SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Buying Properties

Don’t Forget the Oops!

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Rehabbing properties and understanding what a rehab takes is a key part of almost any real estate investment strategy.  Distressed properties that need a lot of rehab are often where deals can be found.  Plus, rehabbing properties after a tenant moves is just a part of the landlording business.

Estimating a rehab job can be tough, especially when you are just starting out.  You want to make sure you estimate accurately so you can budget appropriately.  There is nothing like the felling you get when you are 80% through a job and realize you are out of money.

Newbies are often afraid of larger rehab jobs because they fear that they will miss something, and you know what, they likely will.  They also seriously underestimate the amount of time, labor and materials that will be needed on any job.  Costs overruns can add up quick.  But here is one way both newbies and more experienced landlords can protect themselves.  Factor in an oops into your rehab budget.

The oops budget is designed to make sure you have the money in case you miss something or underestimate.  Depending on the size of the rehab job, I usually will make an oops budget somewhere between 10% and 30% of my rehab estimate.

So for example, if I have a smaller job, consisting of mostly paint and some tile work totaling about $5,000, I will only budget about 10% or $500 for an oops.  I likely did not miss anything and if I did it is not going to break me.

But if I have a serious rehab job, where I might be taking a property down to the studs or doing some foundation work, I might budget as much as 30% for the oops.  I do this because there is simply much more to miss.  I do not know what will be found once we really get in there and tear something up.  An oops budget of $15,000 or more is not unheard of in larger more complicated jobs.

If you do not need the oops money, then you can save it for the next job.  I also sometimes think of extras that need to be done as we go along.  I added closets on one property since I had some money left over.  These closets allowed me to charge a higher rent.   I have done other things such as adding more exterior lighting or improving the landscaping to enhance appearances.

So use the oops, it is a great budget item and real budget saver.  You newbies out there should be cautious and budget for a higher oops.  Trust me you will need it until you get more experience.

Looking At Properties? Take These Tools

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You’ve read the books.

You’ve found the blogs

You’ve networked with investors.

You’re ready to jump in!

There are a few things that you absolutely have to have before purchasing an investment property. These tools will be a resource to you as you analyze potential deals. Keep them in your car because you never know which corner opportunity happens to be hiding behind.

  1. Camera (or phone with a camera and flash). As you look through properties, keep them organized by first taking a picture of the address. Then, make sure to take pictures of each potential repair. This approach will be invaluable. You could look at a hundred properties before you find the right one.
  2. Hammer. When looking at properties, there are going to be some areas you don’t want to touch. Maybe you want to check out the siding or wood strength/malleability. Maybe you smell a dead animal in the walls. A hammer is a good tool to bring along, and also a tool you’ll use again and again.
  3. Tape measure. A tape measure can also serve as a level. If think the floor is sloped, pull out the tape measure and find out. I have 4 tape measures…
  4. Flashlight. I looked at plenty of properties that didn’t have electricity. It also helps when you want to check out those small crawl spaces and underneath sinks. I recommend picking one that you can also wear on your head. Since I do a good deal of rehab after working hours, having a hands-free flashlight is a gem.

It should go without saying that the internet will be one of your best resources as well. Make sure you are searching through the brick and mortar—as well and combing through the paper trail of each property.

 

Kevin—have I left anything out?

The One Clause You Must Use When Buying a Property

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You never know when a potential deal will come along.  I have literally gotten a property under contract less than an hour after talking with the owner.  That is why I always have a copy of a purchase contract on hand.  Because you really don’t ever know, so be a smarter landlord and be prepared.

I like to keep my purchase contract short and sweet.  It gets right to the point describing the property, how much I will pay and when I will close.  I do not like to put a bunch of other contingencies or clauses in there.  They tend to muddle things up and if you really want the property and intend to close, they are not necessary.

There is however one clause that is absolutely necessary.  I will not sign a purchase contract without it, and neither should you.

Here it is:

“Seller warrants that seller has good, clear and marketable title subject only to property taxes and any easement and or/restrictions of record.”

If you cannot get a “good, clear and marketable title” to a property, then do not purchase it.  If there are so called, “clouds” on the title, then move on down the road to the next deal

Clouds on a title can do all sorts of things.  They can hinder your ability to get bank financing.  Clouds can prevent you from getting title insurance (something you want) and they can leave you exposed to a law suit (something you do not want).

All sorts of things can cloud a title.  The property could have been sold at a tax sale.  A foreclosure may have been done improperly.  A property may not have gone through the proper probate process or may have IRS or contractors liens attached to it.

So how do you find out about these clouds?

You pay to have a title search done.  A title search generally ranges in price somewhere between $250 and $500.  Do it!  Do it every time you are going to purchase a property.  It is money well spent.  Don’t think so?  Imagine purchasing a property only to find out later that the person that sold it to you was not the rightful heir and had no authority to sell it.  Can you say lawsuit?  How much will that cost you?

So use this clause in your purchase contract.  Use it every time.  Get a title search done, every time.   Avoid those clouds on the front end, don’t let them develop into a storm.

The Autumn Leaves Mean Deals

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I hope everyone had a great holiday weekend.

As we get summer behind us and look forward towards fall, smarter landlords are also looking forward to some great end of the year purchases.  It has been my experience over the years that some of the best deals show themselves towards the end of the year.

Why is that?

I think there are a couple of reasons.

  1. People have had their property on the market for a while now, some since spring trying to hit the “peak” buying season, and have had no success.  They will now be ready to make a deal.
  2. Banks will be looking to unload non-performing assets or foreclosures.

You see, the end of the year is both a psychological and fiscal boundary.  People want to start fresh in a new year.  They want to unload things that are perhaps holding them back.  They are tired and ready to deal.

Banks and many other businesses will be starting a new fiscal year.  That means it is time to clear the books.  It is time to take those tax write offs.  It is time to move some inventory so the banker can get their year end bonus.

Basically, the looming end of the year can be a great motivator.

So what should a smarter landlord do if you want to pick up some of these deals?

  1. Get your money and/or financing in order.  You will need to be able to move quickly.  It is best to have all of this arranged now.
  2. Know your market.  You will need to know what a deal is and jump because others will be looking too and the good ones go fast.
  3. Network.  Let others know that you are in the market and what you are looking for.  Paying someone a finder’s fee is a great way to get deals.
  4. Keep a close eye on all of your sources.  Many deals are still found through the Realtor’s Multiple Listing System (MLS).  Have your realtor set up a search that will e-mail you directly potential deals.  Use key words such as bank or corporate owned, price reduced, make an offer, priced to sell, estate, etc., as part of your search criteria.

It’s September.  Time to think of the autumn leaves, football and getting a break from this humidity.  But smarter landlords are also thinking about picking up some year end deals.  Some are going to come your way.  Be ready!

Preparing to Buy Your First Property

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If you’re like me, you turn to the internet to answer all of your questions. Every time I’m ready for a new challenge, I begin by typing, “How to…,” in the Google search bar.

So, I’ve created a few posts that combine strategies that have helped me to prepare for the big purchase. Following these strategies can increase your savings, reduce your expenses, and move towards your goal of home ownership.

First and foremost, define your goal
Do you want to buy a single family house or a multifamily house? Will you live there? If so, how long do you intend to live there? Will this be a rental property? Do you plan on selling it in the future? Answering these questions will narrow down your search criteria.

Next, decide on your price range
I’m a huge proponent of living below your means. Reduce your expenses to live a more moderate lifestyle. My advice would be to set the top of your price range below what you can afford. Make sure your price range is based on a well thought out budget and a consistent spending record.

Get your finances in order
Pull your credit and review that information. You are allowed to request a free copy of your credit every year from each of the three reporting agencies (find that link here). Is everything correct? 1 in 4 people have a mistake on their credit report. Having open disputes on your credit report could prevent you from qualifying for an FHA loan. So, take care of this early.

Get smart
You should be able to have an intelligent conversation with your lender about your options. Don’t let others make decisions for you. This is your purchase, isn’t it?
Which product best suits you: FHA, FHA 203k, Conventional, or Homepath?
Learn the lingo: GFE, Warranty Deed, Closing Costs, Owner-occupant, Per Diem Interest, FRM and ARM

Save and Source
Stick to a savings plan that is consistent and can be tracked. It’s not enough to stick money under your mattress. You have to be able to show where the funds came from and where they went, for at least 3 months. This is to ensure you’re not opening new debt to fund your down payment or closing costs.

Find a Knowledgeable Real Estate Agent
Everyone I have worked with was based on a referral, and I must say, I have worked with some amazing professionals. If your real estate agent is knowledgeable and experienced, he/she can connect you with other knowledgeable and experienced professionals like lenders and title companies. They can advise you of real estate trends or bidding strategies. I chose an agent who was also an investor. So I gained a good bit of insight on buy and hold deals, flipping houses, and the benefits to gaining your real estate license.  You can often find such an agent at your local REIA meetings.

Have FUN
Searching for a home is a fun experience! Don’t let the research or the pressure stress you out. Don’t get emotionally attached to the property either. The best real estate purchases are made when the buyer has a clear mind and is not in a hurry. I lost out of many bids that I wished I had won, but I ended up with a great purchase that I love. I’m sure you will too.

Herding Cats

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Previously, I wrote about having your offer accepted.  In that article, I touched on some of the major items that you will need to keep up with, such as inspections and appraisals.  There are however a whole host of other things that you need to keep up with as well.  In fact getting to the closing table can sometimes be like trying to herd cats.

Real estate transactions involve several players.   Each player has their own role to play in you having a successful closing.  There is your attorney, the seller’s attorney, each attorney’s assistant, the lender, the lender’s assistant, the appraiser, the title searcher, the insurance agent, the bank inspector, the termite inspector, etc., etc.

Keeping up with all of this can be a challenge.  But, if you want to close on your deal by the date defined in your contract, it is in your best interest to make sure all of these players work together.  In other words, get used to herding cats.

Many of these players are swamped with other projects and real estate deals.  Yours can easily get lost in the shuffle.  I have not seen a real estate attorney’s office yet that was not stacked floor to ceiling with files.  So you have to protect your interest in getting the deal done.  No one else will care like you will.

What you as the smarter investor need to do is start a simple file as soon as you offer is accepted.  Yes, get an old fashioned legal sized file folder, write the address of the property on the tab, and put a copy of your signed contract in the file.  Then attach this Closing Information Sheet on the front cover.

This Closing Information Sheet is the one we use to keep up with our closings.  It lists all the players, gives dates when things like appraisals are due and provides a checklist to make sure we do not miss anything.  Feel free to download a copy of it here.  You will be thankful you did.  Because when herding cats, you need all the help you can get.

My Offer Was Accepted, Now What?

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You have gotten to know your market.  You have a pretty good idea of what a good buy and hold deal is. You just negotiated an offer.   It got accepted.  It is your first deal!  Now what?

That depends on what is in your purchase contract and how you are planning to purchase the property.  No two contracts are the same but most have several standard parts.  These can include:

  1. Buying the property “as is.”
  2. A property inspection period.
  3. A review of leases and financials.
  4. The need for some type of financing to close the deal, likely from a bank.
  5. A way out or escape clause.

So let’s go through each one.

  1. Many investors buy investment properties as is.  Buying a property “as is” means exactly that.  You are buying the property as it is where it is and the seller will not make any repairs.  It is incumbent upon you to know what you are getting into and what, if any, repairs and upgrades are needed and what they will cost.  To find all this out you need an inspection period.
  2. Just because you are buying a property “as is” does not mean you should not inspect it.  In fact you should!  During initial negotiations you may only have seen portions of the property.  Now is the time to see it all.  Your inspection should include all rental units, attics, basements, crawl spaces, roofs, etc.  Anyplace you can get into.  If you are new to this, you may want to hire a property inspector or at least take a trusted contractor with you.  During this inspection period you should be doing two things, making a list of repairs needed and looking for major damage and/or problems you were not aware of.  If you find major damage or problems, it may be time to go back to the negotiating table.  If the seller will not renegotiate, use your escape clause and back away from the deal.
  3. Get copies of all leases and at least two years of past income and expense reports.  Read these over carefully.  You will be inheriting the tenants and they come with certain rights.  You can’t just kick them out because you are the new owner, you will have to live with them for a while.  Be sure you are aware of what you are getting into.  Make sure utility payments jive with what you were told for example.  Do the tenants really pay them, or are they listed as expenses on the expense report?  Depending on what you find, you may need to renegotiate.  Again, if the seller is unwilling to do so, you may need to back away from the deal.
  4. Finally, if you are getting bank financing, there will be an appraisal.  Always, always, always go to the appraisal and meet the appraiser.  This person can make or break your deal depending on how they value the property.  Be helpful to the appraiser.  Take them some comps if you can.  Hold their measuring tape for them.  Explain to them, or better yet provide a list of the repairs and upgrades you plan to make.  Do all you can to ensure the appraisal goes well.
  5. This is pretty self explanatory.  If something goes wrong, such as unexpected and costly repairs, you need a way out as we see in 2 and 3 above.  But only use it if you absolutely have to.  If you make an offer, you should have every intention to close.

Assuming all is in order and has gone well, your next job is to secure insurance for the property.  Find a good insurance agent who understands your market and understands investment property.  Trust me, not all of them do.  You can often find one at your local REIA.

Finally, develop a checklist to make sure all of these various pieces get placed in their proper slots.  Do not just assume that the appraiser has the proper address to send the appraisal.  Do not just assume that your insurance agent has sent the proper forms to the right places.

It is your job to follow up with all of these people and make sure that everything gets to the right place in time to close.  E-mail the bank to make sure they have the appraisal scheduled and that they receive the appraisal when completed for example.  Nobody else cares about this deal as much as you do and often times you need to expend some energy to get all the pieces together.

Only then, once it all has been fitted together, then maybe, you will close on your first deal.  Congratulations!  Now the real fun begins.

100% Occupied May Not Be What It Seems

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100% occupied.  Sounds great right?  That is just what we want to hear when we are looking to purchase a multi-family building to add to our portfolio.  However, not everything is always as it seems.

Trying to sell a building is easier if you can tell perspective buyers that the building is 100% occupied.  The buyer thinks that there will be less work involved in taking over the building when the sale closes.  They will not have to advertise, they will not have to do showings, they will not have to spend money rehabbing the apartment to make it rent ready.  There will be a smooth and easy transition.

But, as I said, not everything is as it seems.  Sure the building may be 100% occupied.  But, what if the current owner rented the last few apartments to anyone who could fog a mirror just so they could say the building was 100% occupied?  What if the people they placed in the building had been evicted from their previous residence just a few months before?

Don’t think the above happens?  It happened to me when I bought a four-plex several years ago.  Yes, I did my due diligence and reviewed all of the leases and the income and expense statements.  Everything looked fine.  But if I had bothered to check a simple and free database I would have noticed that one tenant had just been evicted and had a drug arrest as well.  No one in their right mind would have rented to this guy, unless you were trying to say 100% occupied.

So what happened?  You guessed it.  As soon as we closed, he stopped paying.  Four rent free months later, after going through the expensive and lengthy eviction process I had a dirty and damaged rental unit back in my possession.

On the bright side, I learned a valuable lesson.  Check out the current tenants as best you can before you close.  The court and criminal databases are free here as they are in many jurisdictions.  It is as simple as typing in a name.  If you do find something odd, go back to the seller and discuss and if you need to, renegotiate.  It would not have been so bad kicking the guy out if I had gotten a little bit better price.