Categories
Blog

How to Buy and Manage a Long-Distance Rental Property

Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace.com, and his work has been featured on Money.msn.com and Reuters.com. He was one of five contributing editors to TheTycoonReport.com and has also written for MarketGreenhouse.com and SeekingAlpha.com. He’s been investing in real estate since 1995 and a Realtor since 1998.

Investors sometimes ask me whether it makes sense to buy rental property in a city or state that’s different from where they live. Often, they’re curious about exploring other areas because there are few good deals left where they live, or they’ve heard that certain towns in other states are booming.

During the peak real estate years of 2003–2007, investors from as far away as California were calling real estate agents in states like Arizona, Georgia and Florida to snap up investment properties — often without even seeing the homes in person! That was crazy investing then, and it’s just as reckless now. As it turned out, that kind of blind fervor for real estate investing portended an end to the bubble.

However, that doesn’t mean investors shouldn’t buy out-of-town or out-of-state properties today. You just have to be prudent and take certain precautions.

Why be a Long-Distance Landlord?
There are pros and cons inherent with long-distance real estate investing. Let’s take a look at the pros first:

1. You have the freedom to invest in more affordable areas.
By not restricting yourself to the area in which you live, you open up a whole new world of investing possibilities. Many investors in high-cost-of-living states like New York, California and Massachusetts can no longer afford to buy homes where they live, but are finding the Midwest and Southern states to be much more affordable. In addition to cheaper sales prices, these areas also have lower taxes and dwelling (i.e. rental property) insurance premiums.

2. You can fund your future retirement home.

Some investors buy a home in a retirement community with an eye toward living there one day. They may buy a condo near the beach, or a country cabin in the mountains. Then they rent the home out with either short- or long-term leases, and in the process, their tenants pay down the loan principal until the investor is ready to retire. By then, the mortgage might be fully paid off.

3. You may gain new tax deductions.

Many parents have children who attend college in another state. Instead of spending a fortune on a dorm room and semi-annual visits, they buy a modest three-bedroom home near campus. The student lives in this home and rents the other two bedrooms to some friends. The parents save on dorm fees and offset a good part of the total mortgage payment with the rent collected from the other students (or better yet, their parents). Furthermore, each time that the parents travel to visit the child, 50 percent of their total trip expenses can be legally written off on their income taxes because they’re also inspecting their property!

Handling the Disadvantages of Long-Distance Real Estate Investing
Make no mistake: Owning rental property far from home can be a complex undertaking. There are several challenges long-distance landlords often encounter:

  • Lack of knowledge about the area in which they’re investing
  • Lack of familiarity with good local service providers
  • Relying on others to take care of day-to-day problems or repairs
  • Difficulties in getting the rent paid on time

But these obstacles don’t have to prevent you from purchasing long-distance rental property. Here are some ways to make your investment a success:

1. Do your homework and learn about the area.
Begin by hiring a good real estate agent from the area you’re interested in. You can browse online to get the names of several real estate agents in the area who regularly work with investment properties. Interview each agent by phone, and ask those you like best to send you listings of homes for sale that meet your criteria. Browse rental properties online to get a feel for the return that you can expect on homes in your price range.

Once you’ve selected a real estate agent, plan to visit the area and view properties together. Desirable, modestly priced homes sell quickly, so a home that interests you on Tuesday could have a contract on it by the time you arrive on Saturday. You’ll want to create a list of eight to 10 homes to tour.

Because there are more expenses involved in buying and managing long-distance real estate — such as the travel expenses you’ll incur to visit the property — don’t rule out foreclosures, short sales and other distressed properties that can be purchased at a substantial discount to comparable homes in the area. This type of home probably won’t be move-in ready, but after you make the necessary improvements, it should yield some start-up or “sweat” equity.

2. Develop a go-to list of local service providers.
Ask your real estate agent for the names of service providers — like plumbers, electricians and handymen — with good reputations that you can depend on for ongoing property maintenance. Try to use smaller “mom-and-pop” companies; they often have better pricing and tend to be more honest about the actual repairs needed. Larger companies have been known to tell long-distance landlords that they need a whole new water heater, AC unit or roof, when less expensive home repairs or replacements might have done just fine.

If possible, you’ll want to contact the recommended service providers before you close, introduce yourself and tell them you’d like to use their services for your investment property. Be sure to ask what forms of payment they accept, as most service providers like to be paid when they finish the job.

3. Manage the property yourself.
It’s not very difficult to make the necessary calls as problems arise, but if you find that landlord duties such as managing repairs and collecting rents is becoming too stressful, ask your real estate agent if his or her company provides property management services. The monthly fee for property management will range from 10 to 12 percent of the rent.

4. Automate or simplify rent collection.
There are a couple of ways to handle collecting rents on time. Some tenants can have their rent automatically deposited into your bank account. I have two Navy tenants who have the rent deducted from their pay on the first of the month and immediately deposited to my account. Most banks let you transfer money online between accounts as well.

You can also have tenants deposit the money into an account at a local bank — you’ll get the rent faster than if they mailed you a check. To encourage timely payment, send them an email or text reminder as the first of the month approaches.

Once you’ve rehabbed the property and your tenants are in place, your rental should run on autopilot for quite awhile. If your tenant calls with an occasional repair problem, you can simply pick up the phone and contact one of the service providers on your list.

In sum, there are many advantages to buying long-distance real estate, and while there are some disadvantages, they can be easily handled if you’ve done your initial research and set up a network of reliable resources.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

Categories
Blog

Due Diligence: 10 Steps to Take Before You Buy

Rick Sharga is executive vice president of Auction.com. As one of the country’s most frequently quoted sources on foreclosure, mortgage and real estate trends, Sharga has appeared on NBC Nightly News, CNN, CBS, ABC World News, CNBC, FOX and NPR. He has briefed government organizations such as the Federal Reserve and Senate Banking Committee and corporations like JPMorgan Chase, Citibank and Deutsche Bank on foreclosure trends, and done foreclosure training for leading real estate organizations. Sharga shares his advice on how to protect yourself before you buy any type of property.

Due diligence is one of the most critical periods in any real estate transaction. But many buyers cut corners in the due diligence process in their haste to have their bid accepted. Here are 10 due diligence steps you shouldn’t skip, especially if you’re considering a foreclosure, bank-owned property or short sale.

1. Do a title review. Always get a preliminary title report on any foreclosure property you’re interested in buying, and look for any secondary liens or tax liens. Make sure there aren’t any hidden liens or encumbrances on the property that will blossom into unpleasant surprises later.

A lot of paperwork got lost during the real estate crisis as companies like New Century went through bankruptcy. The courts are still unwinding cases where people sold properties they didn’t own. That’s why it’s so important to ensure that the title is clear and that the property really is for sale. You’d be surprised at how many investors decide they’re not going to get title insurance, but it’s just not worth the risk.

2. Inspect the property thoroughly. You may not be able to get inside a foreclosure property that’s still occupied. But if you can, have a licensed professional inspector review the house for evidence of structural defects, water damage or other major problems.

But most importantly, make sure everything is functional. I know of one case where an owner who had lost his home to foreclosure did what some owners do in that situation: He ripped the wiring out of the walls and took the piping. But then he did something different: After he was done, he put up new drywall. So when they did an inspection of the house, it looked fine, but there was no wiring or piping behind the walls.

3. Consider the surrounding property and neighborhood. Don’t confine your inspection to the structure itself. Look around at the landscaping. Does the property back up against a bank that has no vegetation? Will the drainage work in the event of a heavy storm?

Check out the surrounding neighborhood as well, as its condition can affect the value of your property. Do you see pride of ownership in the other homes? Or do you see abandoned properties in the area? And note that abandoned houses aren’t just a problem in “bad” neighborhoods. Because of the recent housing crisis, you might find abandoned or unfinished homes even in relatively new housing developments.

4. Examine recent sales activity. Look at how many days homes have stayed on the market. Are properties moving quickly or languishing? What are the buy vs. rent trends in the neighborhood? How many of the homes sold were distressed inventory? Too many sales overall could suggest that people are leaving the neighborhood — see if there’s an underlying reason why.

5. Review price trends. Are they going up? Have they plateaued? How do they compare to what they were during the last peak? That information should give you an idea of whether property values are going up or down, and help you figure out what you should be spending.

6. Find out how many homes in the area are in foreclosure. Too many suggests price weakness over the near term. Are there a disproportionate amount of distressed properties in the area? Before the crisis, only about 1 percent of properties went into foreclosure in any given year — or one home out of every 100. In today’s environment, you might see maybe three or four. But more than that might indicate a problem and a reason the property is priced as attractively as it is.

7. Look at the upside potential. Are you near a good school? Are you near a transportation hub? Are there new businesses that are popping up or being launched in the area? Those are potentially all good upside opportunities for you. Conversely, has there been a plant shutdown recently? That will probably lower property values. The local chamber of commerce can supply some of this information; it also helps to have some local connections.

8. Go to open houses. See what the standard of quality is in other homes that are currently for sale. Are tile countertops fine, or do I need to install granite or do other home improvements? This is a good thing to do whether you’re planning to flip the home or rent it. It doesn’t mean you have to overspend. But you want to meet the neighborhood standard or be slightly above it, and spend as little as you can to attain that standard.

9. Research zoning requirements. If you’re going to rent out the property, consult with a real estate attorney to see if there are any local ordinances or laws that might make it difficult to be a landlord. Some areas aren’t zoned for rental property. Some developments limit the number of rentals in the neighborhood; others have limits on the number of adults who can live in a single house, which could be a problem if you plan to rent to people who want to room-share (like college students).

10. Check your liability insurance. If you’re going to be a landlord, check with your insurance agent to find out how much liability and property insurance you’ll need.

While these 10 steps may sound like extra work, they’ll pay off in the long run. Whether you’re going to occupy it, flip it or rent it, real estate is one of the most expensive investments you’ll ever make. It makes sense to protect it.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

Categories
Blog

Short Sales: 4 Things Buyers Must Do

This is the second in a two-part series. Click here for part one.

When the value of a property falls so much that the home is worth less than the mortgage, it causes a quandary for both the bank and the borrower. A short sale — in which the bank agrees to accept less than the amount owed — addresses the problem and helps all parties involved. The bank gets something rather than nothing; the homeowner gets out from under the mortgage. Both avoid the expensive and time-consuming process of a foreclosure. But if you’re the buyer, there are some important steps you need to take before moving forward with a short sale offer.

1. Fully evaluate the condition of the property before you make an offer.

When lenders evaluate a short sale request, one of the first things they review is the financial shape of the borrower. The borrower must prove financial distress; at a minimum, the borrower must be at least two or three payments behind. The lender will also review a borrower’s liquid assets to see if they could be used to pay the delinquent amount.

How does this affect you, the buyer? You need to remember that borrowers who are continuously late on their mortgage payments are also likely to defer maintenance on the home. Maybe the hot water heater doesn’t get so hot and needs replacing, but there’s no money to buy a new one. Shingles might be missing from the roof, or some electrical outlets might not work. While this can work to your advantage — you may not have as much competition for a home that needs some work — you also need to estimate how much those repairs are going to cost.

Homeowners who qualify for a short sale must provide a property disclosure form that highlights any known issues — and not just obvious problems but the not-so-obvious ones as well. Say that a pipe burst within a wall and briefly flooded the dining room. That must be disclosed. The seller should also indicate that there may be mold issues behind the walls due to the water damage, even if there’s no visible problem. Read the property disclosure form carefully.

With a short sale, you’re often able to inspect the property before the sale at an open house or by appointment. Take advantage of this opportunity. You may even want to hire a licensed home inspector to make a full report of all potential issues. At the very least, drive by.

2. Research the title.

A title report lists all current and previous owners as well as any other entity that has an existing legal interest in the property. Upon a successful offer, you’ll have time to examine the preliminary title report showing all current liens. A lien indicates a legal interest in the property that must be satisfied before the home can be transferred. A mortgage is a lien, for instance. But there are others. If a contractor performed any work on the home but hasn’t been paid, there may be a mechanic’s lien that can only be released when the contractor has been paid in full. Delinquent property taxes and federal and state income taxes may also be a problem.

An owner may have more than a second (or even third) mortgage, a home improvement loan or even a home equity line of credit. In a short sale, these liens will still need to be paid in full or otherwise resolved. The bank with the first mortgage may agree to a short sale, but the others may not.

A divorce can also be an issue. When couples split and the divorce decree is signed, the ex-spouse may remain on title. If so, the “ex” will have to deed the ownership back to the person living in the home before the home can be sold.

3. Check the listing agent’s experience with short sales.

Before the housing debacle, many banks weren’t used to short sale requests and didn’t have properly trained staff to evaluate, approve and manage them. Today, short sales are much more common, and as more and more occur, the time it takes to process a short sale request has shrunk. When you approach the listing agent, ask if he or she is experienced dealing with short sales. (A real estate agent who has the “SFR” designation has been certified as a short sale and foreclosure specialist.)

The agent representing the seller should have experience working with a bank’s short sale department and be up to speed on what documentation the bank requires and the steps that need to be completed. Without the proper presentation, the short sale request could be bungled, delayed or perhaps declined solely because the agent and the owner did not follow the proper bank protocol.

4. Get pre-approved for financing.

When a bank first evaluates an offer, you want to make it as appealing as possible. That means the bank needs to be convinced of your ability to close on time. Along with your signed sales contract, you should include an approval letter from your lender. This letter should be on the lender’s letterhead along with your loan officer’s contact information, and it should highlight the amount for which you’re qualified, which just happens to be the very same as the short sale amount.

The letter should also state the items that your bank reviewed when issuing your approval. It doesn’t have to list how much money you make or how much you have in your bank account, but the letter should point out that your income, assets and credit have been evaluated and approved, and all that’s needed is a property address. The very one listed in the sales contract!

The pre-approval letter is still a key part of the short sale approval process if you’re the winning bidder, so make sure to get one from your lender before bidding. Then, you’ll be ready to bid on the home you want!

This information was originally published on Auction.com,
LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

Categories
Blog

The Short Sale Primer for Real Estate Investors

Thanks to the housing crisis of the last decade, most consumers are familiar with real estate terms like “foreclosure” and “subprime,” even if they don’t fully understand them. But one term that might not be as familiar is “short sale.” Yet short sales provide a good opportunity for novice real estate investors to buy real estate below current market value.

Short Sale Math
A short sale, by definition, means that a lender has agreed to accept less than what’s owed on the mortgage as a debt paid in full. Short sales have been around for decades, but their existence was relatively unknown to the general public until lenders and agents alike began promoting the option. Here’s a typical short sale situation:

A homeowner buys a home five years ago for $500,000 and puts 10 percent down, borrowing $450,000. Over the next few years, not only does the home value fall, it falls to $300,000 based upon the relative selling price of nearby homes. But when property owners sell, they have to satisfy all existing liens on the property. In this example, the loan balance using a 30-year fixed-rate loan at 5 percent would pay down the mortgage to just over $413,000 after five years.

If the homeowner wanted to sell, the mortgage lender would say, “Fine, but you still owe us $413,000.” If the property value is $300,000, the seller needs to bring in $113,000 more just to cover the existing mortgage.

This scenario played out across the country during the housing crisis and still does to this day. Thousands of homeowners everywhere are “upside down” on their mortgages. That’s where a short sale comes into play and why real estate investors should be aware of them.

With a short sale, you’re negotiating more with the lender and less so with the owner. Why? Because the lender has the final say in whether they will accept less than what’s owed.

When a lender considers a short sale request, there are two possible outcomes: The home goes into foreclosure and the bank has another house in its inventory, or it accepts less than what is owed at a price closer to the current market value.

Advantages of Buying a Short Sale
So, what are the advantages to buying a short sale?

A better price. The primary advantage is a better price. Short sales are often priced below market, so a buyer can get a property for less than it would be worth if it were a traditional sale. The lender may be more anxious to negotiate a lower sales price in lieu of moving forward with a costly foreclosure. On Auction.com, buyers have the advantage of seeing each bid that is submitted. This transparency lets buyers know exactly what they need to pay in order to purchase a home, without overspending.

A chance to inspect the property. With a short sale, you also have the opportunity to inspect the property before finalizing the sale. In contrast, you may have some degree of difficulty inspecting a home that’s already been repossessed — a full inspection may not even be an option. But when the home isn’t yet foreclosed upon, the owner may be more accommodating and allow you to hire an inspector to get a solid understanding of the property’s current condition. With that in mind, the property owner is required to provide you with a list of any known issues with the property, such as recent flooding or appliances that need repair. Auction.com works closely with listing agents to ensure that buyers can view properties at open houses or by appointment.

Less competition. Considering a short sale purchase can also mean less competition. Investors who only concentrate on foreclosures — rather than pre-foreclosures — miss the short sale opportunity. In areas where housing inventory is in short supply, investors can take advantage of the short sales available exclusively on Auction.com.

Financing is often available. Foreclosure or bank-owned sales typically require that you pay cash. With bank-owned sales, this is especially true if the property is in bad condition. In contrast, lenders are more likely to finance a short sale. Because the property owner still has a financial interest in the property — and is probably still living in it — short sales are by nature less “distressed.” A majority of the short sales offered on Auction.com are financeable.

The Short Sale Timeline
Short sales do have some challenges. One major consideration is the time it takes for a bank to approve a short sale request package. Some short sale approvals can take up to 60 days or more, although banks today seem to be reducing that timeframe as more and more short sales are approved. Remember, you’re negotiating with the lender, and the real estate agent listing the home may not have very much experience with the short sale process, much less the owner.

Patience is important here. If the lender rejects your offer, you may receive a counteroffer that you can accept, counter and resubmit — and so on. This isn’t the case with Auction.com, where the auction is the negotiating process. Since the bidding process is transparent, buyers on Auction.com know what amount they need to bid online in order to win the auction. Also, the auction purchase process is often shorter, since Auction.com has a direct relationship with the mortgage servicer and experience processing thousands of short sales.

Finding a Short Sale
There are several ways to find a short sale. First, you can pay attention to “For Sale” signs that have a “Short Sale” rider attached with the contact information for the listing broker. The sign means the bank is open to a short sale request.

Another way is enlist the services of an experienced real estate agent. He or she will know the market and will give you advice on whether a property is overpriced or underpriced. Do some of your own research on real estate websites, but keep in mind that their valuations of a property may not be entirely accurate.

You can also visit the local county recorder’s office and investigate “pre-foreclosure” notices or a Notice of Default. These are the first legal steps that lenders will take before filing for foreclosure. These notices show the property owner, contact information and the lender, along with other characteristics of the home. At this stage, the lender may be open to a short sale request but the owner must make the request, not you.

Understandably, these options can entail a lot of legwork on your part.

One of the most convenient ways to find short sales as potential investments is to check the listings on Auction.com. Here, the initial work has been done for you: The lender has already accepted a short sale request — all that’s needed is a buyer. Property details and photos are available for buyers to review before choosing to place a bid.

If you have your financing options ready to go and can find a short sale in this manner, not only will it streamline the process, but you’ll also have the opportunity to get a great deal at the same time.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.