No one enters into real estate investing with the hope of losing money. One of the main reasons we get into real estate is to make money, sometimes a little and sometimes a lot. But do you notice how little information is available about what happens when your real estate investments don’t work out? The truth is, notwithstanding the hype of the late night television and internet gurus, investing in real estate is often riskier than we think.
The Best Intentions
When I sit down to evaluate a real estate investing opportunity, there are lots of documents to review. For example, on a straightforward lease option refinance or rent to own deal, I have the property to evaluate, the home inspection report, the credit report and financial statements of the tenant-buyers, the neighborhood demographics, regional real estate trends, local economic data and so on.
This is part of everyone’s due diligence. I also map out various disaster scenarios in case something goes horribly wrong. I never expect my real estate investments to explode, but I want to be ready just in case.
And yet, even with these best of intentions, things can happen. Bad things. Things that cause me to lose sleep.
Real Estate Investment Horrors
The truth is that real estate investments often go wrong. No one likes to admit this because we’ve been conditioned to believe that anyone can jump into real estate and make a fortune. But it just doesn’t work that way. For every investment of mine that has worked out well, I can show you at least as many that have not. And, even with all the due diligence I undertake (which is probably more than most), I can still get whacked by unforeseen events.
Here’s an example. I had just put in place a lease option refinance deal with a homeowner in another province. I followed my Lease Option Refinance Strategy and had 12 months of expenses covered in case something went wrong. Well, something did go wrong. Not two months into the term, the tenant-buyer stopped paying their monthly lease option payment. Then I found out that evicting someone in this province was not a simple matter. It took a year and over $10,000 in legal fees just to get the tenant-buyer out of the property. Well that ate up all of the security deposit. I also had investors on the property that I could no longer make payments to because of the lack of income, and on top of all that, the local economy tanked when the price of gas dropped.
So there I was stuck with a property that was empty and that had lost a lot of its value. I don’t see a lot of situations like this being discussed on TV or elsewhere. What could possibly be done?
Overcoming the No Win Scenario
Well, for me the trick is not to take anything personally. I had done my due diligence on this investment and something went horribly bad anyway. It’s easy in these situations to crawl into your favorite la-z-boy and hide. But that doesn’t make the problem go away.
So, channeling Captain Kirk – who does not believe in no win situations – the only thing I could do was to get creative and find a way out.
In this particular situation, I ended up negotiating with the investors who eventually bought the property from me and rented it out. Did I lose money on this deal? You bet I did! I lost thousands and got schooled in a big way about the unheard risks in real estate investment. But with this experience, I now know even more things to consider in when performing my due diligence. It was an expensive lesson to learn, and one I don’t want to have to go through again, but now that it’s done, I’m better for it.
This story also points out the importance of working with a solid team of professionals: your lawyer, broker, lender, investors, property manager and so on. There is no way you can be an expert in everything, so find those trustworthy, experienced pros to help you out. Ask a lot of questions, do your best due diligence, and invest when your gut says it’s right.