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Biggest Real Estate Blunder? Readers Dish

Key lessons: Don't overextend, and don't be a landlord without doing some soul-searching first.

Data on housing are showing distinct signs of improvement in many markets, but memories of the bear market in real estate are still fresh. With that in mind, I decided to survey Morningstar.com readers to find out about their biggest real estate mistakes as well as what they had learned from experiences.

Somewhat surprisingly, few copped to buying at the peak of the recent real estate mania. But readers had a lot of blunders, big and small, to share. Some of the tales of woe related to home purchases, while other respondents discussed misadventures as real estate investors, in both rental properties and in real estate securities. To read the complete thread or share your own real estate tale of woe, click here.

'No House Is Worth Becoming an Indentured Servant For'
Even though real estate news had, until recently, been bleak, a handful of posters said that their biggest regret was waiting to get into the market.

Ctyankee wrote, "My biggest blunder was not getting in on the real estate market in New Jersey in the 1980s (a market already at historic highs). I know a low-level manager who purchased a condo, upgraded to a house, upgraded to a large house and then got transferred to Atlanta and paid for a mansion in cash. I would have settled for just owning a house."

OnTarget also looks back to the '80s--a period of sky-high interest rates but depressed housing values--with regret. This reader rues "not purchasing more in the 1980s."

But a healthy contingent of posters advised that it's a mistake to buy if doing so will mean taking on too much debt. Kayaker shared, "We overextended in 1980 to buy our first house, and nearly lost it when our owner-financed 12% balloon note came due in 1982 when mortgage rates were 17%. After that, I treated house purchases like any other purchase. Lesson: No house is worth becoming an indentured servant for, and they are not the great investment the real estate industry would like you to believe."

W004dal learned the hard way about the perils of overpaying. "Our biggest blunder was coming back make a second offer on a property after walking away previously. The selection for us was limited due to a variety of factors, and this mistake gave that away. The seller knew she had us on the ropes and wouldn't budge on price, so we ended up paying much more than we should have. The property dropped by 15% in value since then, but there aren't any other places that would be better for us. What we learned: bluffing is a necessary skill for any negotiation or major purchase, especially when circumstances have dealt you a bad hand."

Hollie cautioned that buying a vacation property can be a dicey proposition, too, even if the price seems right. "The cost of the mortgage [on our vacation property in the mountains] was only $400 per month but with travel, renovations and taxes this quickly mushroomed. Miraculously we sold it in 2005 and recouped what we put into it. We learned many valuable lessons. We decided unless we had enough money to not notice the costs, we would never do that again. So that means never. We learned we could have stayed in the best resort hotel in the area for the same number of visits and come out ahead. We learned we don't like being tied down to one vacation place. We feel that this blunder saved us from making the mistake in at a costlier level in the future."

Andymoler58 has reached the same conclusion. "Don't buy vacation/rental property. You're better off just being mobile and taking the dollars and traveling to different places around the world once or twice a year."

'Don't Invest in a City Where People Are Leaving'
Other posters reinforced the lesson that even novice real estate purchasers know: Location matters. A lot.

Jimoak regrets "selling a home in a Boston suburb just before it quadrupled in value and moving to a rural Connecticut town with stagnant real estate values."

Taking stock of the economic conditions and population trends in a community is an essential step when gauging locations, in Fireman's view. "If you are going to invest in a house, buy in a municipality where the political leadership has some talent. If you will not make an investment in a private company that is losing money and sales, don't invest in a city where people are leaving."

For other respondents, their home blunders relate to financing issues. Although Peter5 has an interest rate many of us would be tickled with, he counts not holding out for an even lower rate as a regret. "My biggest 'blunder' was, as a serial refinancer, not paying points on our refi last month and being satisfied with a 15-year no points/no closing costs 2-7/8% loan. I should have paid the points to get a lower rate since I think mortgage rates have bottomed and we'll be in the house awhile."

Complicated real estate financing should send you running the other way, in the view of TMTango, who lost a house after a mortgage with a balloon payment became unaffordable. The lesson? "Home financing is nothing about which to be creative."

Dennis also advised that savvy buyers should never close on a house without having a real estate attorney by your side. This poster noted that he made a litany of mistakes on the way to his first home purchase. "As a young corporate/banking lawyer with over four years experience, I bought an apartment without using the services of another lawyer. Apartment buying was fairly new in New York in 1974. I was naive about real estate. I did not focus on the fact that the broker I was using represented the seller and not me. When I put in my lowball offer (18% under asking--the economy was in the tank), I was told that there was another bidder and found myself in a bidding war with a buyer who I later learned did not exist. I got it for 11% under the asking price. The seller asked for a 20% down payment. I gave it to him. The standard practice was 10%. That down payment was forfeitable if I could not finance. I had not even talked to banks to see if I could get a mortgage, a new concept for co-op apartments in New York then." 

'I Have Had No Desire to Become a Landlord'
A healthy contingent of posters said their biggest real estate mistake wasn't in the realm of purchasing a residence for themselves, but rather in deciding to become a landlord.

After renting out a house for several years, Dndhatcher concluded "that I don't like being a landlord and don't want to manage a series of rental properties for retirement income."

PatrickJoseph and partner purchased a rental property around the market's peak, and have ended up doing more maintenance than they bargained for. "We basically bought ourselves a job," this poster wrote. And even though the property is no longer under water, he said, "It was a tremendous waste of money, particularly when I figure in that I put on hold contributing to my 403(b) for many months while we furnished the rental and kept it afloat."

$unshine, a veteran real estate investor, believes that timing is everything in the real estate market. "The rental properties always look good on paper, but I firmly believe rentals require you to time the market and perhaps plan to sell before the market peaks. Otherwise you'll need a lot of cash to get through a downturn."

Among seasoned owners of rental properties, tenant woes were a recurrent theme. Beeman summed it up thusly: "Rentals take work to be successful investments. Bad renters are the biggest problem."

After watching her parents deal with a difficult tenant situation, dragonpat vowed to stay out of the rental business herself. "My father was a landlord in addition to having a full-time job at Chrysler. I remember from my childhood the tales he told my mother of vetting possible tenants, having to foreclose on some tenants, and having tenants leave in the middle of the night and stripping everything they could (including the brand new furnace). Subsequently, I have had no desire to become a landlord."

Bobert42 and his spouse had two solid tenants for their three-unit apartment building, but a bum tenant for the third unit taught him the following lessons. "1) It is next to impossible to vet a tenant even if you have a property manager. 2) The state and local laws are always in favor of the tenant, and it is next to impossible to evict deadbeats using legal means. 3) Tenants seem to get it in their mind that you, the landlord, are providing them a place to live out of the goodness of your heart. Tenants call to complain about the behavior of other tenants expecting you to act as a police force of one." In the end, Bobert42 and his wife decided to get out of the business of being landlords. "We ended up selling the place after owning it for about five years for a profit and vowing never to do this again."

Ditto for Racqueteer, who wrote, "The tenant thing really got bad toward the end, and I'm not sure that I'd take the same path now."

'This Was My Greedy Mistake'
Other posters noted that they hadn't invested in properties directly, but instead had gotten burned by buying REITs. Bubbygator reflected, "In 2005-06, I invested widely in REITs--loving the high dividends. When I found Novastar, I gradually moved almost all my money into this stock. This was my greedy mistake. If I had simply limited the amount of money in any single investment, I would have come out OK. Instead, in February 2007, after delaying its dividend report, the company stopped its dividend and announced it would not qualify for REIT status. The price dropped like a bomb in one day! I had about $600,000 invested, and lost more than $330,000 by the time I got my sell order executed."

And Nobhead also got burned by making a bad pick in the REIT market. "My only investment in a REIT, recommended by my then full-service broker, made my $80,000 turn to less than $40,000 very quickly."

Erryl's post noted that even globally diversified real estate funds didn't escape the recent downturn unscathed. "I held onto [closed-end fund]  CBRE Clarion Global Real Estate (IGR) too long when the great recession began. I greatly underestimated the global nature of the real estate bubble."

Finally, several posters shared valuable general guidance on how not to get burned in the property market.

From previous stumbles in real estate, Inspectorgadget learned the following: "1) You're never as smart as you think you are. 2) Think before you leap. And rethink what you thought."

Invest4, who purchased a property in late 2005 only to see the market turn south, shared the following advice, which is not just applicable to investors in the real estate market. "Do your due diligence and be cognizant of your own sense of fair value (right or wrong) and resist following the herd (a challenge I struggle with in today's equities market). Always be aware of purchases driven in part or in whole by emotions (I already knew this, but still allowed it to influence my decision making). Although circumstances and perspective change over time, force yourself to contemplate your longer term goals/ aspirations and whether or not your purchase is aligned."

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