10 Expert Solutions to Common Investing Problems
Yours Free Courtesy of MAREI
“This content is derived from more than a decade of my own personal and professional experience as a real estate investor, Broker, property manager, hard money lender and specialized agent. My goal is to provide you with a set of highly-detailed solutions that can help you save time, money, headaches and stress by showing you exactly how to avoid many of the common mistakes investors make and solve real-world problems that will come up.” – JJ Pawlowski
Introduction to Problem Solving
In this article, I’m going to personally walk you through some of my own experiences and give you actual problems solved and mistakes to avoid. Each set of solutions and examples is grouped according to category. Categories include…
- Beginner Investor Mistakes and Problems
- Deal Analysis and Contract Mistakes and Problems
- Financing Mistakes and Problems
- Contractor Mistakes and Problems
- Landlording Mistakes and Problems
- Flipping Mistakes and Problems
IMPORTANT: Before you leave this page, Be sure to Download My List of 60 Common Investing Problems and Mistakes to Avoid (available for FREE through MAREI) and Register for the Meeting on April 14th. Being able to identify potential problems and know what mistakes to avoid is an important first step toward saving time/money, avoiding headaches/stress and having a better overall investing experience.
NOTE: Much of the content in the article was transcribed directly from my Investor Problem Solving training course.
Beginner Investor Mistakes & Problems
When I was a new investor I spent a lot of time, or maybe I should say I wasted a lot of time, out there wandering around, trying to figure out what to do, how to get started, what route to take – I just didn’t know. Not to mention fear. I was scared to death. Not knowing how to get started and dealing with your fear are just a few of the many problems and mistakes that beginner investors deal with, and here are a few others.
The investor believes everyone has his or her best interest in mind.
- I think it is best to say everyone has their own best interest in mind and operate that way.
- Trust, but always act in your best interest.
- A real estate agent pushing every single house as a great investment opportunity. You need to decide on your own using your own parameters.
Note: This isn’t a hit on real estate agents because, remember, I am a real estate agent. I’m just giving you an example. Once the property closes, the agent receives their commission check, and now you’re stuck with the property. Whether or not it’s a good deal, the agent was paid but now you’re dealing with a problem.
The investor doesn’t realize financing is one of the most important components, and roadblocks, to real estate investing.
- You can have a grandiose plan but if you don’t have the capital or financing it is going to be tough to get off the ground.
- You should expect to need cash, credit, and financing at some point of your investing process.
- Most investors utilize some type of financing for their investments most of the time.
- Financing options for investors are changing regularly!
- Get pre-approved or have a plan before you go too far in the investing process.
Note: I want you to seek out and discover what financing options might be available to you today. One reason for this is so you can get pre-approved to go out there and make offers.
Deal Analysis and Contract Mistakes & Problems
Paying too much for the property was one of the many mistakes I’ve made when analyzing and buying my investment properties, and there are many more that would fit into this section. Here’s another one.
The investor doesn’t think to solve the seller’s problem.
- Many of the properties you will consider buying are foreclosures, and in those cases you’ll try to get the best, lowest price possible from the lender seller.
- There are other circumstances though, and oftentimes better possibilities, too, where a traditional seller owns the property and is looking to sell.
- In these unique situations, if you help the seller solve his or her problem, you’ll oftentimes end up getting a great deal.
Note: Keep in mind, I’m referring to a distressed situation or maybe a beat up property, not a full-price, retail situation where you’ve got people that are living in the property and they’re looking for the retail price. I’m not talking about those situations, I’m talking about a situation where maybe a seller has owned for thirty years and the property is beat up and needs to be rehabbed. Or maybe there is a distressed situation where the seller is going through a divorce, or maybe there has been a death in the family, or perhaps they’ve lost their job. It could be any number of distressing situations that could potentially lead to a good deal for you. It doesn’t mean you have to take advantage of the seller.
- You can find yourself getting a great deal on a property when you help solve the seller’s problem. I once met a seller who was trying to sell her house. It was a very well kept house but hadn’t been updated in probably 40-50 years. Because of this, it wouldn’t be very desirable to most traditional owner occupant buyers.
- I simply asked the seller what she was wanting to get out of the house, and I was more than surprised by the asking price (in a good way). She understood the cosmetic disadvantages to selling in the traditional way. The price she wanted worked for her, and worked for me, so it ended up being a win-win. You can have a win-win and still get a great deal, that’s a great thing about real estate.
Investor Financing Mistakes & Problems
Do you know what ARV is, or how to calculate it? Is your loan-to-value to high? Do you need to know where to find investment financing? Throughout this section, we’ll talk more about these and other issues like the one below.
The investor tries to fit the scope of work into the deal itself.
- Fitting the scope of work into the deal means you only budget for what the financing allows you to budget for.
- This occurs when you are trying to limit or eliminate the need for any money out of pocket in the deal.
- It’s incredibly hard in real estate investing to be successful and profitable by cutting corners and not doing things the right way.
- Trying to fit a scope of work into a deal instead of focusing on the real needs of the property is a waste of your time and money.
- Trying to fit the scope of work into your deal is problematic and should be avoided. Let’s say for instance you run the numbers and figure out that in order to avoid putting any money down on the loan you are looking at the scope of work “can only be $15,000”. If it’s higher you will have to put (more) money down. You tell yourself, your lender, and your contractor you can only spend $15,000 on what would (or should) otherwise be a $25,000 rehab project.
- This is a big mistake. It’s better to not do the deal at all than to go into it using this methodology. The main reason is because cutting the scope of work will harm your project, the quality of it, the resell amount, or the financing amount altogether.
Note: You may say, “I’m not selling this house, I’m just trying to rent it.” That could still be a problem, because if you’re fitting a scope of work into the deal, when you go to refinance the property, that new lender is going to get an appraisal, and because you didn’t do everything you were supposed to on this scope of work, that appraisal may come in at a lot less. If your value is coming in at a lot less, that means your loan-to-value ratio is going to be smaller. You could potentially need a lot of money out of pocket to be able to refinance and hold the property.
Contractor Mistakes & Problems
I once paid a contractor up front and never saw him again. Don’t make the same mistakes I’ve made in dealing with contractors, including the ones below.
The investor pays a contractor up front.
- There are alternatives to paying contractors upfront.
- One is to offer to pay for materials needed. I handle paying for materials over the phone. It’s easy for me and the contractor and doesn’t require me to “front” the contractor any money directly.
- The other option is to let the contractor know a specific pay schedule/draw request process. I have weekly draw requests so my contractors can get paid regularly and not have to wait.
Note: A little secret is when you pay for your own materials, often times you save money. You potentially can make some money too. How does this work? Many contractors upcharge materials, so when you’re paying for the materials, you’re saving yourself from any upcharge that contractor may have included. Also, you can get cash back, or points, or rebates by paying for your own materials. Most credit cards or supply stores offer some type of incentive or rebate program for buyers. I get two percent rebate on all of the purchases I make every year at a major supply store, and when you’re doing a couple of projects over the course of the year, two percent can add up to a nice little sum of money. When I’m getting money back or saving money by paying for the materials and not getting upcharged, I also have a paper trail. If you don’t pay for the materials yourself, you’ll find that there’s not much of a paper trail to go off of.
Another Note: I think draw requests are a good incentive to keep a project going. I think that contractors like to get paid weekly, and that gives them incentive to keep things moving along. I do encourage you to let your contractor know the specific pay schedule/draw process you’re going to use, which we’ll talk more about at some point.
Final Note: If you’ve done all the things that we’ve discussed here, and the contractor still requires an upfront deposit or payment, you are going to have to handle this on your own. I can’t tell you what to do in your own project, but I can give you advice and my own opinion. The first time you do pay a contractor up front and never see that contractor again, you will have learned a lesson that so many of us have learned along the way.
The investor doesn’t obtain or require lien waivers
- You should always require a lien waiver whenever you write a check to a contractor.
- The lien waiver needs to reflect the amount of the check you are giving the contractor.
- The lien waivers should total the entire amount of money spent on the project.
- Lien waivers may also be required by a title company when flipping the house in order to provide mechanic’s lien coverage.
Note: If you need a sample of what a lien waiver might look like, they are available for download inside of my Investor Problem Solving training course.
Landlording Mistakes & Problems
Many investors will be a landlord or own a rental property at some point in their investing business. In this section, we’ll talk at length about many of the common mistakes, and how to solve some of the tenant problems that come up, including the following.
The investor doesn’t check local civil court records as part of the standard application processing.
- Never before has it been so easy and efficient to quickly find information readily available on the internet. This also includes many local civil courts in most major metro areas.
- You should always check online civil court records when they are available in your area. Sometimes the search is free. Sometimes there is a cost.
- The cost is probably minimal compared to the cost of renting to a problem tenant you could have avoided in the first place had you done a simple online search to begin with.
- You are looking for any landlord-tenant actions.
Note: There are a couple of tips that I normally add to this section. One is that a person may have gone by a married name earlier, or might be married now so they had a different last name in the past. When you do your credit check, often times the credit report will pull up other names that this person may have used. You’ll want to reference that credit report, because you may want to check civil court records for that person using all of their current/former names.
The investor doesn’t ask himself or herself, “When this tenant screws up, what do they have that I can recover my damages from?”
- I ask myself this question when considering an applicant.
- The reason I do is because I begin with the end in mind.
- It’s a lot easier to plan for the problems and not have any then it is to expect everything to be fine and then have issues with non-paying tenants.
- My opinion is anyone you rent to must have a garnishable form of income so that if the or she stops paying you have a legitimate source to collect your damages from.
Note: If the tenant damages your property, what are you going to do? Renting to someone who has a garnishable form of income will help you in the end if you need to try to recover those kinds of damages, too.
Flipping Mistakes & Problems
Are you holding out for a higher price? Yep, I’ve done it, and it’s a time consuming mistake. Is your scope of work too light? That’s a big, costly mistake. Here are some others flipping related problems and mistakes to avoid.
The investor underestimates the scope of work or budget for the repairs.
- Many investors make the mistake of putting together a SOW that is too lean and doesn’t cover all of the repairs, improvement, or rehab the subject property actually needs to bring it to a retail level to sell.
- One way to try to avoid this is to get multiple contractor bids.
- Another is to add an additional 10% contingency line item to the
budget to cover for unforeseen items (don’t tell your contractor you did this).
Note: This is one of the biggest mistakes and problems you will probably have in flipping. You need to perform whatever improvements that the house needs in order to bring it up to retail level. This means that the project has been done in a way that really “wows” the buyer, who is generally an owner-occupant. However you go about doing your flip house, keep in mind that it’s really important to do it to a level that’s going to give it that “wow” factor. The more “wow” it has, the faster it will sell, meaning a quicker pay day for you.
The investor overestimates the ARV or expected sales price.
- There are a number of ways investors will try to estimate the ARV.
- One might be using the real estate agent to pull sales comparables.
- Another might be using an online site or source.
- Some investors will use the tax assessed/appraised value to try and ascertain an ARV (I don’t recommend doing this).
- I recommend reducing the ARV amount you think it should be by 10% to come up with a more realistic amount.
- As far as sales price be sure to subtract out all of the expenses of the sale.
Final Note: These problems and mistakes can affect both newer and more seasoned investors in all areas of their investing businesses. I know this from personal experience, but all you have to do is come to the event listed below. And be sure to check out the two bonuses (1) Download My List of 60 Common Problems and Mistakes you Can Avoid and (2) Submit Your Own Investing Problem to Receive a Comprehensive Solution at the April 14th MAREI Meeting.
“Get Solutions to Many Common Problems and Learn How to Avoid Costly Mistakes During My Live Presentation at MAREI’s Monthly Meeting on Tuesday, April 14th.”
*Will Be Provided During My Presentation on April 14th or Via Personal Email