What Could Go Wrong?

[David Cole]

I am an aspiring real estate investor creating a real estate investment plan to aid me in my journey to success. I've decided to start things off with a simple question: What could go wrong?

I have wracked my brain coming up with as comprehensive a list as I can. Being inexperienced in many aspects of the process has left me doubting the completeness of the list. I was hoping maybe you could offer some input and help me flesh out this list. Here is what I have so far:

At any time before, during, after investment:

I or any of my team unexpectedly dies, becomes seriously ill, or injured

An impassable disagreement occurs between any 2 parties of the investment team

A member of the investment team fails(for any reason) to uphold their agreement

Before purchase:

Incorrect property valuation

Inability to secure financing after earnest

During Financing and purchase:

Loan executor fails to follow through with the loan.

Loan executor misleads or baits me with incorrect terms and conditions

Seller withdraws contract

Seller tries to renegotiate contract

Seller withdraws agreement to carry loan

Title issues

During rehabilitation:

Cost overrun - If the cost to complete a rehab exceeds the estimated cost budgeted.

Time overrun - If the allotted time to complete a rehab is exceeded

Unforseen issues - if issues arise due to unknown/hidden problems, termite damage, mold, etc

Problematic Contractors - Contractors that want to increase the bid midway through the job, fail to pay their employees, don’t show up when scheduled, fail to consistently clean, low or no skill, do poor work, fail to carry proper insurance, do not use agreed upon materials and/or finishes, use the “you can’t see it from my house” methodology, dress and/or act not in accordance with accepted job site standards, live or sleep at the job site, steal materials, supplies, and/or tools, attempt to undermine my relationship with my real estate team including agents, investors, other contractors, clients or potential clients, places lien or sues, dies or is seriously injured during project, experiences major life event that prevents or hinders their ability to continue, contractor or their employee dies or is seriously injured on the property, gets OSHA or other governing body violation(s)

Code Violations - Red flagged for failing to obtain proper building and/or work permits prior to beginning project, overgrown vegetation, etc

Problems Specific to Rental Properties:

Tenant does not pay rent or pays late

Tenant does not pay utilities/trash service

Tenant causes damage to property

Tenant does not take care of maintenance and/or cleaning of property

Tenant smokes or has pets when these things are not allowed

Tenant makes unauthorized changes to the property, ie painting walls, removing landscaping.

Tenant allows others to move in without adding them to the lease

Tenant misused the property, ie drug lab, melting plastic in the oven, spray paint graffiti on shed, parks in unauthorized zones such as the grass

Someone injures themself while on property

House fire, floods, other natural disaster

Major maintenance issues such as roof replacement, appliance malfunction, plumbing leak, etc

Tenant violates city code, ie noise ordinances, trash and debris in yard, etc

Unavoidable costs such as normal wear and tear include failing appliances, scratched/scuffed wood floors, dirty paint, worn carpet, etc.

After rehab:

Property does not appraise and/or sell/rent for expected ARV

Interest rates go higher than expected

Property tax increase

Stricter laws are put in place that prevent finance/refinance

This is all that I could come up with. Maybe you have some ideas or have had some experiences that you could share with me that I could add to my list. I plan to flesh this list out with potential solutions to each of the items in this list, which is why I need the list to begin with. I need a Plan B. I appreciate you contribution. Thank you.

[Christopher Brainard]

The question is so vast it's just hard to give a good answer. 

As a newbie, I would say there are two real problems you face: 

1) You pay too much for the property (including purchase price, any renovations, loan costs, etc). As long as you buy the property at an excellent price, you aren't very vulnerable to losing capital. For example, if you buy a property at 70k with a FMV of 100k and the AC dies on the first week. That sucks, however, you can pay a contractor 5k - 8k to replace that AC and you're back in business. You're still way under market, so even if a catastrophic emergency happens, you can exit your position and still make some cash. Newbie investors get burned by paying too much for a property and expecting everything to go smooth. It never does and it will always cost more than you think.

2) You rent to the wrong tenant. As long as you have a tenant that pays rent and takes reasonable care of your property, you're probably doing alright in the long run. Many new investors don't setup proper screening criteria and take the first tenant that applies. This almost always results in problems and the investor left with a financial loss. 

-Christopher