Costly Mistakes In Real Estate

Investors sometime make investments in real estate that turn out badly. They may then blame the loss on the “real estate cycle” when there were mistakes that could have been avoided by better planning and analysis. Based on data obtained through interviews with more than 200 real estate practitioners, several costly mistakes were identified and discussed. Here are three of them:

Misjudging demand. Developers have faced costly setbacks by assuming that customers existed without undertaking adequate market analysis. For example, a retail development designed to attract shoppers from executive ranks in the adjoining commercial center failed to realize that high-income executives have demanding work schedules and tend to shop during their leisure hours near their suburban homes. Clerical workers, who might shop during lunch or break periods cannot afford up-scale store prices.

Faulty property analysis. Investors invite catastrophe by failing to thoroughly examine all physical aspects of property improvements, including size, structural stability, and mechanical systems. Some investors have suffered losses by relying on ballpark estimates of rehabilitation costs or by purchasing multi-unit buildings after seeing only representative sample units carefully selected by sellers.

The investment fallacy. Too many people have equated real estate investment with a more passive “buy low, sell high” investment in assets such as stocks, gold, and stamps. They have failed to recognize that time, talent, and work must go into maintaining and enhancing a property’s value. They have failed to understand that income properties and “investment” properties are largely the fruits of imaginative and capable management.