The City of Hillsboro and Paint Creek Joint EMS/Fire District are set to close on a real estate deal next week, and the district’s board of trustees will likely accept
What are the most common mistakes that home buyers make?
This is a BRIEF summary of how to buy real estate. Obviously real detail could be many chapters in a book. Some of what I am going to say may seem counter intuitive, but I assure you its rock solid.
This applies to any kind of real estate investment, but should be applied as vigorously to your residence as investment properties.
Don’t Buy On Emotion. Especially NOT Because It’s “Pretty”.
The biggest way to make or lose money is emotion. You need to leverage emotion in your favour and let others be influenced by any emotion.
Never rationalize by saying silly stuff like “This is my home – not an investment. Its for my family and my kids”… and make a bad deal using some Hallmark sentiment.
Its busisnss and its your life savings. Be smart.
MY NUMBER ONE RULE OF MAKING MONEY is: Buy ugly. Ugly is your best friend for value. When I say “ugly” I mean cosmetically ugly – not having structural components in failure. There is a difference.
Most people can’t see past ugly – so your work to beautify will earn you sweat equity. When I say this, – I don’t mean those expensive home renovating shows on the (un)reality network. I mean you can do a lot with cheap stuff like paint and landscaping.
Ugly is a relative term, but it leads us to Point 2
Buy The Worse House in the Best Neighbourhood You Can Afford. Location is Everything.
Structures do not go up in value. Understand what determines value in a “property”.
Land appreciates – Structures depreciate. So a good investment is the location.
Sophisticated investors know that the more expensive and higher quality a property – the more the land component is the dominant proportion of value – compared to the structure.
To illustrate here are examples of the two extremes:
A wreck of a cabin on the Malibu waterfront sells for $14 million. The same lot next door can have a much bigger, fancier house and the sale value is still $14 Million. Why?
At this extreme quality of location, the house has almost no value until it becomes some kind of castle. Its all land baby. So the ratio of value is 95% land and 5% structure.
In the worse crime ridden “hood” it will be the inverse. The structure is the only value and its depreciating. That is why inner cities have burned out vacant lots. Even for “free” no one wants them – because of the location.
We are getting into some technical land-economics/appraisal learning now that maybe too heavy for Quora, but…this is how real estate REALLY works.
So a typical middle class house in the middle of these two extremes has its value split about 50/50 between the structure and the lot. This is an important concept for future flips, and the more sophisticated topic of Land Development.
We are now digressing into a different topic of HOW TO MAKE MONEY IN REAL ESTATE, but lets do that for a moment.
So when you purchase a middle class house and renovate it – your beautification effort is aimed solely at the 50% portion of value that is the structure.
You are spending money – hoping to recover that cash – by increasing the EMOTION of the structure’s part of total value.
Does that make sense?
This is why flips of middle class houses are ok, but you don’t see huge increases in value over your total investment.
If you own a high value location, spending money on the structure yields almost NO return because your efforts are aimed at the tiny 5% value influence of the structure on total selling price. This high end market lends itself to “renovating” the land component – through rezoning or subdivision. Thats the land development game.
Impoverished houses (or cheap) houses have more of their proportionate value residing in the structure – so when you do a (cheapo) renovation on them – you get a better bang for the buck because you are enhancing the component of value with the most influence.
BUT the bad location will not attract wealthier buyers – so you have a cap on the the maximum money you can make by marketing to poor people.
When I was flipping houses in university. I bought cheapo houses that looked ugly, and did cosmetic improvements. I influenced the structural component that made up the majority of the house price. The renovation was to emphasize Emotion (over real function) – and I made lots of money.
I soon realized there was a maximum profit to be had because the people who buy in bad “hoods” aren’t rich enough to ever push the price over a threshold. If a buyer had more money – they wouldn’t be buying here.
So I took this understanding and tried to buy even uglier houses, BUT in more affluent areas. My post renovation profits increased dramatically!
I was getting the best of both worlds. The emotion of the renovations – marketed to richer clients.
So…the worse thing you can do is buy a prettier house in a lesser neighbourhood to feel like you have a “nice” home. You are essentially doing the exact opposite of what made me millions.
So when you buy in a lesser quality area (to save money or get a prettier house) – you are permanently capping your future potential. Its like deciding you want the office with the comfy chair in exchange for NEVER getting a promotion – no matter how hard you work. That is the relationship of land (location) to structure.
I hope that wasn’t too complicated. You now know more than 99% of people, including most realtors.
If you are the ugliest house on the street (or the cheapest) – the neighbourhood is pulling your value up. It doesn’t take much to paint the house, plant some bushes, put up a fence, etc and suddenly you are in good company on a nice street…then BOUNCE – The potential is released.
BUT, if you have the nicest house in a crappy area (yes crappy is a technical term) – the rest of the “hood” is dragging your value down. Everything you do to this house is fighting the negative geography.
I understand this is a dance. I have an eye for this so thats how I bought a Porsche Turbo and a $12,000 Rolex in year 4 of university.
You cannot change a neighbourhood’s reputation or inhabitants. You can’t go to Home Depot and buy a special paint roller that gets rid of drug dealers or abandoned cars next door. You can do lots of things to structures, but as you earn more money – you can’t move the land across town, or give it a view, or make the lot larger.…You have to get those attributes the day you buy.
People get fixated on a pretty house for a specific reason. The flowers in the back yard or the french doors. They let that drive them to purchase in a bad area. I had a buddy proudly buy a house under a freeway overpass because it had granite counter tops. I looked up at the shadow of that noisy hell and thought… “He is never getting his money out.”
Sure enough, he got caught up in the “Property Brothers” fad and did a ton of renos that didn’t return a penny.
Don’t Buy Too Small
This is mostly relavant to condos. Don’t ever buy a one bedroom. Always buy 2 bedrooms.
One bedroom condos are the garbage of the market. People buy them to save money or to “get in” the market. They don’t go up in value at the same rate as 2 + bdrms and are the first to fall in value. They are inferior.
I could go on about this but in short: Families can’t live in them. You can’t have room mates for extra rent, etc. So they have a much smaller demand market. They are always catering to the bottom feeders of the market. The most broke people who can’t afford bigger. You don’t want that to be your future market.
This is also the problem with mobile homes, etc. They are inferior goods.
DON’T BUY: “What You Can Afford”
Everyone else here says the complete opposite. They are WRONG!
If you can’t afford the right investment – don’t buy at all – Period.
Buying crap is worse than not buying at all. People who compromise on the rules above are the ones who lose money and make real estate look bad.
Remember what I just said about one bedroom condos and mobile homes? Don’t be that person because “its what you can afford”.
You are better to stretch and pay more by buying something nicer (in a better area) with a suite you rent out. If you can only afford $300k, but there is a much better neighbourhood and lot for $400K – (with a suite paying $600 a month) – buy that.
You get a $400k house (but after the rental suite income) you have the same payment as a $250K house. Its a much better investment.
Don’t Confuse Old or Ugly With Falling Apart. Furnaces, roofs, foundations, and major constructive elements that are failing will wipe you out. They are very expensive and you don’t get one dime back for the $5,000 furnace or $10,000 roof. People expect them to work. I see people selling houses trying to get credit for the $50K they spent on things a house SHOULD HAVE. They get burned.
People expect your car to have a rear view mirror and a steering wheel. They don’t care that it broke and you paid $1,000 to fix it. You don’t get one extra penny for the item every other car (rightly) has. So do inspections by professionals and pay the money for that service to avoid spending money on Zero return items.
Failures aren’t just in the structure. The land can have buried oil tanks that are contaminated, or serious erosion problems near creeks or steep banks. If something seems “off” or worrisome to you – don’t ignore your instinct. Have it inspected. They might be selling for a reason. Looking at houses on rainy days is a good thing. You see plenty of sins like leaky roofs
Speaking of buying ugly. when you buy someone else’s pretty reno, you don’t know what they hid with fresh paint.
There is a saying in real estate: “You make your money the day you buy”.
It means that if you pay too much or buy a bad house (see above) you will never make money on the other end.
- This could be a chapter in a book, but know your market prices, offer low, and be prepared to walk. Negotiations with vendors can get emotional as they have feelings for their house – so try not to be rude – but be firm. I’m not so sure I would tell my realtor everything about my motivation: as in how much I like the house. They are people too – making a commission.
- Don’t get stuck on some little detail. People get weird about negotiating (like they do at auctions). Stubborn in odd ways. If the house is good and you are close to your deal, stop haggling over a few thousand dollars, or come up with non cash compromises – like they can keep the hot tub.
- You can stick it to the realtors as well. If they want this deal to come together the realtors can kick in some commission to pay for the bad fridge.
- If you are tight for cash, you don’t want to be fixing things the day you move in. Write the repairs into the deal as part of the price. Then you are using mortgage money to resolve these issues instead of precious cash.
- Don’t forget “subject clauses” that let you out of the deal. Always put in a subject clause that is for your SOLE discretion to back out. Something you alone control. If you say subject to financing and you get financing – or the vendor helps you get it , you could be stuck with a house you realize you don’t want.
I actually used to put in the clause “Subject to my mother approving”. lol.
- Give yourself enough time on your subjects to get the inspections done. Don’t let people bully you on these things or feel bad. This is your life. You need to look out for yourself.
- Don’t forget the extra closing fees.
- You can negotiate mortgage rates more than most people realize, saving thousands of dollars. Really shop around.
I could go on and on. I hope this wasn’t too technical.
People always ask me to mentor them on development deals, but if you can’t follow this – and understand it, you are not ready for the complex stuff.
PS (Edit): I’ve had a lot of people msg me for advice – so I’m setting up a Facebook page to offer some free advice and motivation about financial topics. Some will be from here and others I just drop in. It may be a bit thin at first, but bear with me as I generate useful content for wealth creation and success that I feel don’t get mentioned.
Here’s the link;
Sign up to Follow me there as well so I know if anyone wants to know my real life secrets to making money.