Ever since I started to watch Gram Stephan Youtube channel, I kept my eye on an idea of buying my first rental property ever.
And I almost did a week ago. I wrote almost because I pulled the plug at the last minute.
If you want to know what happened and look under the cover of the process of buying an apartment, keep reading.
I always considered buying property as chaining myself to one location, one job and committing to never-ending long term debt.
What I didn’t understand back then was how real estates works. I didn’t even had enough money for the downpayment and the picture of being a wage slave and doing soul sucking consulting job for years so I can repay the mortgage gave me nightmares.
Since then a lot have changed. Thanks to Gram Stephan and his YouTube videos about the mechanics of real estate investing, I finally understood the rules of the game.
Save for the downpayment as soon as possible
Having enough money for the downpayment helped me to feel more secure. The assurance that paying the downpayment won’t put your lifestyle into jeopardy is very important.
When I graduated, having saved enough for the downpayment seemed like and impossible dream. Especially when that money could be spent on more exciting goals, like traveling or getting an MBA.
If I didn’t saved for wrong goals, postponed lavish vacations and jumped into real estate investing right away, I could already cash out my first real estate investment.
Don’t was time waiting for the economic crisis
Real estate market in Czech Republic was peaking for the past 3-4 years rising tens of percent year on year. There are many reasons for such incredible market growth.
First, government does not approve enough construction permits, so the supply side is artificially suppressed, meanwhile demand is stronger every day.
Second, Czech is flooded with Chinese and Russian Capital, that cannot be deployed in their home countries. Therefore they look for safe heavens such as cheap real estates in Czech Republic.
Third, mortgage rates are rising up, but are still reasonably below 4%. Right now, I am able to get 30 year 10 year fixed mortgage for 2.92% p.a., if I commit to be an active client. I might get even lower offer, if I throw in an insurance package protecting bank from my inability to make mortgage payments.
So there is strong FOMO flowing through me everyday. On one side, I risk buying on the top of the peak, but on the other side real estates prices really never decline during economic crisis, at least in Eastern Europe.
Real estate investing is a long term game
Watching Gran Stephan YouTube videos taught me, that I should look at real estate from different perspective. It is a long term game and if I rent the property early on, I might reap the rewards maybe 5 to 10 year later.
Ten years sounds like an eternity, but the magic lies in the inflation, the fixed mortgage rate and the rising property value.
If you want to know more, watch some of his YouTube videos, or write in a comment below if you like me to write an article about it.
From zero to active real estate investor
So it made sense for me to start looking for decent real estate investment properties in the market.
Did I told you, that I made a SAAS for sourcing real estate properties available for sale and valuing them by the most sophisticated financial metrics? Yeah, I did it and it costs 500USD a month to get an access to my tool. It is that good.
Anyway, I found a really decent two room apartment thanks to my real estate valuation tool.
Found two rooms with kitchenette apartment
The building alone is not nice or anything. Exteriors are tagged with graffiti and front walls are teared and teared by ruthless time.
But the building was constructed in an old school way with bricks, not prefabricated panels, that are so popular in Eastern European countries. The address was pretty close to the subway. The price for square meter was reasonable. So far so good.
The only red flag were subpar financial metrics. Numbers clearly showed, that this property won’t be profitable. About 15% of the mortgage would have to be covered from my pocket.
What convinced me were the pictures. Interior design looked so cozy, almost like if the owner was a hipster. Kitchen line was almost new and bathroom didn’t require any renovation.
The price was also in my reach. As they say, I fell in love with the apartment. As an investor it is number one rule you should never break.
Calling real estate agent and initiating sales procedure
I immediately called realtor to check the availability. On the other side of the phone was a woman. Her voice was very compelling and very professionally sounding.
I was probably the first buyer, who called, because she explained, that the first opening day start on Monday and I can choose from many time slots available.
She told me I should definitely see the apartment in person and that she will show me personally, because she never do group openings. That gave me confidence, that I deal with a competent real estate agent.
In real, the apartment looked much smaller than in pictures, but it is quite normal, that agencies use professional grade photo gear, like wide lenses, over sautéed brightness and weird angles so each room looks at its best.
All in all it was fine for young couple or a up and coming single with stable corporate job. Few hours later I called her to ensure the availability and to see what are the next steps.
She assured me, that even though there are like 8 investors in line, she gives each one a fair chance to litigate. This sounded weird, but later I realised why.
Basically, it works on the basis of first come first serve. But with deal terms, that favours real estate agency first and foremost.
The next steps were following. Sign a reservation agreement with real estate agency. Pay a reservation fee. And maybe after two weeks, in case I pay by cash or 2 month if I need financing from a bank, I will sign an agreement about future agreement.
Now the process sounds simple, so I let her send me her proposal for the reservation agreement. And from that moment the deal went downhill.
Evaluating real estate reservation agreement risks
I am not a lawyer or anything, but I can tell, if deal conditions are win-win or lose-win. This case was a 100% on the lose side for me.
If you didn’t know, reservation agreement helps you to secure the deal. Real estate agency stops advertising the property and will start preparing agreement on the future agreement.
For almost no actual work done, you pay a reservation fee, which translates to a real estate commission. So the agency gets paid first.
If I for whatever reason back from the deal, I will lose the reservation fee. If a seller do the same, I will get back the deposit after certain time.
So far so good. If someone really, really wants the property and is 1000% sure he wont back up. Then the only risk is the gain from interest earned on the capital if it was deployed elsewhere.
The risk of the agency refusing to return reservation fee back is real, but this agency is quite big on the market and If it went to the court, I would win.
The thing about contracts is that devil lies in the details right? What are the other risk we missed?
Second risk is the loss of reservation deposit, due to fraudulent behaviour of someone in the agency. Money is not deposited at third party account. The only free option is to keep cash in a segregated company account. Of course you can hire an attorney or keep it at a bank notary account, but I would have to pay the extra cost.
Third risk is that agency might not have the exclusivity agreement with the seller. Because of that, agency don’t have any leverage to make the seller sign a contract with you.
Therefore, the reservation agreement should always be three sided between myself, the seller and the agency. That way seller is legally obligated to whatever he signed for with you.
Fourth risk is the terms when deal falls apart. The penalty is 100% on my side, if I for whatever reason prevent from closing the deal in time.
The formulation is so vague it can happen, and it happens all the time, that banks won’t approve a mortgage at all. It might happen that even with pre-approved mortgage application, bank for whatever reason score you as risky and mortgage is declined.
Legally, this situation puts you into the position of someone, who prevented from closing the deal. And then reservation fee is gone. Totally not your fault.
I described most of my concerns to the agent and she was really reluctant about it. Saying it is an industry standard contract, that everyone on the market uses.
And she repeatedly pushed me to sign reservation contract the next day afternoon. Is it classic sales tactic or is there a legit reason to sign it?
I was not willing to accept the terms even thought she tried to play it off by saying, “I am not a lawyer, but…”. Of course your are not a lawyer, thats why you are a real estate agent.
After a brief moment of tension, she agreed and promised to send me a new version with a proposal for buying agreement. I won an addition of three-sided signatures in the footer. A term excluding the penalty, If I won’t manage to secure financing from bank recommended by real estate agency.
Lowering a reservation fee or postponing it after final agreement is signed was a no go. I get it, she would risk, that deal will fall apart after 2 months and it will be a waste of time for everyone. It’s true, that with paying later term, its win for me and lose for her.
I didn’t want to push the luck too much and agreed to revise the contract and let her know later.
Buying agreement seemed OK for it being a first draft, but I again missed a lot of terms protecting me from one side misconduct. But there was no time to think about it yet.
Pushing my luck too far
An hour and half before the meeting, I was stuck in the meeting at my 9-5 job and a fear of a bad contract creeped me out. I sent her a mail with an apology, that reservation contract is off the table and that I am only willing to sign final buying agreement right now, but not the reservation one.
A minute later she called me on the phone and blurted out what is going on. That she arranged a time with seller and he will come at agreed time.
That got me confused, I politely responded, that in no circumstance I said it loud, that I will come to sign a reservation agreement.
She then lost her temper and shouted “this…this…is so unprofessional…”. But she calmed herself and offered to give my number to agency’s lawyer so he can explain me the whole thing.
I agreed. But the lawyer never called. The next day I got an email wishing me good luck, that I can still use agency’s financing services, If I choose not to deal with agency itself.
I replied, that I will gladly use their financing, if we have a deal. She then announced, that apartment is not longer free on the market and that she signed a reservation contract with another buyer.
Lessons learned from my first failed real estate deal
Thats end of the story of me trying to buy my first real estate investment property.
- I learned a lot. The lessons learned are:
- Don’t play their game and sign reservation on the spot.
- Always require a contract proposal before signing.
- Always negotiate fair term so its a win win deal.
- Especially depositing reservation fee at a third independent party account, that is insured agains the fraud.
- Excluding penalty when the banks refuse to approve the mortgage.
- Don’t hesitate and if it’s win win don’t push it further and take a risk, otherwise deal is gone.
- Again never fall in love with the property.
- Always, always listen and trust the financial metrics.