I was dismayed to read today about a real estate investor who was the victim of a ‘scam’ involving one ‘sourcing’ company (who seems to be well know for such things, according to Google). Read about it here.
The investor made all the classic avoidable mistakes – he plainly didn’t check Zillow or Trulia (put in the links for these) for the price history and market price for the property, he didn’t visit the property, he didn’t check out the property manager, the rental contract, or the condition of the house. And he ended up paying for it.
Due diligence is a vital aspect of any real estate purchase – fortunately there are plenty of reputable brokers and sources of real estate both in US and UK and, while they provide a valuable service and source good quality, usually turnkey investments, all of these will ask you to do your own checks and due diligence before committing any of your hard earned money.
Ok, lets say you’ve found a property finder who you get on well with, and he’s found you a property that, at least on paper, looks like a good investment. What next?
- Check out comparable properties nearby. Checking the address on the Zillow or Trulia websites easily achieves this. You can see what else is for sale on the market nearby and what has sold recently and for what price.
- Visit the property. This of course isn’t possible for everyone. If it isn’t possible, the internet can provide viable alternatives – A quick ‘virtual’ visit to the neighborhood on Google street view can tell you what the area is like – are there many boarded up and empty houses? Are there a lot of gaps? Is the house the same as the photos the finder sent you? In addition to this, the finder, if reputable, will have contacts with good builders/maintenance teams, who can take a quick look at the property to see if there are any repairs required and assess the overall condition. If you can go there yourself, go with a builder to check the same.
- Speak to a local letting/management agent. Again, a reputable property finder will be linked up to a company like this who can perhaps check the tenants, and check the existing rental contract. You can check market rents on Zillow and trulia, and confirm the rents with the agent. He will also be able to quickly assess the quality, and check past payment history with the seller.
- Check for back-taxes owed and any other liens. Your attorney can do this in the purchase process, but if you feel there maybe an issue, it’s also worth checking yourself with the local city hall before you commit. You can also check who the current owner is online without too much trouble, and if there are any title issues there.
When your happy with the area, condition, tenants and title, then take the net rent, AFTER the letting/management fees, taxes, water, user fee (garbage collection) and take a FURTHER 15% off that figure for potential voids and repairs. This figure should be your net net income – it varies from city to city, but in Buffalo with the houses we buy it’s around 12-20% depending on the area and whether it’s a single or double unit.
This should be the figure you’re happy with as an income from the investment, weighing up the potential growth, the areas potential, and the various other risks. There are various methods on assessing risk in an investment – this article, although 2 years old, cites investment risk as
- % of people spending >30% on housing
- % without health insurance
- % not working
giving an overall housing stress indicator. Buffalo was shown to be the lowest risk city for investors in USA, followed by Pittsburg and then Minneapolis.