Falling for snake oil salespeople - Developers, Educators, Agents
By Phil
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
Stuff-It-Up Strategy
I thought I had won Lotto.
Or at least the equivalent. I’m in my early 20’s, fired up from reading ‘Rich Dad, Poor Dad’ and listening to Tony Robbins tapes (yes, tapes folks, my early 20’s were a while ago) and attending my first ever property investment seminar.
The presenter was no dynamo at all, but the information was exactly what I was looking for. It was the ‘how’ to go along with the ‘why and what’ of Rich Dad, Poor Dad. Brilliant.
They outlined exactly how to purchase one of their specially selected ‘investment properties’, along with all of the capital growth projections, tax benefits, and cashflow projections showing what a small amount I would need to ‘top up’ every month to own the property.
And the BEST PART…The properties were there and available in the room that night, ready to buy. The icing on the cake was it was a ‘one stop shop’ all set up to help make it easy for me; they had a mortgage broker there, a legal firm to handle the contracts, their own in-house property manager and the best investment properties available on the market today. Unfortunately, there was a limited amount so only the lucky few who ‘got in first’ would be able to secure one.
Naturally, I was one of the many attendees who beat a path to the back of the room to ‘sign up’, and I had bought my first property subject to seeing it with the Director of the firm himself, who, in an incredible show of selfless assistance took me to the new development the following day to point out the many benefits of the house. In other words, a professional salesperson sold a complete newbie, with big ambitions but zero skills or education…A lemon.
The Problem
The problem was that I didn’t know what I didn’t know. And what I didn’t know was…A lot.
Of course, none of us know what you don’t know until you realise you don’t know it! And that is where the danger lies.
Being educated, taking the time to be patient and learn more than just from a few books would have saved me a fortune and a lot of stress on this ‘deal’.
As it turned out, here are a few highlights of issues which could have been avoided had I known better:
· I paid full price for the property. I had no idea about negotiation or that it was possible to buy below value, so I paid the full asking price.
· The asking price was supported by a registered valuation, at the exact asking price. I later learned that the ‘flexible valuer’ had given a valuation approximately 22% (at absolute best) above where it should have been. I had over-paid substantially for it at a stage of the property cycle where buying under value was easy, at least for others who knew what they were doing.
· It was negative cashflow. This may not sound too surprising given it is in Auckland, but this was two cycle’s ago, and back then it was EASY to find positive cashflow deals (again, for others who knew the basics), Getting 8-10% gross yields was an easy task. Yet I managed to secure a deal at 6.3% gross yield. Ouch.
· The broker arranged the finance for me, so helpfully, through what he called an ‘alternative lender’. In other words, a second-tier lender. I was assured that it was the only way for me to be able to buy it and that the additional 3% interest rate margin didn’t matter since the projected capital gains made it more than worth it. Projected…Learn to be very cautious around that word. This made the property SIGNIFICANTLY negative-cashflow and the monthly top-up took up every spare cent of my minimal salary, not to mention the fact that I had to forego anything ‘fun’ and tighten up everywhere I could just to pay the loan.
· And then there was the Property Manager. I was assigned a property manager from their own in-house property management firm. She was a nightmare. She walked all over me, treated me like hell, and treated the tenants even worse. It was a nasty experience from start to finish. Not to mention the 9% management fee (plus disbursements and whatever else they could add in) at a time when it turned out 7% was the high-end.
· There was more that happened too, but I think you get the picture. It wasn’t pleasant and managed to suck the fun out of my life quite successfully.
The Alternative (getting it right)
“If you think education is expensive, try ignorance.”
Property deals with BIG numbers. One small mistake can cost tens or hundreds of thousands of dollars. Yet still many people try to go cheap on the front-end and cherry-pick seminars looking for free advice or rely on forums to seek advice from people they often have no idea about. Sometimes it works, but equally as many times it causes losses and stress.
I would seem bias because we run a Property Coaching program, but I believe in the value of education. Coaching isn’t right for everyone but at minimum, seek out answers from people who are qualified with real experience. Free advice is often the most expensive. Get good advisors around you and don’t be afraid to pay them well. Surround yourself with like-minded people and bounce ideas off them. Be patient and take your time, don’t be rushed into anything, and do a lot of Due Diligence on each deal.
And when something doesn’t go to plan…Fail forward and fail fast. Learn from the mistakes and use that to make the next deal better. The lessons learned from the ‘deal’ above, have made me a lot of money and saved me a lot of stress. Get around people who are happy to share the good, the bad, and the ugly, openly. The value is ‘off the charts.’
And remember, when you think you know it all…You are in real trouble. Kick ego to the curb and be open to always learning and staying up-to-date. And if you don’t know what you don’t know, at least make it your mission to find out what you don’t know and then seek out those who can teach you.
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