When people ask me, “What is the worst mistake you have ever seen an investor make?” my answer is easy. The worst thing you can do as an investor is not do your due diligence. The only other thing that comes close is being too greedy.
Here’s why they go together:
When I say an investor has gotten “greedy,” I mean they are passing up opportunities for profit that simply don’t make sense to pass up. For example, I have a friend who passed on the opportunity to sell some hotels in his portfolio for about a billion dollars at the very height of the last peak in the hotel market, but he refused even though he’d only paid about $500 million to acquire them and the market was volatile. He did not pass on the offer because holding those properties was part of his strategy (a possible reason to keep them); he passed because he thought they would be worth even more later. Of course, the value went down shortly after during the next recession.
When an investor gets “greedy” they stop looking at the facts. They allow their emotions to determine their deals and forget that profit is made when you buy, not when you sell. That is why due diligence is so important: You have to make decisions based on facts rather than emotions.
The sad thing is that it’s easy to avoid this mistake but so many people still make it. Just check your deals out! I personally have never bought anything I did not see first, but you can also have your team work with a due diligence checklist. Before you buy, you need to know some very basic things about properties that sometimes do not necessarily spring to mind immediately. That’s where the checklist comes in.
- Is the plumbing copper or plastic?
- When was it built? (This will affect what codes and regulations you need to consider if you are remodeling or rehabbing)
- Have all the permits been issued or can you get them?
- Was past work properly permitted?
When investors fail to check into these kinds of due-diligence details, disaster strikes. For example, if part of an improvement made on a property was “bootlegged,” meaning that a permit was not obtained, if you plan to renovate the property the inspector may require you remediate the unpermitted portion of the previous work in addition to your new changes. Now, you have to tear part of the building down or rebuild it because you didn’t spend an extra hour or two checking things out in advance.