchasing a property isn’t the best investment move, and one should always factor in risks before they sign the dotted line.
13. Blindly Trusting Others – A number of people who purchase property are first timers, who often rely on the word of others when they invest. Blindly trusting a third party while investing can be extremely stupid, for people are bound to do things in their best interest. Blind faith can lead to you spending more than what is necessary or purchasing real estate which doesn’t suit your requirements. One should consult experts in order to get a clear picture and rely on the word of those who have a proven record of offering good deals.
14. Mistiming The Deal – Timing is key to everything in life and a real estate deal is no different. Most builders offer sales on their products and waiting for them could see you get a better deal on your investment. The demand and supply situation in a particular location also has an impact on prices and it is crucial that one times the deal perfectly to make the most of it.
15. Investing at the peak of market and later on Real estate market crashes resulting in Lower Rent, whereas EMI remains same
16. Negative Cash Flow as EMI outflow is much higher than rent inflow.
17. Invest in my hometown for sentimental reasons. I already have Home in Native Place, so I will stay in rented Flat in City
18. Buying Farm House and later on hardly use for fewer visits, where in Hotel cost would be much cheaper than maintaining a Farm House, with no appreciation.
19. Shady Developers (not professional) with huge Debt & involvement of Local Politician, local Don,
20. Person with Transferable Jobs should avoid buying property until they are certain of location for quite long time.
21. Work from Home Concept brought out that there is no need to be buying property close to office which may be costly.
22. Millenniums not buying but renting but during lockdown during Covid, many housing society imposed restrictions on them hindering their activities from Committee members who are mostly retired persons
23. Studio Apartment in City and week end home
24. Due to past bad experience, I will avoid Investing in Real Estate
25. Consulting colleagues / friends / neighbors / relatives etc., etc., even after listening to the best experts in the industry
26. Forgetting That All Real Estate Is Local