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4 Common Myths Of Real Estate Investing To Remove From Your Head
Investors often run into pitfalls because of their believes in myths that have somehow crept into their heads. These could be due to stories that have been told, rumours going around the place, isolated experiences, and even bias advertisements and television shows. It is therefore important to acknowledge the presence of myths and avoid letting them get into your head. Because making investment decisions based on myths instead of facts and reality is a dangerous approach to investing. Here are 4 of the most common myths.
Myth 1: The owner is telling the truth, the whole truth, and nothing but the truth
It’s not that I want to bang the hammer on owners. But even an honest owner may fail to abide by this myth because he does not know what are the material information you are looking for. The fact is that you cannot naively expect a seller to tell you every defect in his property. He will instead be ringing the bell on every highlight of the house.
It’s human nature and instinctive for sellers. If there is a leak in the ceiling, you can expect a viewing to be closed on rainy days. If there is noise pollution from the adjacent road, you can expect windows to be tightly shut when you visit. If for some reason, the plumbing chokes 4 times a year, he will not be letting you hear about it. If the afternoon sun shines into the living room, you can expect viewing hours in the morning or evening. There are many many more tricks of the trade in a seller’s playbook. So when negotiating with a seller, you cannot make your decision based on information provided by the seller. You have to depend on yourself to meticulously search for defects and scrutinize prices based on value.
Remember that no one is trying to scam you. It’s more like a game that you play with an owner-seller. Each party deals a card and it is up to the opponent to call out the bluff. If you cannot find anything wrong with a property, a seller will feel that a high price is legitimately justified. While finding skeletons in the closet will help you justify a lower price. Sellers want to sell as high as possible and buyers want to buy as low as possible.
Myth 2: Fast track to getting rich
The only fast track way to getting rich is when you sign off the inheritance document your sugar daddy left for you. The only thing between you and becoming an instant millionaire is not a $499 “get rich quick” real estate seminar where trainers teach you the “secrets of successful property investors”. I don’t know how these businesses are sustained. But the fact that they are not going away means that there is strong demand for these types of workshops.
One of the common strategies taught in these seminars might look like this. You buy a million-dollar property with nothing down. Then you take out an equity loan at 80% loan to value which is equivalent to $800,000. Use that to buy another property. Rinse and repeat until you reach the end of the road. After which you start all over again with another million-dollar property. This is theoretical genius but practically financial suicide unless you are already a multi-millionaire. Even then, you are threading water.
It’s time to wake up from your dreams. Making it in real estate requires hard work and discipline. If success is as easy as attending a secret seminar, they would be teaching it in school to eliminate poverty.
Myth 3: A real estate agent can be trusted 100%
You will eventually end up dealing with real estate agents as a buyer or seller even if you avoid them like a plague. Even if you do not hire them, a seller or buyer at the opposite end will probably have one at their corner.
First of all, take note of who the agent is working for. You cannot expect an agent to lean towards you when it is the other party who hired him. But you will be shocked to learn that an agent may not back you up even if you are the boss! To have a little closure on the frustration building up in your throat, you have to understand what is the motivation of an agent. And that is to close as fast as possible so that they can spend the commission on a Disney holiday for two weeks. No agent will forego their own interest for the interest of all parties. And you cannot expect that from them as well. They have a family to feed just like you. And my guess is that they treat their families as a higher priority than yours. This is why sometimes information you get from them should be classified as part-truths or half-truths.
You will find that realtors are very friendly and open people who give you as much factual information as possible when you first inquired about a listing. It is only when you show yourself as a genuine and serious buyer or seller where you will be able to observe spanners, fireworks, and pancakes flying about in conversation. At the stage where closing appears imminent, even the most honest of realtors can lose their credibility. This is when the dam breaks and the floodgate of closing tricks pour out. Among those spanners are:
- The property is in high demand and you should sign now to avoid losing it.
- Someone else have made a higher offer and you have to at least match it to close.
- Another buyer has made an offer and you have to move fast.
- Seller has already rejected an offer that is higher than yours.
- The deal is a no-brainer as property prices are only going up.
- Seller will entertain any prices within a price range but turns down your offer within the range.
- Seller has rejected your offer when in fact the agent did not even inform the seller of it.
Playing along with these games is tiring. But it does work on non-investing home buyers with little experience. Your best defence is to ignore all these statements when you identify them as fluff. Accept that these games are part and parcel of negotiation. Communicate your ability to walk away from the deal. Hey, if you are an investor, there is always a comparable buy a block or 2 away.
Myth 4: You can trust your gut
Let’s put it this way. If you can trust your gut, thousands of homes will not have to be foreclosed due to the subprime crisis. Booms and busts are the best examples of what trusting your gut can lead to. There are risks for every type of investment. But your gut is not capable of making a calculated decision for you. Yes, you might have read books by world-renowned investors who made it big be trusting their gut. But for every one of them there are 50 more investors who did it by going with logic.
Getting emotionally involved in investing is a dangerous way to play the game. It has been documented for ages. So it is a little astonishing how people can still pour their life savings into bubbles. Especially when these are overseas investments. The gut feeling that the government will not let this or that happen becomes the reassurance one needs to invest in something he does not understand.
Experiences investors or new investors can make mistakes. But making one due to a gut feeling or emotional attachment is the hardest one to swallow.