Is honesty the best policy? It seems some investors don’t think so. CREW talked to investors and Realtors about the worst whoppers they hear on a daily basis.
If you think you’re getting away with these tall tales, you might find your lawyer, potential JV partner or real estate agent has caught on more than you think. And once the real story is revealed, the cut to your credibility could cost you future deals. Avoid these 5 fibs.
1.Cash flow falsehoods
It’s nice to be optimistic, but if your cash flow estimates for a property are based on the lowest possible costs and the highest possible income, you’ll likely to end up in the red.
“It’s pretty dangerous because if you’re depending on your projected returns, not your actual returns, and those don’t come through for the first year, you could find yourself in a tight position,” says Marcel Greaux, co-founder of the Toronto Real Estate Club.
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Comparing apples to oranges is a fruitless exercise, say experts. Don’t sell an out-of-town JV partner on a “steal of a deal” by comparing it to hot properties on the other side of town – much closer to amenities and transportation. You’ll eventually get found out.
Missing, or misrepresented, numbers is the most common lie of omission, argue seasoned investors. From leaving maintenance fees and vacancy rates out of the paperwork to estimating appreciation at 12% (industry standard is 3%) – these investors have something to hide, says Tahani Aburaneh, author of Real Estate Riches.
“Immaculate condition,” “brand new kitchen and bath,” “Renovated” – tenants will pay a premium for pristine. However, when investors lie to JV partners and funders about the condition of a property they’re asking for trouble, say experts.
Greg Head, co-author of The Canadian Investor's Guide to Secrets of the Real Estate Cycle, remembers one investment property presented to him as $55,000 under fair market value, before renovations.
“When I dug into it and started asking questions, the truth was revealed that those numbers were after renovations had been done and did not include the renovation costs,” he says. “That sets off a red flag and the investors doing that have lowered their credibility with me.”
Driving decisions with fear is one way to get people to sign quickly, and there’s nothing like a time limit to push people through the due diligence process.But, “don’t rush it,” says Aburaneh. “They say you’ll only get this deal if you sign today to motivate people to get in now and then people operate on fear. That’s when mistakes are made.”
6.OK, we lied; there’s a sixth ...Mortgage madness
Failing to stress test a property could mean your buy-and-hold policy will become buy and lose, says Greaux. If you don’t make sure a property cash flows at 5% interest you’ll be in trouble when these low rates end.
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