Practical Aspects of Home Buying
Cost of Buying or Selling a Property
How much will it cost to buy or sell a property? You can expect the following:
- Real estate agent commission: 6% this is included in the price, but you should be mindful that the seller has to pay these fees. If you take a buyer's agent, buyer and seller agent will split the commission 3%-3%.
- title search insurance and other legal fees: $2000-$3000
- home inspection fee: $300
- appraisal and mortgage origination would cost around $1500
Property Search
Where do you want to search for a property? If you search in the area where you live, you might get faster access to information, seeing a house helps you quickly understand whether this house is for you, and you can make an offer earlier than other investors. The question is how much of an edge do you get by being local?
A skilled home buyer with superior local information can hope to pay 5% to 10% less for a house in any given location. It is unlikely, however, that he would get to buy properties with more discount that this if the house is in tenant ready condition. If the buyer lives next to the property, he might be able to manage the property himself, and that would avoid his paying 10% of gross rent as a fee to a professional property manager.
However, some areas in the US yield much more than others. While it is easy to get a 10% rental yield near Atlanta (GA), there is no way to get anywhere near that in San Francisco (CA).
The traditional way to search for a property consists in organizing a meeting with an estate agent, describe to him what you are looking for, after which he will let you visit homes that he believes correspond to what you search. This process is very time consuming both for you and for the agent and restricts your property search.
Visiting in person is the best to feel the vibe and the soul of an area, and it makes sense for a home or a vacation home where you want to live. However, when it comes to making a rental investment decision, it should come next after making sure the property financials are aligned with your objectives.
A more modern way to do this is to consult online resources such as Zillow, Trulia which cover all the houses in the US. This will give you a precise idea of how much houses sell and rent for in any area. You can also feel the vibe and soul of the neighborhood by checking the crime map on Trulia (and see whether crimes are parking tickets or gangs shooting at police) as well as the school map, which will show you the quality of the school districts.
After that, you can contact a few local estate agents (through Zillow for instance), sending them a standard text that you arranged to describe what kind of property you would be looking at, and when you would be buying. You can then talk to one or a few agents and select the one you wish to work with for that area. (You should be transparent with the agent on the fact you are looking for an agent in the area, and then select one who will search for you). Agents should be able to advise you on the best online resource for the location. For instance, Zillow or Trulia listings can be a few weeks old in some areas, so that another website is more up to date).
Some agents contacted by email will never answer you call (they are not motivated) while some others will be more friendly. After the first conversation with them, you might ask them if they can advise a mortgage broker, a property manager and an insurance broker in that area. That should be easy for them and professionals usually like to be referred to each other. This will help you get started when you find a good house.
Again, if you speak to 4 or 5 estate agents, they will introduce you to 4 or 5 mortgage brokers, and you will have a good idea of what financing you can get, and what your budget is. Understanding what financing you can get is the first step in your buying real estate.
Once you selected one estate agent, he should be able to give you access to a personalized search on the Multiple Listing Service (MLS). The MLS is an online resource that contains the most up to date and most accurate information on what properties are available and what comparables have sold for. MLS is accessible to real estate professionals for a fee, so they will give you access for as long as the search is on with them.
If some properties are of interest to you, discuss them with your estate agent, he has a lot of local knowledge and will help you understand your investment, as well as advise you as to what price you can make an offer on a given property.
Buying Process
Before making an offer, you need either proof of fund from your bank or a pre-approval mortgage letter. So knowing the financial situation is a prerequisite.
The estate agent profession is regulated in the US. A person must be licensed as an agent and follow the regulation if he is to sell other's people homes. The typical forms that the agent will ask you to sign are standard forms issued by the state's board of realtor.
The estate agent should be able to discuss options with you, the offer will come with an earnest money deposit of a few thousand that you can get back if you change your mind within a time period described in the contract.
if you make an offer conditional on inspection, you will be able to request that the seller does repairs on warrantied items found during the inspection or ask for money. The seller may require you to make an offer as is, in which case you do not have the option to lower the price after inspection, but you can still walk away should the inspection turn out any problem.
A most important point is the time you are allowed to have the inspection organized, and decide whether or not to walk away. You cannot let that deadline pass without a decision as you would lose your earnest money for no reason since you can always obtain that the seller agrees and signs for an extension.
While a real estate agent will give you a sales talk, and some market information, a good home inspection report will help you understand the quality of the construction. The inspector will notice any minor building code infractions, and while they may not amount to much, this enables you to understand whether the builder knew what he was doing, and what you should expect regarding durability.
Rehab
Buying a house that is not in tenantable condition is a great way to obtain a property at an improved price. However, if fix and flipper are very active in a given area, it becomes likely that the only deals that are left are looser once the cost of repairs is taken into account. Buying for rehab is a much more complex operation than buying an already tenant ready property. It adds the complexity of finding suitable contractors and checking their work.
For this reason, it is not usually advisable to buy for rehab for an out of state investor.
Management
Before buying a house, you need to find a suitable management arrangement. If you cannot manage the property, property managers usually keep $600 to $1000 in reserve in case of emergency, charge between 8% and 10% of gross rent, and a month of rent as tenant finding fee.
Small to medium property managers should have 3 to 4 full-time employees managing the properties or doing accounts for 200 to 400 properties under management. Having this critical mass is necessary to ensure that the manager is experienced and can deal with an emergency, and to ensure that there is enough income for someone to be paid to be there to answer the phone.
You should also check how professional the property manager is: what kind of monthly report does he send, how simple does he make it for the tenants to use wire the money rather than wait for checks in the post, whether he uses credit reports to screen tenants. A good manager will have the ability to select and retain good tenants, ensuring low vacancy for your properties. A bad manager will struggle to keep tenants, and will also struggle to find new ones for your property resulting in high vacancy. Vacancy is the nemesis of your rental property profitability.
Some tenants are very easy to manage while some others will have constant problems. The latter will cost you money and will cost your manager time. Your manager should be experienced with managing similar homes to the one you have, and you should ask him about that. This experience will help him to appropriately screen tenants. His interest in this is aligned to yours; he wants tenants who never complain of anything and keep paying.
Finally, some property managers will propose contracts with much higher fees (11%, 12%) and substantial contract renewal fees for tenants who stay year after year. You should be able to negotiate those away, as those are not reasonable terms.
Turnkey Provider
Turnkey providers are real estate companies engaged in the process of buying, rehabbing, selling and managing properties for investors. They provide a turnkey solution to the investing problem. They generally look at properties marketed below $200,000 since prices above that would be more for fix and flippers who want to sell to homeowners.
Compared to a solution where you need to study a real estate market to find better yield properties, filter out the houses that need some rehab, and find management suitable for that property, a turnkey provider can enable you to access a property market.
Most turnkey providers are honest companies that can identify properties that would be appealing to renters after rehab, and are looking to sell these to a rental investor at a competitive price, the property management can leverage on their particular understanding of a tenant market segment, and can result in much lower vacancy and much higher yield. Therefore, you should definitely consider turnkey providers.
Turnkey providers do not need to be registered real estate agents if they own the properties they sell. This means that the contract they ask you to sign can be based on the state's realtor board forms or can be completely free form. In the latter case, you need to make sure there is a provision for you to walk away in case the inspection is done after the renovation is not satisfactory to you. You should also make sure that the contract terms allow for time for the rehab to be completed, and some weeks to carry out the inspection. Some contracts are drafted in a way that they do not allow this, but you can always agree with the providers on the insertion of reasonable terms, and then add them manually.
There are however a few warning signs you should consider: some providers charge prices far above market price for the properties, or else they ask for management fees at 12% instead of 10%. Finally, some providers have terrible feedback from dissatisfied customer online. Everything except integrity is negotiable, so you can always obtain better terms from your provider, but you need to be careful to see who you get to work with.
