5 Things I Wish Someone Had Told Me Earlier
by Vena Jones-Coxz
It is a major regret of my youth that no one ever bothered to tell me that
working for a living was a drag, or that depending on a job to make you rich was
a fantasy. I guess I was aware on some unconscious level that my dad's real
estate investor friends were able to go to Europe for months on end while my
friends' parents—even the ones with great jobs— were lucky to put 2 weeks of
vacation time together each year, but I always assumed that my dad's friends had
so much spare time because they were unemployable, never having been told that,
despite their paint-spattered overalls and 15-year old pickups, they were
multimillionaires.
In short, when I entered the “real” world after college, my education was sadly
lacking in some very important areas. In the ensuing years, I've learned some
lessons about the world of real estate—some painful (never give a big earnest
money check to a seller until you know he actually owns the property), some
pleasant (it is possible to hire other people to do the jobs you hate). Each
time real estate investing teaches me something new, I wonder why somebody
didn't just sit me down and tell me about it years ago. How much easier my life
would have been if only someone had told me these things early on...
1. Real Estate Isn’t About Properties, or Deals, or Financing.
About 4 weeks into my real estate career, I made my first deal on a house. In
one of the most obvious examples of karmic retribution I've ever experienced,
the seller of this house was one of the little old ladies that I'd once accused
my parents of taking horrible advantage of. However, this particular little old
lady surprised me by telling me right up front that all she wanted for her home
was the loan balance plus $1,000 to move, despite the fact that the property was
worth about $15,000 more than that. It seems that her husband had recently died,
and that she was moving out of state to live with her daughter and
grandchildren. In short, she wanted to be gone by the end of the month.
Now, while this was my first actual deal, I had made approximately 100 offers up
to that point that went nowhere. Like many first-time investors, I hadn't fully
absorbed the lesson that real estate was about people, not properties; as a
result, I had made all of my offers on houses where I thought the seller should
be motivated to sell for some reason. I never once asked whether or why the
seller wanted to sell cheap, because, hey, the house was ugly right? Who
wouldn't be ready to sell cheap?
It was this lady that taught me the all-important lesson that people don't
necessarily want what you think they should want. Her house was in pretty good
shape; she could have sold it for full value in 60 days or so. But what she
wanted wasn't top price, it was speed. She wasn't motivated by money, but by a
desire to put the property behind her. As a result, she was pleased as punch to
take about 2/3rds of the value of the property at the closing a week later. And
if someone had bothered to tell me right from the beginning that not every owner
of a junker house or a house in a questionable neighborhood automatically wanted
to sell cheap (even though it was the logical thing to do!) perhaps I could have
saved my time in making the previous 99 offers. People are funny, and the only
way to really know what they want out of a deal is to ask them. So if you're
making offer after offer and getting rejection after rejection, you might want
to think about talking to sellers about what they want, instead of assuming you
know.
2. Never, Ever Rent to Anyone You Know.
It's inevitable: someday your buddy (or brother) Joe is going to need a place to
live at exactly the same time that you have a vacancy. It's going to go through
your mind that this might be the perfect solution for both of you. Joe's a nice
guy, and with his carpentry skills (he was the one who drilled through the
fridge door in your college apartment to invent—the Keg-A-Rator!), you know
he'll fix your place up real nice. So, in a gesture that you will never cease to
regret, you offer Joe your vacant property. He gets a discounted rent, you get a
tenant you can trust, everybody wins. Everybody, that is, except anybody who's
even remotely involved in this situation. The thing about renting to people you
know (and this also encompasses lease/optioning, carrying financing etc) is that
you and your friend/family member enter the agreement with opposing viewpoints
in terms of the benefits of the situation. You go in happy because you know your
buddy will treat you fairly—meaning that the rent will be on time, the repairs
you agreed on will be made in a timely fashion, and he won't turn your new
refrigerator into a Keg-a-rator. HE goes in happy because he knows you'll treat
him fairly—meaning that you'll let him slide on the rent at Christmas, take his
time on the repairs, and indulge his longtime dream of raising Rottweilers in
the basement. You think he'll be the perfect tenant; he thinks you'll be the
perfect landlord. It's a conflict of outlooks that can't be resolved without
lawyers or fisticuffs.
Remember, when you become a housing provider, your outlook on life undergoes a
major change. Your friends who are still tenants probably haven't had the
benefit of experiencing that kind of entrepreneurship, and more than likely have
no idea what it's like to invest huge chunks of time and money in a property. My
partner once lost not one but an entire group of college friends when he evicted
one for nonpayment of rent; suddenly he'd become "The Man" and was no longer
welcome at the poker games. I have a brother who can't see me at family
gatherings without eventually coming around to the subject of how shabbily I
treated his best friend by forcing him to pay late fees every month. I have
never, ever seen a situation like this work out to the satisfaction of both
parties. If you have, I'd like to hear about it. On the bright side, since no
one ever tells people that renting to friends and relatives is a very bad thing,
there are an awful lot of buying opportunities out there generated when owners
realize they're never going to see a dime out of Joe. Keep your eyes open for
these situations; they can become some of your best deals.
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 til 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
70 cents 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.
Bio:
Vena Jones-Cox’s real estate business focuses on finding great deals on 1-3
family homes, then lease/optioning them to homeowners or wholesaling them to
investors and renovators. All told, she buys and sells about 50 properties per
year.
Vena is a frequent guest lecturer at real estate investment groups throughout
the country, and particularly enjoys working with new investors. Vena frequently
authors articles on real estate investment and the regulatory environment for
various newsletters and publications, including The Real Deal, her own monthly
newsletter. She has been a guest speaker at the Cato Institute in Washington,
D.C., lecturing on the effects of lead-based paint regulation on small
investors. And in her spare time, Vena hosts a popular weekly call-in radio
program on public radio. Real Life Real Estate Investing can be heard throughout
the Midwest and throughout the world on the Internet (WNKU.org) Wednesdays from
5:00-6:00 PM EDT.
Vena Jones-Cox is a past president of the Real Estate Investor’s Association of
Cincinnati, the Ohio Real Estate Investor’s Association, and the National Real
Estate Investor’s Association. She intends to form the International and,
eventually, Pan-Galactic Real Estate Investors Associations so she can be
president of those, too. Vena Jones-Cox has been featured in publications such
as The Cincinnati Enquirer, Smart Money Magazine, Money Magazine and Reader’s
Digest in articles about successful real estate entrepreneurs.