This is my second blog post focusing on my journey of buying a first real estate investment property.
As you have may experience yourself. The process of looking for one is the most exciting part.
You look at professionally photographed pictures. You dream about how you already own that apartment. How you are handing keys to your first tenant. So far so good.
Then you call the real estate agent and set up an apartment tour. And the moment you meet him face to face and shake hands, he drops a bomb on you. Saying:
“This is a nice cozy apartment, that…(include a catch)”.
You are so excited and hyped from the apartment ad, you fail to comprehend the actual meaning of what he said.
Deep down your sixth sense tells you it is weird and something does not add up, but you don’t want to give up and leave. You want to keep that dream as long as you can. So you agree to start with the tour.
Then when it is over, you get mixed feelings. You tell the agent you need time to think and once you secure the financing, you will get back to him.
But you never will. Because the day after, when you put all the puzzle pieces together, you realize it is a bad deal.
My last apartment tour
Take for example the first apartment tour I attended myself. The apartment looked OK from the pictures. A nicely refurbished kitchen. A balcony with a view over the park. But the living room having obsolete furniture. All pointing to the fact, that current tenants might be older.
Since the price was reasonable and the location should be close to the metro station. I immediately called the real estate agent and we set up the tour next week.
Because I always try to immerse myself in the situation as I would live in that apartment. I decided to walk from the metro station instead of taking a bus.
It took me nearly half an hour of speed walking to arrive on time. The distance was in reality much bigger than it looked on the map.
The district itself felt depressing. Maybe because it was an autumn evening with cloudy weather, but there was no life around that area. On one side there is a four-lane highway. And on the other side a large enclosed abandoned area with few buildings here and there.
I arrived just in time and saw a real estate agent with another buyer waiting for me. And that is where the first real estate trap comes from.
A list of real estate traps
1. Bidding war during group tours
The common strategy is to invite more than one buyer and do a group house tour. As a buyer, you will get nervous, when you see someone else going after your dream apartment.
You never know how badly they want the property and how much money they can invest. If they have more cash than you, they are in advantage. More cash means faster sign up if they decide to go cash only. It also means less risk for the bank, cheaper mortgage, and smoother financing process. In case you need leverage.
So there is nothing you can do on the tour to nudge the deal in your favor.
The only way to go around this trap is to know other buyers beforehand. That means coming soon to the house tour. And meet the other buyer before the real estate agent gets involved. I know this can only happen by a pure chance, but it is worth to try.
Then you put him aside and say: ”
Hey man, I know what is going to happen. The real estate agent will try to put us into the fight and I don’t want to be a part of that. Let’s be honest. If you want it, then I can let it go for a small tip. It would be still cheaper, than bidding against each other. What do you say?”
He can either agree or disagree. In any case, you are better off anyway.
If you come after the moment when the buyers and agents already met each other, then the best strategy is to stay silent. Let others speak and ask questions.
From the connotation and the content, you will know, what are others thinking. And then you can manipulate the conversation with a well-timed bomb.
For example in my case, another buyer was a young guy looking for his first apartment to move in with his girlfriend. He was asking a lot of questions in the beginning, but after we entered in, he went silent. It was obvious this won’t be his dream apartment.
So I didn’t have to poison the well that hard, it was already poisoned. From time to time I made bitter remarks like:
“Uhmm, OK. So the kitchen looks fine, but I think it would need another 5k to renovate it.”
You get the point.
When real estate agent highlights a feature, that is usually so common. It means he tries to sell hard any pros he can find on his property.
Any tiny detail plays a huge role. Does this apartment have atypically small windows? Let’s sell it as an exceptionally bright and well lighted cozy starter apartment for students, who are night owls.
In my case, there was a picture of a balcony having a nice view of the park. I told myself:
“Cool, a small balcony with one tiny table and a stool. I can imagine sitting there in the summer every morning drinking coffee.”
The reality was something different. When went we went up the stairs. The real estate agent suddenly stopped after reaching the fourth floor. And he was like:
“Let’s take a moment to appreciate the view. This balcony is free to use for everyone in the building. So you can have a morning cigar there while enjoying the view. How cool is that.”
I was speechless and almost burst into laughter when he bragged about it. I thought the balcony was a part of the apartment, not a common area.
This agent was either an amateur, dumb, or the apartment is so bad he had to hype this feature.
3. No elevator
As you have might assume, since we went up the stairs, there is no elevator. And this apartment was on the fifth floor.
Interesting fact, that never comes up in the advertisement. The less information ad has, the more surprise you can expect.
I felt bad for their current owners, a pair of 70 years plus old pensioners, who have to climb the stairs every day.
People might think, that health should climb the stairs. But forget that moving furniture in and out is painful and expensive.
When the building has no elevator, consider only flats on the first floor or second floor.
4. Greasy kitchen
The kitchen is often an overlooked part of the apartment. We spend in the kitchen about 10% of our lifetime.
It does not need to be cozy and luxurious, it just needs to be clean and well equipped. Otherwise, the place will get messy quickly.
And that is the key factor when you come to the new apartment. Look at the kitchen, look for any dirt around the oven, around the desk. Look for the evidence, that current owners are tidy and take care of the apartment well.
If the place is messy, expect to sink more money into a kitchen renovation. To get rid of the grease, to make it a place so clean, that you are not afraid of eating from the floor.
In my case, advertisement touted a renovated kitchen. Pictures showed a full-sized polished kitchen counter with a bright red stove and no sign of dirt.
The reality was quite different. When I looked closer at the kitchen stove. I saw it was covered with micro crumbs and food leftovers, glued together with a stinky grease.
I felt icky. And disappointed, that the real estate agent didn’t even make an effort to clean it up before the house tour.
5. Weird seller conditions
As I mentioned at the beginning of this article. Sometime during the tour, the real estate agent will nonchalantly reveal, that there is a catch.
He will do it in a way, that makes you miss the point. If you are not a real estate pro and don’t understand the lingo, you won’t realize the real impact of what is he saying.
You are so overwhelmed with his sales pitch and the constant influx of new information, you might get too excited. And sign the reservation contract right on the spot without doing the due diligence first.
1. A studio
“Oh, by the way, this is a studio, that was very well renovated…”
In translation, the property was used as an office in the past and the owner decided to transform it into an apartment.
But for whatever reason, the paperwork was not done. The property is not officially an apartment designed for living. So the bank won’t give you a mortgage and you won’t be able to sign up this property as your permanent residence.
You can still unofficially live in the studio or rent it to criminals or call-girls. You just need to pay it upfront with your hard-earned cash.
“Oh, by the way, this price is for the 68% share in the apartment.”
A majority share in something is not enough. Unless it is a co-ownership with your spouse or another family member.
Imagine, that the other owner will have a right to enter your apartment whenever he likes. And to sell his share to someone else, who will go bankrupt. Then you can expect a raid from executors, who will seize all your stuff. You will also have to share any profit coming to the apartment with him.
How does it sound?
Even then, the property becomes unsellable unless you have 100% ownership. You might manage to buy the rest of the shares, but then the overhead costs associated with sale doubles. And most probably the counterparty will use the leverage and drive the price up.
3. A land ownership
“Oh, by the way, the land, that apartment was built upon, belongs to someone else. But we can arrange the sale. No problem.”
This happened to me when I was touring one of the apartments I liked. The location was superb, both in walking distance to the subway station and the shopping mall.
The price was also reasonable and the apartment went through a well-done renovation. It could be rented straight away for a premium price.
There is a catch though. Since you don’t own the land, the apartment can be taken down by the landowner. Because there is no proof he allowed the current owner to build an apartment upon it.
He also might request a monthly ransom for trespassing his land.
It sounds absurd, but it happens. Many properties built before the Civil amendment act in 2014 in Czech have unresolved land ownership issues.
And what about arranging the sale? Well, good luck with that. In my case, the landowner lives 300 km far away in some remote village. The sale might become an adventure with no clear and satisfying ending.
4. A mandatory easement
“Oh, by the way, the current owner would love to sell the property. But only after they get accepted to a retirement facility.”
This trick not so obvious, but has a major impact on the property valuation.
What does it mean in this case is, that current owners will have a right to live in an apartment you buy forever for free.
I understand the reason they want to sell. They are old, they just want to be taken care of in a retirement facility. And to start the admission process, they must get rid of any property they own.
So in the meantime, they need to live somewhere right.
But the catch is that there is no guarantee, they will get accepted. The admission process can take anywhere from six months to two years.
The real estate agent tried to soften the deal by saying:
“Of course, they will pay all the mandatory fees, like electricity, repair fund… So you won’t have to spend any money from your pocket.”
That might work for a buy and hold buyer, who pays cash-only, but not for me. During that time, I will have zero cashflows from the apartment. And so every monthly mortgage payment would have to be fully covered from my pocket. That is no go.
It also might happen, that tenants will change their minds. And decide to never apply for the retirement home. Then you have to be patient and wait a decade before the apartment is “freed”.
6. Bonus trap – Elevated ground floor
The last trap but not least is the misinformation about the apartment floor. Sometimes what is advertised as a first floor, can be in reality a lowered ground floor.
I lived as a kid in a tiny basement, that had windows a few inches above the ground floor. As a family of four, it was not the happiest period of my life.
You hear all the noise from the outside, from the cars, from the steps when people walk by. You smell all the dog shit, all the smog. In the summer, you cannot open the window because of the insects.
And worst of all. There was no sense of privacy. Everyone saw through the basement windows, even with curtains. I felt like someone was always watching me.
Please don’t do it to yourself and don’t do it to your kids.
So there you have it. I hope this post will help you to avoid the biggest real estate traps.
Buying an apartment is so complex I could easily write a series about it. If you are interested, write in the comment section below. See ya.