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 Real estate investors should consider all possible sources of properties available for sale.
Print Advertising
Newspaper classified and display
advertising is used both by real estate agents and by owners selling
without agents. Although newspaper advertising is the most widely
known, there are other publications that carry ads including magazines
and newsletters, both general and specialized business and real estate
publications.
Signs
 Although
most larger properties that are available For Sale usually do not have
signs, single-family homes almost always do and even the smaller residential
properties (duplexes, 4-plexes) often do. You should certainly
check out any properties of the type you seek that do have signs.
Real Estate Agents
As discussed in Lesson 2, when
one is buying income properties larger than single-family homes, the
availability of many, perhaps most, properties is usually only known
to real estate agents. As also discussed, a buyer does not usually
save the commission by not using a buyer's agent.
Web Sites
There are a number of sites that provide information
about real estate and sites that not only provide lots of information, but also
show many of the properties that are listed on the MLS. Most of the sites
have lender information and links to related sites. Most site only deal
with single-family homes, but there are sites specifically for income property.
We have provided links below that will take you
directly to some of the many available sites. The sites open in new windows,
so to return to our site, close the site's window.
Special Sources
- Foreclosures
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Some real estate investors concentrate on buying real estate foreclosures from banks and
government agencies. The up-side is that you can sometimes buy
below market value, although properties often sell for higher than market
value because buyers get carried away with the excitement of auction.
The down-side is that the property has often been abandoned and vacant
for a substantial period. That leads to all kinds of problems, including:
corroded old plumbing, cracked plaster or drywall, pervasive mildew,
unwanted, unscreened tenants and a great many others.
The real money to be made in any
real estate investment is finding something with the right things wrong:
a sagging porch, pealing paint, broken windows and other things that
can be repaired inexpensively, but make a huge improvement in the curb
appeal of a property.
The days of stealing a really good repossessed
property for a song are, for the most part, long gone. These days banks, and
even government agencies, know the value of painting and fixing before they offer
their foreclosed property for sale. It is a fact that repossessed properties
often sell for market or even above. This is because buyers do not know the market
and assume that they will be getting a good deal because they are buying repossessed
properties from the government.
However, if "bargains" are your passion, start by taking our Buying
Foreclosures e-course.
- Lender Owned Properties
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If, at foreclosure sale, there
are no bids for more than the loan being foreclosed, the lender ends
up owning the property. Lender owned housing is usually marketed
through brokers having relationships with the lenders. While, you might
be able to develop your own relationship with some lenders, you will
likely find little interest on their part for doing so. Sale of
owned properties is usually of secondary concern to lenders and they
prefer to minimize their work by sticking with known methods and brokers.
- Tax Sales
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Property taxes are a lien
against real estate. If taxes are not paid for a time, varying
by state, the county ends up owning the property. Anyone can then
buy the property for essentially the amount owed in back taxes. In
theory, one might be able to buy a property worth tens of thousands of
dollars for back taxes of only a few thousand dollars. There are,
however, a few things that must be kept in mind. First, what is
the true value of the property and why did the the owner let it go for
the amount of back taxes rather than sell it quickly for at least 70
or 80 percent of its value. Second, most states provide for a redemption
period for tax sale properties, varying from a few months to a year. Accordingly,
the buyer doesn't know if he will own the property long-term until passage
of the redemption period. This doesn't mean that the buyer will
lose his investment if the property is redeemed, as the laws provide
for reimbursement upon redemption. The buyer will also receive
interest at the rate prescribed by law. However, it does mean that
he needs to be careful how much time and money he invests in the property
prior to expiration of the redemption period.
- Bankruptcy Sales
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Another source of properties
that you might consider is bankruptcy sales. Properties sold at
bankruptcy auctions often go for under-market prices. However, most bankruptcy
auctions do not allow for contingencies, require a significant deposit
(usually 10 percent) upon successful bid, and require a short escrow. One
must complete all due diligence and have their financing ready to go
prior to the sale date. Bankruptcy is a federal legal procedure
handled by the appropriate branch of the federal Bankruptcy Court. Most
of the work of processing bankruptcies is actually handled by Court appointed
Bankruptcy Trustees. The Trustees are assisted by attorneys, accountants,
and other necessary service providers, all being paid out of the assets
of the one who files bankruptcy. Real estate is usually sold at
auction through a licensed broker who is responsible for marketing the
property. Unless creditors chose to dispute the facts of the bankruptcy,
most proceedings regarding real estate involve a Judge only in
that he usually approves (1) the price and terms of sale, (2) the terms
of the listing with a broker, and (3) the sale to the successful bidder.
The auction will take place on a specified advertised
date and may take place on-site of the subject property or at some other specified
location. Usually, prospective buyers must register in order to bid at
the auction. Registration may be allowed on the day of sale or be required by
some date prior to that day. A specified deposit (cash or cashier's check)
is usually required to receive a bidder's number on the day of the auction. This
deposit is typically in the range of $1,000, but may be significantly more for
larger properties. This deposit will be refunded immediately after the
auction if the registered party is an unsuccessful bidder.
For parties interested in purchasing the property,
but unable to attend the auction, arrangements can usually be made to participate
by phone or written bids or via an authorized representative.
There may or may not be a minimum or reserve bid
on the property, and the successful highest bid will be subject to Court
approval. The successful bidder (Buyer) will usually be required to immediately
make a deposit, usually about ten percent (10%) of the total contract price. The
deposit must usually be cash or cashier's check. This deposit is usually
non-refundable except if the sale is not approved by the Court. The balance
of the price must usually be placed in escrow within a short period after the
date of sale, often in the range of five (5) to ten (10) business days. Close
of escrow will be scheduled for as soon as possible thereafter, usually based
on the Trustee's estimate of the time required for Court approval.
The property will usually be sold "as is," "where
is." No warranty or guarantee is expressed or implied by the Court, the
Auctioneer, or the Broker. It is the Buyer's responsibility to verify all
information.
The Court will usually deliver title free and
clear of secured liens as well as any other valid liens of record. A preliminary
title report is often available for inspection prior to the sale. Usually,
no contract contingencies for financing, inspections, or other due diligence
tasks will be accepted. Terms are cash to the Court. Bidders must
perform all due diligence tasks required to satisfy themselves as to all material
facts prior to auction. The Buyer or Buyer's agents should verify all pertinent
information prior to the day of auction. Sale is usually final on the day
of auction. Often the Buyer must pay all escrow and closing costs, including
an owner's title insurance policy if one is desired. Property taxes will
usually be prorated to the close of escrow.
If specified, a commission will be paid by the
listing broker to a licensed broker who represents the Buyer for the sale. To
qualify for the commission, the Broker or Salesperson must usually register as
the Prospect's agent by some specified date prior to the auction. Furthermore,
the licensed Broker or Salesperson must usually accompany the Prospect to the
auction.
As with any type of auction, bidders must be careful
not be carried away with the excitement of the procedure and bid more than the
property is worth.
- Other Auctions
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Properties are sometimes sold
through the auction procedure even when no foreclosure, tax, or bankruptcy
is involved. Since private party auctions are usually run by the
same brokers who handle Bankruptcy Court auctions, the procedures are
usually essentially the same. Again, there may or may not be a
minimum bid specified and often the highest bid will be subject to Seller
approval. The Seller will usually reserve the right to withdraw
the property or to postpone or cancel the auction prior to the sale.
Again, bidders must be careful not be carried
away with the excitement of the procedure and bid more than the property is worth.
New Construction
- Buying From a Builder
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Buying a newly constructed property from a developer/builder
has both advantages and disadvantages.
One advantage is that it will generally come with
certain warranties, both as provided by the laws of a particular state and as
specifically advertised by the builder. Unfortunately, these warranties
are only as good as the builder's financial condition. Real estate development
can be an extremely risky business and a builder that is financially strong in
one economy and market may be out of business in another. Whether or not
anyone else will be responsible for the construction depends upon whether the
developer sub-contracted out some or all of the construction or did some or all
of it with his own crews. Unless you are able and willing to obtain this
information, you must consider the worst. That is, the developer did it
with his own crews and there will be no one to go after if he goes out of business. Accordingly,
a buyer of new construction must take the same precautions as a buyer of old
properties. That is, careful inspections are highly recommended.
A more certain advantage of new construction is
that the components are new. Even though the overall warranty of the developer/builder
might be worthless, the warranties on components such as plumbing fixtures, appliances,
heating/cooling systems, and even materials such as roofing and siding will generally
have limited warranties by the manufacturers thereof.
A disadvantage of new construction is that it
often does not include certain things that would be included with an older property. As
examples, landscaping and window coverings are often not provided unless specifically
included, at additional cost, of course, including addition profit to the builder.
Another disadvantage of new construction is that
there is a rent up period, meaning time without income after close escrow. This
can actually be an advantage in a good market because you can put good tenants
in rather than take what the previous owner had. However, for a larger
property in a slow rental market, it might take months to rent up all units. Furthermore,
a savvy lender will understand this and it will have an effect on the loan terms.
- Building It Yourself
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An investor with the necessary knowledge and experience
can buy some land and build it himself. He can do this a variety of way,
from hiring a licensed general contractor to acting as general contractor himself. Most
states allow an owner-builder to construct even large residential and commercial
projects without a contractors license. However, whether a lender will
make a loan for an owner-builder project and whether an owner-builder can obtain
course-of-construction insurance is another matter. The degree to which
this is a problem often depends upon the owner-builder's previous construction
record and, in the case of the lender, also usually depends upon the size of
the loan and the loan to value ratio.
Conclusion
Real estate investors should
consider a multitude of sources when searching for properties.
For properties being purchased via foreclosure,
property tax, or bankruptcy sales it is very important to never buy anything
without extensive prior inspection. Although most states do not allow the
terms "as is" to protect the seller against failure to disclose defects in a
the normal course of commercial business, such is not the case for foreclosure,
tax sales, or bankruptcy. Accordingly, these modes of purchase usually
offer no avenues of redress for the buyer who didn't get what he expected.
By their nature, some of the sources usually provide
properties that require rehabilitation. Buying for rehab can be either
profitable or costly, depending upon whether one correctly assesses the property. Being
sure of the conditions of the major building components (e.g., HVAC systems,
roofs) and the real costs of the total rehab (including the little things) are
critical. Landlord311 staff have personally been involved in rehabs with
results at both ends of the spectrum. Good luck.
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