Sometimes real estate investors make a number of mistakes and instead of receiving the expected salary, they simply lose money. Although there are pitfalls when buying an apartment at almost all stages, there are a number of nuances that have the greatest impact on the outcome of the transaction. What are the most common mistakes funders make with small budgets? Can they be avoided? And how to minimize possible risks?
Investing in real estate with a small budget suggests the use of such a financial instrument as a mortgage. Usually, an investor with sufficient funds to make a down payment buys an apartment in a new building at the pre-start or excavation stage – when the value of the object is at its lowest level. By the time the house is handed over, the property has already increased in value significantly, and this is a great opportunity to sell it on assignment for a short-term investment.
When investing in the long term and generating passive income, it is more profitable to buy a furnished apartment from developers who provide good discounts when the house is almost ready. After that, you can rent the property, which will partially or fully cover the mortgage payments. It would seem that everything is simple enough, but in reality, in each of these cases, an investor can lose money by making one or more typical mistakes.
Excessive savings
When choosing an object, an investor may not have the best idea: “Why not save money and choose a cheaper option? What difference does it make to sell later? After all, the demand for housing continues to grow. And the rest of the money is better invested somewhere more”.
This is the most obvious mistake. First, very cheap housing can have a number of serious disadvantages, some of which will make it very difficult to sell. Secondly, a long search for a buyer may result in the fact that the investor simply will not have time to sell the apartment on assignment before the house is put into operation. As a result, you will have to change your strategy, which is often always associated with lost profit. Thirdly, the price of the apartment from the moment of purchase may increase insignificantly, and it is good if, after deducting the costs of the mortgage and the tax for the sale of real estate, the investor at least breaks even.
The situation is similar with the choice of an object for long-term investment. You need to select real estate not based on how to spend the least amount of money, but based on the potential income – what percentage of the mortgage payments can be covered by the rent?
In this case, careful analysis of the market, the area in which you plan to buy real estate will help minimize risks. Even before entering into a deal, it is necessary to compare the projected expenses with the possible income, and it should be based on real market data, not subjective mark or wishes.
Failure to understand the sequence of actions
Another mistake is related to strategic planning. Let’s imagine that a person decided to buy an apartment with the goal of selling it in 2-3 years, thereby choosing a short-term investment strategy. However, at the same time, he performs those actions that imply the purchase of an apartment in the long term, that is, for 10 or more years. Or he initially chooses the wrong strategy that would be the most optimal for him.
All this happens due to ignorance of the specifics of the market and misunderstanding of the sequence of actions. To prevent this from happening, you need to first objectively assess the current situation and find out which strategy is most suitable for you. Try to answer the following questions for yourself:
- What is your goal? Would you like to purchase real estate for capital growth (or passive income)?
- Do you have sufficient funds to invest on a short-term (or long-term) basis? Have you done any preliminary calculations?
- Have you foreseen the possibility of force majeure? Are you sure that you will be able to get out of a difficult situation if it arises? By the way, have you thought of a plan?
Based on the answers, evaluate how suitable the strategy you have chosen for yourself is. And then, if necessary, draw up an action plan for yourself that will correspond to your strategy. If it is difficult to do it yourself, I recommend contacting professionals from any real estate agency you like, where they will help you not only with choosing an object, but also tell you in detail how to act in your specific case.
Insufficient verification of the developer
Let’s say you have already decided on a strategy and have chosen a great property that has good prospects in terms of growth in value. However, another error may occur at this stage, and it is related to insufficient verification of the developer. It would seem that now the shareholders’ funds are safe, because in case of bankruptcy of the company, the money will be returned.
However, there are a number of other problems that could not be solved by introducing an escrow account. Delays in commissioning facilities are one of them. The fact is that such procrastination is fraught with losses for long-term investors. And for potential buyers of apartments on assignment, this may not be the most positive signal and thus push them to abandon the deal.
To reduce this risk, it is important to carry out preliminary monitoring of the implemented projects of the developer. You can do this on the portal “The only resource of builders”.
But what to do if the developer has already violated the established terms? If the delay exceeds two months, the buyer has the right to compensation or cancellation of the contract. Most importantly, do not sign additional agreements on the postponement of the deadline for the DSU. Often, developers offer shareholders to sign this document in order to avoid paying a penalty. And this is what deprives buyers of the opportunity to receive compensation.
In addition, you can check the developer through the “Arbitration Case Directory”, where information about court cases with the developer is automatically collected. Analyze the reasons that forced shareholders to go to court. Depending on their nature, you will be able to understand whether you should trust this or that developer when buying real estate for your purposes or not.
Haste with the conclusion of the contract
The analysis showed that the developer is trustworthy, and all that remains is to sign the documents? It is important to take your time, as rushing into a contract can lead you into a trap.
Let’s say you plan to buy an apartment for resale in 2-3 years. So, the developer can block this possibility by stipulating in the contract the need to obtain written consent when making such transactions. It would seem that this is not a problem, you just need to request the document when the deadline is suitable. However, as a rule, in order to prepare this consent, the developer needs to collect a whole package of documents, and this can be done only for an additional fee. In the capital, prices start at 100,000 rubles – refuse to pay, you will have to wait for the house to be commissioned.
Long-term investors may also face erosion of their rights. For example, if the contract stipulates that if defects are discovered, the shareholder can only count on their removal free of charge by the developer. Although according to the law, the buyer can demand a reduction in the price or compensation for the costs of eliminating defects at his own expense.
Therefore, in order to avoid unpleasant surprises, it is important to carefully read the full text of the contract. It can be difficult to do it yourself, but you can always seek help from a competent lawyer who specializes in real estate matters. And remember, minimizing investment risk is always a good idea.