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Today's Topic: 10 Mistakes To Avoid In Real Estate Investing
Issue #011
April 9, 2005
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10 Mistakes To Avoid In Real Estate Investing

10 Basic Mistakes To Avoid As A Real Estate Investor

1) Don't do real estate transactions with your family. The old adage of 'don't mix money with family and friends' is really true - and real estate investing is no exception.

There's a story in there somewhere, but that's the subject of another discussion.

2) Don't assume you have a clean title until you run a title report.

3) Don't create your own deeds of trust. I did this on more than one occasion and would not recommend doing it.

You create the terms and the instructions for your escrow company or real estate attorney. Let them create the deeds.

4) Do not create any documents that you may need to record at a later date without the full legal description on the face of the document - "above the fold" - as it is referred to in publishing. In this case, that is on the top 1/4 to 1/3 section of the document.

5) Don't forget to record 'exhibits'. In the event you record a document referencing the legal description as an attached 'Exhibit', you have to record the exhibit at the same time you record the document.

6)Always get title insurance, it's cheap. In the grand scheme of things, you're not saving money by skipping it. Title can have long range implications - especially with keepers and selling via long term contracts.

7) Don't try to save money by avoiding closing with a title company and an experienced escrow agent or closing attorney. You might not save money.

8) Don't ignore your gut feelings.

If something doesn't feel right, it probably isn't. Don't ignore it - there is a part of us that is like a radar detector.

In my experience, every time I have ignored 'an odd feeling' or the hit the 'over-ride' button, where I got an intuitive signal - it has almost always been a mistake. In real estate investing, mistakes cost money and it can be big money.

9) Don't make assumptions about market values. You have to know what the property is worth:

==> as is
==> what it will be worth after renovation
==> or what it will be worth at the end of the term of your agreement if you are going to control the property a while

==> overestimating the market value can be a serious error

==> underestimating the market value can leave a lot of money on the table

(I have made both mistakes in the space of two months - on two different transactions.)

10) Don't do renovations that require inspections or validation without permits.

The primary reason is liability.

Vicarious liability is becoming a big issue in today's world. It's no longer a matter of direct liability - it's also a matter of 'kind of being responsible' whether you are directly responsible or not.

The weird part about it is that you can be held responsible in the future for something someone else did a long time in the past.

You can also be held responsible directly for physical liability if there is an injury on your property and you are not covered properly by l&i insurance - during a renovation.

If you think this a minor issue, check out the decisions in California courts lately on the subject.

There are also long range insurance implications. Suppose you rewire a house, or even portions of it, without inspections and permits. And further suppose, after you sell the house there is a fire and it is determined by the insurance investigators that the wiring was faulty. You could be held liable.

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The most expensive mistake in my investing history...

was not getting title insurance before I recorded a deed of trust. Even though I had the DOT drawn up by an escrow company and had my real estate attorney check it over, I did not get title insurance before I recorded the deed.

The deed of trust had an abbreviated legal on the face and referenced the 'exhibit' with the full legal description. Subsequently, the maker of the note defaulted several months later. When I instructed my attorney to file a foreclosure, in second position, the title report did not show me on title. Apparently, the abbreviated legal was somehow missed by the title report.

I researched chain of title myself and decided that the title company had made a mistake on the title report and effectively diminishing my second position deed of trust, to a significantly lesser one.

When I discussed this with my real estate attorney, he said that the only way I could resolve it was to re-record my deed of trust, along with the 'exhibit' showing the full legal description.

At this point in the game, there were at least ten other liens recorded against the title and if I had re-recorded, it would not have made a bit of difference in the foreclosure process.

Adding insult to injury, soon thereafter, as the second position lien holder, I received a notice of foreclosure from the 1st position lien holder. So apparently, my deed of trust did show up on title, in spite of the fact that the title company used by my attorney had told me otherwise.

The net result was a significant loss. The deed of trust had a face value of $80K.

The simple solution to this was title insurance at recording. But at the time I simply didn't understand how title insurance worked.

The title issue was compounded by the fact that the seller (the maker of the note) had gotten title from the original seller via a 'quit claim deed' without a title insurance policy either.

The moral of this story is:

1) Don't use a quit claim deed without title insurance. 2) Don't close any transaction without title insurance. 3) Don't record a deed of trust without a full legal description on the face, or the attached 'exhibit' being recorded at the same time.

If you are buying the property 'subject to' and are not going to pay off the underlying debt until a later date

==> either by a third party bringing money to the table ==> or restructuring the debt after time has enabled appreciation to work its magic,

at least do the following. Record a deed of trust against the property for the amount of your investment with a 'lender's' title insurance policy. They're cheap.

I have done this since my first title fiasco.

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To verify my thoughts about this, I got a newsletter from Dianne Kennedy recently, entitled, "A Little Mistake That Could Cost You a Fortune". (You can sign up for this newsletter at www.LegalTaxLoopholes.com).

The following is a quote a segment from her 3/15/2005 newsletter where she is discussing the negatives of getting title to a property using a quit claim deed without title insurance - to save a few bucks...

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Do real estate attorneys make mistakes?

Yes and so do title companies. I have had title companies make three different mistakes in the last three years.

Just make certain that they pay for the mistakes and not you.

The way to do this is to get title insurance before you close.

It's probably a really good idea to learn more about title insurance than you realize, and you will with experience.

There are varieties of title insurance policies that apply to different scenarios.

So it is important to ask a lot of questions of the title company - and probably even more important to build a strong relationship with a title person that you get along with well.

You don't have to know it all, but you need to have resources that are very knowledgeable.

Make friends with your title company, they can become one of your most valued allies in real estate investing.

That's it for this time...

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