Ten Rookie Real Estate Investor Mistakes to Avoid
- Fiffik Law Group, PC
- a few seconds ago
- 6 min read
So, you're ready to jump into the exciting world of real estate investing here in Pennsylvania? That's fantastic! The Keystone State offers a diverse range of opportunities, from revitalizing historic row homes in Philly to managing student rentals near our many colleges and universities. However, like any venture, real estate investing comes with its share of potential pitfalls. Our team of experienced real estate attorneys have see firsthand where new investors often stumble. Here are ten common mistakes to avoid.
1. Lack of Due Diligence:
The Mistake: Rushing into a purchase without thoroughly investigating the property, its history and potential issues. So many investors never even visit the property – often they’re out of town.
Why Avoid It: You could end up with a money pit riddled with hidden problems like structural issues, code violations, or environmental hazards.
The Fix: You’ve got to get eyes on the property. Do not let the realtor or seller hustle you through the visit – take your time and document everything with photos. Do not be afraid to look behind stuff piled in rooms and basements. Make sure you obtain a seller disclosure and ask for any prior home inspection reports and comprehensive loss underwriting exchange (“CLUE”) reports (and read them carefully for what’s there and what isn’t). Hire qualified professionals for inspections (structural engineer, home inspector, pest control).
2. Buying Foreclosure/Sheriff Sale Properties:
The Mistake: Foreclosed properties often present investors with an opportunity to purchase real estate at a significant discount.
Why Avoid Them: Properties being sold at a local Sheriff sale are risky: they’re sold “as-is” and you probably cannot inspect them before bidding on them; if they’ve been vacant for a while, they may have squatters or tenants who need to be kicked-out and that can result in a long, expensive legal process; depending on the type of sale, all liens may not be extinguished in the sale and you get stuck with hidden or unexpected liens; the sales process is complicated and there are traps for the inexperienced plus you have to pay cash and there is no financing option. Finally title companies are sometimes unwilling to give you title insurance on these properties because defects in the legal process resulting in the sale create clouds on the title.
The Fix: Consult with a Pennsylvania real estate attorney to understand type of sale and the rules for bidding. Do some due diligence in advance on the title and have a specific plan in place before you submit a bid.
3. DIY Sales Agreements:
The Mistake: Using a free sales agreement that someone found online – or worse, a letter agreement.
Why Avoid It: A real estate sales agreement contains conditions under which the sale will occur. There are certain terms that must be included for the agreement to be enforceable under the law. The last thing you’d want to happen is have something that’s not enforceable. Problems in real estate deals are not uncommon and the agreement is where both parties look to understand not only the terms of the deal and their rights but also the means and mechanisms for resolving disputes. DIY agreements often come up painfully short on the necessary ingredients for a good real estate agreement.
The Fix: Taking the time to create a thorough and complete real estate contract is important because it reduces the chance of legal or financial problems down the road. The overall goal of the real estate contract is to spell out all the details of the transaction. Work with an experienced real estate attorney to create a good agreement that you can use repeatedly for your deals. If you’re presented with a sales agreement by the other side, your attorney prepared template can inform you what’s missing in other agreements that you should ask to be revised.
4. Underestimating Expenses:
The Mistake: Underestimating repair costs occurs predominantly because investors focus excessively on acquisition while overlooking operational realities. Inexperienced investors’ mistakes stem from improper inspection during acquisition.
Why Avoid It: Unexpected expenses can quickly eat into your profits and put you in a financial bind. Without thorough property evaluation, expensive underlying issues remain undetected until they require emergency intervention.
The Fix: Conduct a thorough inspection of the property in advance. Get the details to your contracting team and get repair estimates that are fixed before you close on the property. Your sales agreement can give you enough “due diligence” time to back out of the deal without consequence if the numbers don’t look good. Create a detailed budget that includes mortgage payments, property taxes, insurance, maintenance, repairs, property management fees (if applicable), and potential vacancy costs.
5. Installment Sales:
The Mistake: An installment sales agreement for real estate, often called a land installment contract or contract for deed, is a financing arrangement where the seller agrees to sell the property to a cash-poor buyer under the condition that the buyer makes payments over time.
Why Avoid It: In Pennsylvania, this type of agreement typically involves the seller retaining the legal title to the property until the full purchase price is paid, at which point the title transfers to the buyer. While the seller holds the title, the seller can accrue additional judgments or other liens that cloud the title to the property. In addition, any money spent by the buyer on improvements are at risk if the deal does not close for some reason.
The Fix: Avoid them. You’re better off not buying the property at all. These are simply not good arrangements for real estate investors to use.
6. Buying into Problem Tenants:
The Mistake: Buying rental properties occupied by tenants without conducting any due diligence on the existing lease agreements and relations with the tenants.
Why Avoid It: Problem tenants fail to pay rent and create legal headaches. Sometimes tenants tell you about “off-the-books” agreements they reached with the prior landlord that you knew nothing about. Sometimes you find out that the seller gave a third party the right to park or store things on your property.
The Fix: Require all tenants to sign estoppel certificates. An estoppel certificate is a signed statement by an existing tenant certifying for the purchaser’s benefit, that certain facts are correct, such as the validity of the lease and that there are no agreements with the landlord other than what’s in the lease. A tenant’s delivery of this statement estops the tenant from later claiming a different state of facts to the new, unsuspecting owner.
7. Partnership Problems:
The Mistake: It’s not unusual for investors to work with one or more partners. Maybe each of you brings different assets to the table: money, know-how, willingness to put in sweat equity. The mix can make for a great partnership. Partners often have nothing in writing about their roles and responsibilities in the partnership.
Why Avoid It: Co-owning property comes with a host of complex issues. Is there anything to which partners will be held accountable if they come up short on promises? When disputes arise, how are they resolved. Judgments against a partner, divorce, health issues and death all create problems for the property or entire venture.
The Fix: Before you invest in property with a partner, put together a partnership agreement that will help you avoid the many downsides of co-ownership and get the most out of it. Talking through the issues will help you all go into the venture with a clear set of expectations for one another.
8. Not Having a Clear Investment Strategy:
The Mistake: Buying properties without a specific plan or goal in mind.
Why Avoid It: A lack of strategy can lead to impulsive decisions and poor investment choices.
The Fix: Define your investment goals (e.g., cash flow, appreciation, long-term wealth building) and develop a strategy that aligns with your goals.
9. Ignoring Location:
The Mistake: Buying properties in undesirable locations. We talked to many out-of-town investors who look at spreadsheets only. The numbers don’t tell the entire story.
Why Avoid It: Location significantly impacts rental demand, property values, and overall investment potential. We’ve had to tell lots of investors not familiar with the local landscape that their target property is in a less-than-desirable area.
The Fix: Research the neighborhood's amenities, schools, crime rates, and future development plans.
10. Failing to Build a Team of Professionals:
The Mistake: Trying to do everything yourself without seeking expert advice.
Why Avoid It: Real estate investing involves complex legal, financial, and property management aspects.
The Fix: A comprehensive real estate investment team typically encompasses:
Real estate agents/brokers who understand investment properties and local markets
Property managers handling tenant relations, maintenance, and rent collection
Attorneys specialized in real estate transactions and compliance
Accountants/tax advisors with expertise in real estate investments and tax strategies
Lenders/mortgage brokers familiar with investment property financing
Contractors/handymen for repairs, renovations, and maintenance
Insurance agents providing property coverage and risk management advice
Mentors/coaches offering guidance based on their investment experience
Real estate investing in Pennsylvania can be a rewarding experience, but it's crucial to approach it with caution and avoid these common pitfalls. By doing your homework, seeking professional advice, and developing a solid strategy, you can increase your chances of success.