Money

How to Not to Invest in Real Estate

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In my quest for financial freedom, I decided to learn about real estate investment. Having missed the opportunities in the 2008 real estate market crash, I have seen home prices going three fold up in the last decade. I won’t say I missed understanding the value proposition the home prices which were available in 2008-2009. From an investor’s point of view, it was a great time to buy as many homes as anyone could to speed up their journey towards financial freedom.

It was in 2009 when I first got really interested in buying a home in the Chicago area. The prices were rock bottom at the time and many homes were available for less than the money used to build them up. In other words, such deals had a huge margin of safety inbuilt.

I quickly looked up a few homes in nearby areas which were really cheap. After a quick phone call with the property agent, we decided to visit 3 bedrooms, 2 bath home in Chicago suburbs.

The house was available for less than $45,000. It was a foreclosure deal which obviously I didn’t understand at the time.

When we visited the home, it wasn’t all bad but needed a good amount of rehab which scared us from buying that property. So, we told our agent that we pass on to that home.

He quickly suggested another home which was in a better area and we decided to visit their next day.

The next home was available for $69,000 and it was also 3 bed, 2 bath single-family home.

In photos, it looked pretty nice and only a minimal amount of work was needed to live in it.

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I still remember it was morning when we visited this home. With our agent, we knocked at the door and someone opened the door. This was surprising for us as the current owner and his family were living in the home when we were looking at their home.

An old lady was cleaning the kitchen in front of us to get it ready to show us. One teenager and a toddler were sitting on the couch staring us while having their breakfast.

We didn’t know at the time that when a home is marked as foreclosure, owners are moved out and the bank sells the property for the amount of loan remaining.

After we came out, our agent explained the situation and it was sad. It got emotional and were naive enough to think that we could save these folks by not buying their home.

If we hadn’t met the family in the house on that day, we might have bought the place.

In retrospect, we still feel that we did well to not buy that home since we won’t be able to live in it after meeting the family.

Was it a good deal?

Not good but a great deal. The home was bought above $250,000 by previous owners and it was available to us at $69,000 due to the real estate market crash.

The deal also made sense according to my real estate purchase formula discussed in another post.

The land itself was I guess worth more than $69,000. At this price, we were getting free construction in a good Chicago suburb area.

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Beaten down real estate prices

For the next 3 years, we didn’t do anything when the market was really good for real estate investors or someone looking to buy a home.

Once while driving in 2012 I noticed a big hoarding on the side of the road. With a big picture of a new single-family home, it said – get this for $100,000.

I took the next turn and drove to the location. It was a small community of 30-40 newly constructed homes with a price tag of $100,000. The locality was great. It had good schools too.

I did some calculations and found that the mortgage would be even lower than the rent I was paying.

This looked like a great deal. But there was one problem. It was right next to the street. There was no front or back yard. Parking was on the street.

We decided not to pursue it since we must have a front and back yard.

In retrospect, this was one of the stupid things we did in our life.

A couple of years later, the same homes were selling for near $300k+.

I could have bought 2-3 single families at the time to live freely for the rest of my life.

I learned about heartburn after missing this one deal.

There are many such great investment opportunities which I have missed so far in my life and I am sure others might have too.

This is why I have decided to write about them to not forget about my failures.

What did I learn from this

When you find a great deal which makes sense and numbers look good too. Then don’t find reasons for not liking the deal.

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I also learned that always ask your agent for private home tours and explicitly make sure that the owner and his/her family won’t be present at the time of the tour. This is especially important when buying foreclosures.

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