Pitfalls for New Real Estate Investors in the 2009 Housing Market

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Investing in foreclosures can be profitable, but it can bring headaches. Here are 5 real estate investing pitfalls that new investors need to avoid.

Three weeks ago, I was having lunch with my daughters when an old friend walked by my table. I waved hello, and he called out that we should talk soon. Shortly thereafter he comes back to sit with us. We talk about our families and our businesses (and the effect of the current economy on both). He had been toying with the idea of investing in real estate, so he had some questions for me. His questions, and dealings with a few other investors recently, led me to consider some facts that you should watch out for when planning to begin buying real estate.

Have your funding in place before you start looking, and understand what the terms are. This may sound obvious, but some people fail to recognize that the mortgage field is changing. Different mortgage packages exist, and each is geared to different loan situations. You cannot always use loans for first time home buyers for investments. This misconception is more common than you think.
Beware of lenders who will not allow inspections, or are insisting on a small window in which they allow an inspection. Typically ten days is given to the buyer to inspect a home. For some foreclosures, the lenders gave my clients two or three days to have an inspection performed. I have always found major issues in these homes.
Lenders making unreasonable requests. Any request where they are rushing you or they are attempting to pay in very specific ways is what I would term as unreasonable. One lender demanded that they would only accept a cash payment for a property (according to a client). Any purchase backed by a loan was unacceptable. Others demanded funds before closing. I am not sure why these practices exist, but they seem off to me. Not to belabor a point which I have made before, but new real estate investors should have a team to help them purchase a house. A Realtor would be able to tell them what is normal in a sale process.
When you know something is wrong, deal with it before you rent or sell the house. Many home inspectors are not pest control experts, but when I see pest activity, I mention it. At that point, an investor should obtain a WDI (termite) report. If you are aware of a pest problem, handle it before others become aware. In Texas, landlords have to provide working water heaters to their tenants. If I report that there is an problem with a unit, look to see how bad it might be.
You may be buying the property “as is” with no hope of getting concessions for repairs. If I sell my home through a Realtor, I would fill out a Seller’s Disclosure form. I am required to be as honest as I can be. If I knowingly fail to disclose a major deficiency, the buyer could hold me responsible, and make me pay for it. Does the lender know the condition of the property? They may not, or it may be hard to prove that they did. Foreclosures can be in very bad shape. The cost of repairs can eat up the money that you saved by paying less. The lender may decide not to offer you any discounts in the rice if you discover that you must buy a new air conditioning system. If you discover a problem after the purchase, you will have little recourse against a lender.

In the coming months, we will be seeing more foreclosures coming onto the Houston market. Currently, the number is around 3000 per month, so an increase of units can be a great opportunity for investors. Houston has experienced a slight decline in home prices, but no where near the declines that other markets have see. This is a good fact for investors. However, do not jump into the market with some knowledge, and I hope these indicators will steer you away from a headache.