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Lesson 3
Sources of Properties
 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
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
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
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
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
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
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
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. RHOL staff have personally been involved in
rehabs with results at both ends of the spectrum. Good luck.
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