If you attend MAREIA meetings, you’ve probably heard me talk about OPM. Most people think of this as a term in business standing for Other People’s Money. And, by the way, it’s also the title of a good movie starring Danny DeVito as a shrewd businessman. His speech about business and capitalism near the end is something more people should hear.
However, my definition of OPM is Other People’s Mistakes and how that information can be many times more valuable than not using your own money in a deal. This month, I’m going to relate some details of a deal (almost) gone bad and tell you how you can avoid similar problems.
In this deal, I broke my own rules and it cost me thousands of dollars of profit. Here’s what happened. . .
I had an assignee for a property that I owned (I bought it as a short sale with the intent to flip it quickly). I assumed (mistake #1—never assume anything) that this would be like any other deal. My assignee and I had agreed on a price and he said he’d make the arrangements for the purchase and rehab money before we met to sign the contract.
Within a day, I received a contract from a real estate agent. It turns out that my assignee had never bought an investment property on his own and wanted the agent for protection. He had solid credit, had agreed to pay the agent’s fees and I didn’t have other buyers lined up so I signed the contract (mistakes #2+3—use your own contract and never let an agent come between you and your assignee/buyer. Agents are best suited to represent retail buyers).
Next, I had to wait for his loan to be approved. I could only communicate through the agent and she told me that the buyer had applied for a mortgage which should only take a couple of weeks.
I was able to contact the mortgage broker who promised that his company did this type of direct funding so this would get done in no time (mistake # 4—many, if not most mortgage brokers will tell you anything to get business).
After two months of broken deadlines and outright lies, the deal fell apart when it became apparent to the buyer and his agent that the mortgage company was grossly incompetent and had communication problems among its staff.
I had put in too much time to start over, so I met with the buyer and agent. In 45 minutes I was able to put them in touch with hard money lenders and other professionals to get the deal closed in a matter of days rather than months.
To sum up, here are a few simple rules for successful real estate investing. They highlight the critical points of possible failure:
- Wholesalers--Control all parts of the deal: the seller, the buyer, the buyers’ lender, and the title company.
- Rehabbers--Control your contractors (or your G.C.).
- Landlords--Control your tenants (or your property manager).
Failure to follow these rules and maintain control will nearly always lead to failure and/or loss of time and money. If it doesn’t, it is sheer luck and you will probably not be so fortunate next time.