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Old 02-26-2006, 12:17 PM
elva
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Post 5 Things I Wish Someone Had Told Me Earlier - Part II

3. There's no one best way to invest in real estate.

Most new investors have a "guru", a teacher to whom they look not only for advice, but for a world view that helps to direct and focus the newbie on a particular strategy. These gurus can take the form of a professional teacher/instructor, a mentor, or, as was the case in my early career, a family member.

One of the major attractions of gurus is their certainty that their particular strategy is the be-all and end-all of real estate investing. My father was a good example of this: he had a cookie cutter that involved buying low-end homes for cash, lease/optioning them, and then ultimately refinancing packages of 5-10 at a time to get more cash to buy more houses. No property, no matter what type, condition, or area ever got any other treatment. And like most gurus, he was willing to defend the death the idea that other strategies were less profitable, more difficult to execute, and generally inferior to his particular favorite.

The guru is a compelling figure to the new investor precisely because he (or she!) is so focused and certain of himself. Following a particular guru can be extremely valuable for the overwhelmed newbie since it allows him to really, really learn how a particular technique works. The downside of guru-worship is that it limits the new investor's experience. Most gurus—and not just those who have seminars to sell—advocate one or two strategies to the EXCLUSION of all others. As a result, their followers tend to have a narrow viewpoint in terms of what a "good" deal is, and therefore to pass up a lot of profit opportunities.

Once I'd quit working for my father, the "pay cash for houses" option dried up and I was forced to learn some new strategies for putting food on the table. Wholesaling properties for quick cash became a prime focus of my business, and quickly became a huge profit center. One day about 2 years ago, I went back through my files of offers I'd made when "Buy and Lease Option" was the only thing I knew, and discovered that I'd walked away from over $100,000 in wholesaling profits during the time I was stuck in that mindset. Many, many properties that didn't fit my dad's "cookie cutter" would have been great little flips, but I simply couldn't see them. And never mind all the times I hung up on a seller with an expensive, pretty house for sale, because I couldn't get it for 704 on the dollar...

4. People are liars.

Somehow, I grew up with the idea that lying was a bad thing to do and that getting caught lying was embarrassing and could get you into a lot of trouble. Somehow, people who apply for rentals missed this lesson growing up, or have unlearned it in adulthood.

Because no one ever told me this, I spent the first four years of my real estate career checking applications only superficially, and as a result ended up giving over control of my houses to some real tenants-from-hell. I actually believed that my properties were cursed, since perfectly good applicants somehow self-destructed just weeks after moving in.

The first thing that clued me in was when I got not one but three separate calls from collection agencies about one tenant within a few weeks of having rented to her. I kept telling the callers that they had the wrong lady, since my tenant's record was clean when I checked it. Finally, one of the creditors gave me a description of the tenant and her car, and I realized that I'd somehow missed something.

A little detective work uncovered the fact that I'd actually checked her sister's credit, since the name and social security number on the application were hers. Furthermore, the "boyfriend", whose $35K/year job in a nursing home qualified her to rent the home, was actually an ex-husband who had no intention of living in the home OR of helping with the rent, and the "prior landlord" who gave such a glowing reference was actually the tenant's mother. Needless to say, she was evicted a few months later having paid only the first month's rent.

Since learning this lesson, I've become an application-checking fiend. I look at driver's licenses. I cross-check current addresses with those on the credit report, then cross-check owner's names with those of landlords on the application. I use the Criss-Cross directory to make sure that the work phone number actually belongs to a business. And I have a firm policy that NOBODY gets to live in one of my houses if they've told a major lie on their application.

After I discovered that something like 60% of my applicants were giving false information on their applications, I developed a full-page instruction form explaining to all potential tenants that lying about their rental, credit, criminal, or work history would result in automatic rejection and loss of their application fee, and you know what happened? Not a thing. I've rejected 8 out of the last 10 applicants I've had due to falsification of the application. Go figure.

5. You never get to the point where you know "enough".

When I had been in real estate for about 4 years, I figured I was pretty hot stuff. I knew all the basic strategies backward and forward; I'd done over 100 deals; I'd spent maybe 1,000 hours in classrooms learning more. I honestly believed that there was nothing else that I really needed to know to be successful.

Then one year 7 of my lease/option tenants refinanced in a 4-month period. Staring down the throat of a mid 5-figure income tax bill, I suddenly "discovered" the 1031 exchange, a technique that's been around for decades, but which I thought applied only to old guys who were ready to get out of the business. About that time, I also started doing a radio program, and my attorney recommended that I look into land trusts as a way of keeping my name out of the public record. Then I discovered that escrowing documents could protect iffy lease/option deals to a degree that made me comfortable. And last week, I found out that a "mortgage to secure option" was a valid way to record one's interest at the courthouse...

So in case no one's told you yet, the moral is: in the real estate business, knowledge is profit. Keep learning all the time, and don't forget to pass a little of that knowledge on to the folks who are coming up behind you.

Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com.
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