How to Notice Red Flags in the Real Estate Industry
Are you prepared for your journey in real estate?
There are several red flags that should be acknowledged within your regular course of business.
Definitely good to know for real estate investing for beginners.
What are you doing to acknowledge, avoid and act accordingly when encountered by red flags?
Today we will review various red flags that every investor should be prepared for.
It isn’t a surprise, that we often hear the scary stories of someone’s nightmare experience.
It isn’t something to be fearful of, but it is something to recognize and be prepared for. This will help you screen potential partners with higher awareness.
The article today will not be one-sided as it will cover all red flags from any party. Unfortunately, shady business does not discriminate.
Your best practices should always be to lead with positive and exude genuine trust worthy characteristics in any interactions.
This article is designed to prepare you better for the future. Unfortunately, everyone’s intent is not always good and we all need to be prepared.
Let’s get started…
Sellers – Watch Your Investors
It is common that many investors are known to be predatory and will not be transparent with you. This is true for some investors, but not all.
An investors’ abilities will always align with their financial support and operational costs. Sometimes, you may run into investors who want to give you the absolute lowest offer they can, no matter your situation, or if they’ve highly surpassed their profit threshold. Be comfortable to talk comps and costs as needed to understand their underlying costs with any investor.
Be sure your investor is transparent with you. Any investor, will have proof of funds. Check for this initially. You should also know the value of your home and be able to discuss that with any investor to help you arrive at a price that makes sense to both of you.
In some circumstances, you may prefer to work with a wholesaler. There is also nothing wrong with working with a wholesaler. But, make sure the wholesaler is also transparent, advising you that they cannot close, but will bring you a cash buyer for a fee.
Regardless, any relationship should be well communicated. If you prefer to stay off market, this can be an ideal partnership for you. If not, you should hire a real estate agent. Act accordingly and be weary of the red flags.
- No POF
- Not Transparent
- Terrible People Skills/Bad Communication
Investors – Watch Your Sellers
While you’re seeking deals be mindful of the angry owner. Some owners may have tried their hand at investing and failed. Possibly, they were sold a lemon and want to transfer the burden to you.
Some are willing to get rid of this burden for a fair price, taking a loss in order to move forward and others want an “eye for an eye” and want to pass along what happened to them.
If you’ve decided to buy sight unseen, be weary of the owner who knowingly wants to sell you a $10k investment for $20k. Be cautious.
Next, watch out for DIY’ers short changing the condition of the property and it’s repair needs because they do all the work themselves. Easily, they will quickly undervalue a repair need or express the condition as livable, however conditions would be unlivable to you or your end-buyer.
Take heed to these factors. Also some sellers are short answered and don’t want to provide very much detail because there are things they want to hide. They aren’t interested in a bunch of questions and they don’t prefer to show you the property. They want the offer before anything else. Act accordingly and be weary of the red flags.
- Disgruntled Owner – Failed Investor
- DIY Owner
- Low/Bad Communication
Investors – Watch Your Contractors
Most of the nightmare stories amongst investors involve a contractor. The best practice to conduct when searching for a contractor, is to first get recommendations. Next you want to interview each contractor to assess their business acumen.
Here a good list of questions from Bigger Pockets you can use to interview your potential contractors.
After these two steps are completed, you should verify their license and insurance is current. Also, verify any open litigations or complaints against them.
Contractors who aren’t conducting good business relationships will start new businesses frequently, if they have negative rapport in a prior LLC. If their LLC is new and they’ve been in business for a long time, this could be a red flag.
It is also not a bad idea to conduct a background check on the owner(s). You should know who you are hiring. If they have a record, have open dialog about that. People change, but don’t be naïve. Ask the appropriate questions to see if this contractor is suitable for you.
You also want to make sure you have a contract in addition to the scope of work. Your contract should include any procedural guidelines regarding the projects’ completion and the pay schedule accordingly. Consult with your attorney to build an independent contractor agreement. There are several “if-then” terms that your contract should address.
Also never pay up front especially above 33%. If you can, provide the materials and pay as the work is completed in thirds, or higher, through project completion. Act accordingly and be weary of the red flags.
- Long Career but New LLC
- Bad Interview
- No Referrals
- Not Willing to Work with a Contract
- No License & Insurance
Contractor – Watch Your Investor
What many people don’t acknowledge is that contractors also have nightmare experiences of customers not paying. This is the main reason why contractors want a deposit up front.
Be sure to vet your customer by having a interview process and laying out your guidelines for how the project will look. Your communication and presentation sets the tone for future business.
It many cases, your work will be for homeowners and they may not have consistent history of working with contractors, so you won’t be able to check references. However, you should always ask for references.
You should also run a background check on a homeowner (or investor) to see if there are any open litigations on the customer/family and their business is in good standing. Be forward about concerning items observed and have open dialog to assess if you want to move forward.
Be sure the owner knows the payment schedule and that if payment is not received, you will place a lien on the property. Be sure that the property has enough value to cover the variance in funds due versus property value and other outstanding liens. Be sure your completion of work and pay schedules are clear and communicated well.
Have your contracts prepared and discuss this with the customer. The contract protects you and should incentivize you both to exceed expectations. Act accordingly and be weary of the red flags.
- No References/Bad Background
- Bad Communication
- Property Not Lien-able (Due to Value vs Current Liens)
- Not Willing to Work with a Contract
Unfortunately many wholesalers are not well versed in the real estate industry and present numbers that are often very inaccurate. Or they may be sending you opportunities that are of no interest to you. This could be an absolute waste of your time.
Be weary of comps that are not applicable to the subject property and repair costs that are highly inaccurate. Attention to detail is a desired attribute for any wholesaler.
Be sure that you ask good questions related to how the asking price was computed and how the comps and repairs were computed. It is better for the wholesaler to leave due diligence up to the investor, versus communicating very inaccurate information.
Be mindful, that you may be able to help the wholesaler recognize something they can correct, and possibly improve upon, in the future if they are open to feedback. Or you may find out that the wholesaler is not competent in what they are doing and decide not to engage with them further.
Be sure, you partner with a wholesaler that is complimenting your business. Act accordingly and be weary of the red flags.
- Inaccurate Information
- Bad Communicator
- Unaligned to Your Criteria
- Low Attention to Detail
Wholesaler – Watch Other Wholesalers
It is common that wholesalers have the wrong idea of how wholesaling works. Some think they can just ‘jump on the bandwagon’ and simply upcharge the end-buyer from what another wholesaler is charging, to earn a buck. This is called “daisy chaining.”
If you intend to uphold any creditability with your buyers, be sure your properties are not being represented by multiple parties with multiple prices. Also be sure you aren’t apart of a daisy chain that will cost the end-buyer several stacked fees due to many wholesalers being involved.
Perhaps if you inform the end-buyer, and they are okay with it, no problem. However, no buyer wants to be surprised at closing that 2+ parties were involved and the end-buyer barely made budget.
Ask the right questions of other wholesalers and understand their plan if you intend to joint venture with them.
It is very common that many new wholesalers are consistently entering the market with little knowledge of real estate. Unfortunately, many of them are not taught well and may have uncreditable perceptions of how business is done.
This could be detrimental to your creditability. Act accordingly and be weary of the red flags.
- Daisy Chain History
- Bad Communication Skills
- Low Training/Uninformed
- Multiple Advertising of Same Property with Multiple Prices
Wholesaler – Watch Your Investor
Be careful of who you present your deals to without vetting the investor. Many wholesalers are presenting themselves as investors to get privy to your deals.
Also many investors are actually wholesalers and investors as well, so this applies to investors who multitask also.
Perhaps the investor wants privy to your deal so they can await for your deal to expire, or maybe they will outright remarket your deal without your permission. Watch for these potential characteristics.
A good practice is to get proof of funds and to not supply the address to investors unless they have been vetted. If you do supply the address hopefully your rapport is strong enough with the seller that they will inform you on who is untrustworthy within your business associates.
Overall, you should know your investors’ buying criteria and know they can close. Be mindful of how and when you communicate your deals accordingly. Be weary of the red flags.
- No POF
- Concerned w Expiry Date
- Vague or No Buying Criteria
Investor – Watch Your Private Lender
Whether a private lender or a hard money lender, be sure to vet your lenders. Some lenders are also actively investing and want to know the details of what you have just so they can pursue connecting with the owner. Any lender should have a NMLS number to solidify their ability to originate loans. Ask for this upfront.
Also, some lenders may be unable to close and are looking to charge you many upfront fees and leave you stranded at the closing table. The only upfront fee you should have is the appraisal fee.
Also be mindful of lenders who are experts with paperwork. They may have some terrible terms worked into the terminology of the agreement that if you don’t catch, you’ll be in a very unfortunate situation.
If you aren’t well versed in reviewing contracts and agreements, you should have your attorney review anything that you plan to sign prior. Your lender should also always allow you ample time to review any agreement before signing. Act accordingly and be weary of red flags.
- No NMLS number
- Multiple Upfront Fees
- Unwilling to Share Application/Agreements
- Wants Address More than the Data
As you can see there is a vast network of people who interact within the real estate industry, and this is only a portion of them.
In any relationship; remember to lead with positive, be genuine, aspire to grow your relationships with kind, professional, like-minded people, and always put your best foot forward.
Be mindful of red flags and act accordingly when you acknowledge them.
We all want the ‘ease of mind’ that we can achieve navigating this market without encountering a nightmare experience, but the most important skill is to be prepared.
Always have your attorney ready to act, but try to make their job easier, by having informed actions.
Today’s article is to help inform you, so you can make informed decisions.
Thank you for joining us today faithful readers-future leaders.
Love ya and keep striving for growth.
Please comment your advice or learning experience that could be helpful for someone else.
Get our FREE Deal Analysis for Rental Property Calculator!
Plenty of great tools for your investing journey!
Our mission is to help others develop using our knowledge. We love helping people!
We cater to those looking to grow professionally and educate themselves in real estate and stock market investing.
Need Investing Tools?
For your real estate and budgeting needs.
Make the Best of Your Home Buying Experience Now!
Best preparation tool available for home buyers!