2015 was the year for industry experts to share their wisdom with the clients-only myEQUITY online community. While we plan for a new year of enlightening education, let’s take a look at some of the highlights from our Ask the Expert Q&A sessions, which included details on performing due diligence and getting started with real estate investing. (If you’re an Equity Trust client, you can follow the links below for the entire transcript of each session.)
Dyches Boddiford, January 8, 2015
What are the drawbacks to buying properties at sheriff’s sales?
There are several kinds of sheriff sales, but I assume you are talking about property tax certificates or deeds (depending on the state). Having your IRA funds available at the sale is usually the biggest issue since the sheriff wants payment upon sale or by end of day. This is a logistics issue you will need to work out with your custodian.
Also, be aware that any property not redeemed will need to have a quiet title suit to get title insurance if you want a bank loan or to sell where buyer is getting a bank loan. This is just a court action to have a judge say all the requirements of law were met in the process. The time and cost will vary by state, but expect $3,000 to $5,000 and six months to a year. This expense will need to be paid by the IRA. There may also be other issues depending on the state, so investigate fully before investing.
Matt Bowles, April 28, 2015
What is the easiest and quickest way to perform due diligence on property that I cannot personally look at? Specifically:
type of neighborhood
value of property
condition of property
is property in a desirable school district?
Great question! I would recommend that you conduct the exact same due diligence regiment for an out of state property that you would conduct if the property was in your hometown. So, to determine the value of the property, you would simply hire an appraiser (or get a local broker price opinion to show you closed comparable sales).
To determine the condition of the property, you would hire a professional home inspector. Same thing you would do if you were buying a rental property on your own block, or a primary residence to live in. Remember, even if you could walk through and look at a property in your neighborhood, unless you are a professional home inspector, you would not be able to identify all the potential problems with the property that would be identified on a home inspection report.
So, even if you can see and touch and feel the property, I would encourage you to have the same due diligence regiment, using 3rd party professionals to evaluate these things for you, whether the property is in-state or out of state. And if it is out of state, that is often better as you won't be tempted to skip any of those steps by just looking at the property yourself.
Also, in terms of looking up school districts and that sort of thing, it is all online these days, so basic internet searches allow you to see school rankings pretty easily. One other online service I would recommend to you that tons of our clients use is RentRange.com. That service is able to tell you, down to the address level of the property you are looking at, what the fair market rent should be, what the local vacancy rate is, and which way the local trends are going in that particular location, with a remarkably high degree of accuracy.
John Hyre, August 11, 2015
I have helped our grandchildren by making contributions to their Coverdell accounts. Their parents are the responsible parties on the accounts and my wife and I only send them money to add to the accounts. Can they use money from the Coverdell accounts to buy Tax Deed property and can we, the grandparents, use the property as a vacation property? Can the parents later sell the property with the money (profits) going back into the Coverdell?
The grandparents CANNOT use the property. That'd be an indirect "personal benefit" to the grandkids and as such, a prohibited transaction. Can the person running the account buy such a property and later sell it for the Coverdell? Yes.
Here's a question I have not thought much about: The kids cannot sign contracts if they are minors and cannot reasonably be expected to self-direct. The parents are disqualified parties as to the CESA, which creates risk of a fatal prohibited transaction if they run the CESA. Safest bet (and yes annoying) is to have a trusted third party run it for compensation.
Vena Jones –Cox, October 27, 2015
I've been thinking about getting into real estate as an investment and have done a lot of reading. There is just so much to know - and that's just if you want to buy a house - never mind all the different types of commercial property or land! It seems like the more I read, the more questions I have.
So here's my question... what was it like to do your first deal? Did you have a team of experts or did you just do it on your own?
There's a name for this: analysis paralysis. Don't worry, it's extremely common and only fatal to your real estate career, not to you personally.
Take a step back and go at this in a different direction: what are you trying to ACCOMPLISH? Are you looking for passive income? Cash? What's your timeline--would you plan to own any properties you acquired for 5-10 years? Indefinitely?
When you've decided what you WANT, it's a lot easier to pick a strategy on which to focus. Once you've done that, the amount of stuff that you "need" to know shrinks enormously--to a point, in fact, where you can get your arms around it and actually start taking action.
There are only 4 exit strategies for ANY piece of real estate (and most real estate-related assets, like notes and tax liens) and they fall generally into the categories of:
Wholesale it (sell immediately, without any modification, to another investor for a cash profit)
Retail it (buy cheap, modify/repair, and sell to a retail end buyer for a higher, one-time cash profit)
Hold it for income
Sell it but carry back financing in some form
Each of these gets you different benefits in terms of TYPE of profit, long-term wealth-building potential, tax consequences etc. The TYPE of asset you invest in is actually LESS important than what you do with it—i.e. the exit strategy.
When you understand your goals and understand the exit strategies that will get you to those goals, you can do what all beginners need to do, which is get good at one thing and one thing only.
Don't worry about "missing out" on other opportunities during this stage; you can't do everything anyway, so why worry about learning everything? That will come with time and experience.
My first deal was a VA loan assumption on a property where the seller wanted to move to Tennessee to be with his kids. It needed updating but was livable, and I lease/optioned it to a handy homeowner.
To get that deal, I made 100 offers that got rejected. I looked at 100 houses with no real idea of what I was looking at (though after about #50, I realized that there are only just so many things that can go wrong with a house).
My "team of experts" were my mentor and my REIA group. I'd take photos of things I didn't understand--bad box gutters, leaning garages, that sort of thing, and corner someone who'd done a lot of deals and ask what it was and how much it would cost to fix it. I had a basic education about what a "good" deal was (like how much to pay based on value and repair costs), a set of basic contracts, and a determination not to work for anyone else. That was about it.