The Bane Of My Existence
There was a comment a few weeks ago wherein the guest wanted know more about my foreclosure situation. I’m telling the full, unabridged story now. The full story will take three posts because it’s that long. I am aware that I was a complete idiot, no need to point that out in the comment section and that’s why I entitled the post “How Not to Invest in Real Estate”. I actually think my story will be herald as the dumbest real estate investment of all time. But I’ll let you be the judge:
EDIT: Removed broker’s company name
I began my financial ruin in the Fall of 2006, shortly after moving to Florida to start my own company. I wasn’t sure what the company would do, but my dream was to own my business and “escape the corporate rat race”. I landed upon real estate investing because I had a friend in California whose family owns several apartment buildings and commercial buildings, and lived out their dreams from it and they started with just one house. At that time (Spring 2007) everyone agreed the bubble had popped and most believed home values were reaching their lows. Good deals were to be had every where. It was a buyers market.
I joined the local real estate investment club, Central Florida Realty Investors, and attended meetings regularly including weekend classes on how to flip homes, negotiate, market, rent, read contracts, etc. The advice and contacts were invaluable. And I don’t fault anyone there for my current situation; I didn’t follow what was taught, plain and simple. I asked advice on the deal that got me into this mess and most folks told me “No” or “Sounds okay, but there are better deals out there”. I soon incorporated an LLC, built a website, and began to make offers and scout neighborhoods. At this point I probably sunk ~$3,000 into real estate investing.
The single biggest problem that most people who get into real estate investing, internet marketing, MLM, or any other of these “make money at home” plans is that they fail to ever take action*. I, to a fault, take too much action. I go in head first and figure things out as I go along. This is fine if you have unlimited capital, but can be very dangerous if you don’t. I learn by doing, and I don’t have much patience to analyze things too long. I rather do a lot and see what sticks. I end up making lots of mistakes, quickly correcting them, but sometimes a mistake can be fatal. The trick is to hit success before my collective failures drain all of my cash.
Now before you fault me for this, keep in mind this is standard practice among the most successful people and companies. They call it “testing” or “gathering empirical evidence”. But in fact it is failing to success. Rarely does a business plan go as thought, businesses more often than not have to adapt quickly. With real estate it’s hard because by taking out a loan, I expose myself to six figures of financial risk, and there is no way around it. So it is something that I can’t really “throw on the wall” and see what sticks unless I had deep pockets. I should have just followed the basic principles I was told, and should not have let myself get convinced otherwise.
One bright Saturday morning during a class, the event sponsor gets up (he didn’t teach the class, only sponsored it) and pitches his services. He’s a broker and runs ***************, and offered a % of his commission to the buyer. He promises to take newbies under his wing and help to handhold them through deals. He proclaimed his many years of real estate experience and was an investor himself. He wanted to form partnerships with investors acting as their real estate broker– he finds the “deals” and you buy them. And everybody profits.
“Perfect!”.
By the following weekend I was in my car with him trying to decide on a home in a new subdivision. On our way there he explained to me our great strategy:
Dean, you have a great credit score (740) and little cash ($5,000) your best bet is to find a homebuilder in the area who is closing out and is desperate to move their inventory. They will offer to cover closing costs and with the percentage of my commission you’ll receive you will walk away from the closing with cash. We can do 100% financing, interest-only for 5 years, by which time the home market will rebound and you can flip for a profit. The interest-only loan will keep payments low, and you can find a renter to cover the costs or live in it yourself. So long as you purchase a house that’s not above $250,000 and has bedrooms on the ground floor, you will have an easier time selling it. Oh, and because the home will be purchased during a ‘close-out’ sale, everyone in your neighborhood will be locked in at the higher price they purchased their homes for, so you’re getting in at bottom price for that neighborhood. When these first homeowners begin to sell, your comps are going to be higher than what you paid for your home.
What is the flaw with this plan? What was I not thinking about? Keep in mind hindsight is 20/20, but if you believed the market was at its low (as most did) then this plan seemed fool-proof.
Part II will be posted shortly. Stay tuned.
* Yes, there are many things wrong with real estate investing, MLM, and internet marketing – for one they prey on the desperate and those looking to make a fast buck. Not to mention that all three of these niches have a sizeable “ponzi-scheme” component built in wherein people make millions teaching you how to make millions. But the truth is most folks don’t ever take action.
