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INVESTORS’ CORNER: Don’t paint yourself into a corner

Real Estate is hot today, make no mistake about it.  We’ve all heard stories of the unsophisticated and untrained buying a property, doing very little but riding the wave of appreciation, and selling it at a tidy profit.

However, from a buyer’s market we have come, and to a buyer’s market we shall return.  If you only have one exit strategy (i.e., selling for top dollar to someone who will get a loan and live in the property), you may find yourself painted into the proverbial corner: owning a beautiful house that leaves you no means of escape.

My mentor often quoted a saying from quick-turn expert and veteran of over 3,000 house “flips,” Ron Legrand: “How can I win, how can I lose, how can I fix it?” Too many of us acquire a case of selective perception regarding the first question, and fancy that we will never be in a position to consider the latter two.

Those of us who survived the “crash” of 2007, and earlier crashes, know better.  It doesn’t always work out the way you plan: Murphy does live on your street.  Best you have a Plan B and C so that if A does not come to fruition, you are not ruined financially.  I have seen a great many incredibly savvy investors crash and burn due to “betting the farm” on Plan A.

What if the market stays great, but some unforeseen feature renders your property unpalatable to the buying public? For example, the unemployed people across the street whom you neglected to notice are in the habit of drinking on the porch and talking loudly for 18 hours per day?  Or if interest rates rise, demand drops, and suddenly, your house is no longer worth what you owe on it?  Best you be in a position to refinance that 15 percent hard-money loan off of it, replace it with a reasonable rate, and rent it until the lending climate changes.  Maybe you should not have financed it 100 percent at the bank and instead left yourself a bit of “wiggle room” in case the need arose to drop the price and get out.  These may not sound like major issues, but multiply them over half a dozen houses, and they are the type of cannon balls that can sink ships with alarming rapidity.

How can I win, how can I lose, how can I fix it?  If the worst case happens, will I still be ok?

Lou Gimbutis is director of education at the Metrolina Real Estate Investors Association, which provides education, mentoring, and networking for real estate investing in the Charlotte region.  He can be contacted at lou@MetrolinaREIA.org.  For more information, visit www.MetrolinaREIA.org.

 

 

 

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