Real Estate Investing Today - One Investor's Story
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Real Estate Investing Today - One Investor's Story
Categories: Real Estate (https://gradesfixer.com/free-essay-examples/real-estate/)
If you are investing in real estate or plan to, this story provides some valuable
lessons. It's not about someone just beginning their foray into real estate investing or
someone hopping on to the foreclosure bandwagon. This comes from my own
personal experience. As a real estate investor for 30 years, I have seen my share of
real estate cycles, but nothing compares to what we are experiencing today.
Recently I had an exchange on one investment property that I need to do in order to
keep deferring the tax. With a standard 1031 exchange, you are allowed 45 days to
find a replacement property and 180 days to close. However, my exchange is not a
typical 1031 exchange. It is from an insurance payout on a property that was part of
an older exchange. This property had a sinkhole and due to this, the insurance
company no longer wanted to insure the property so they paid me off at the fair
market value of the property, which at that time was higher then it is today. I paid off
my loan with the proceeds then resold the property "as is", full disclosure to a nice
couple who probably could never have otherwise afforded to live in the community
where the property was located. We did the closing in a local attorney's office, as I
wanted no mistakes on the sale of this property. For those of you not familiar with
exchanges, because this was an insurance payoff, you are given more time to re-
invest. If I do not re-invest the dollars of profit and my basis from this insurance
exchange, I have to pay tax. Exchanges are tax deferred until you stop doing them.
Then you owe the tax that goes back to your basis in the original exchange. In other
words I would have to invest more money then I received from this insurance payout.
About this sample
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Normally, it would not be that difficult to obtain another property. However, due to the
current market conditions it's not only a matter of finding the right property, but
obtaining the financing. Financing in today's climate is quite challenging with lenders
not lending and high investor loan rates. Even if you can get a loan, the sheer
number of foreclosures and short sale properties out there is overwhelming not only
to lenders (who are backlogged at least two months) but also to us investors. Not to
be undeterred, I decided to see just how things really were in a market I know and
understand but have not invested in lately. I also thought I could find the money from
other "financial friends" if I have to. I've been a real estate investor for quite a few
years and have met many resources in the industry, so I wasn't concerned. With my
strategy in place, I took myself real estate shopping to Florida. I know, some people
go for the sun, but since Florida is on sale and I love to shop I headed south. Before I
left for Florida, I reviewed dozens of foreclosure sites, did cost of living studies;
researched education, arts, crime, and other statistics I felt was necessary to identify
communities I may have an interest in investing in real estate before I left for Florida. I
had 3 objectives for my real estate tour. It Must Have Cash Flow The property must
generate positive cash flow. If I put down 10% how much will I make every month to
cover the 10% down payment? How quickly will I get my money back? Is there enough
positive cash flow to make up for any emergencies, vacancies or other surprises? I
expect positive cash flow on my investment. Re-Invest the Profit I needed to be able
to re-invest the profit from the exchange.
Newer Communities
My investment practice is to be able to invest in newer family communities where
people want to live. Is there is a pride of ownership in the community? Are there
amenities such as shopping and schools that are close by? Is the Interstate close by
but not right in the backyard? I read with interest that Florida is on sale. Now I needed
to see for myself if the sale is like a promo sale where the retailer advertises a sale
but there really is no great deal, or are we talking SALE! Once I got to Florida and
began my tour, I quickly learned one thing that every real estate investor, seasoned
or not should know. If you think you can buy property over the Internet from these
spiffy web sites that have instant quotes among other bells and whistles, FORGET IT!
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There is no way you should try to buy anything site unseen. Even if you have a trusted
person in an area you wish to invest in trust but verify. Get on the plane, the car, the
bus and see for yourself what it is you are buying or stay out of this market! I
discovered that in communities that are overbuilt, tons of houses sit empty and
property values in communities are well below 50% from the 2007 high. I visited three
communities on my trip; one area was so bad I was convinced that the empty
houses outnumbered the occupied ones! I also learned a few things about Florida
real estate that I had not known before.
Drywall Problems
Everyone was talking about the lawsuits from homeowners to builders and previous
owners on poorly constructed homes with drywall problems. Apparently some of the
neighborhoods in the developments I was visiting are experiencing environmental
hazards as a result of drywall that was not cured properly. So not only do I need
home inspections for the structure itself, but also I need an additional inspection for
a new problem on houses built from 2004 through today. Over-Speculation There is
more than one reason why property is on sale in Florida. Many areas I visited had
property that investors bought on speculation. Once upside down, these investors
walked away from the property. There are whole communities vacant as a result of
investors making poor decisions in the recent past and now communities sit in
various stages of completion. I for one am not interesting in acquiring property in
areas where no one wants to live. HOA Fees Many new communities have covenants
and HOA fees (homeowner association fees) that are outrageous. In one community
I would have to pay almost $200 per month just to a community association, which
would have an impact on my cash flow.
Also, if there are enough foreclosures, short sales or other distressed property, who is
paying the HOA dues on all of these problem properties and is the community able
to keep up with the maintenance that these fees are paying for? I must have looked
at 3-dozen short sales or foreclosures before I found one that I was ready to make an
offer on. It turned out to be a property where the borrower was not having taxes and
insurance in an escrow account paid by the lender so they fell behind on their taxes
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and insurance 3 years behind. The lien on the taxes was sold as certificates to an
investor and now time was running out. The property needed to sell and the deal
closed in early June or else the investor who owned the tax lien certificates would be
able to sue for the deed.
The chances that the lender would allow approximately $15,000 in delinquent taxes
stand in the way of their position were slim to none. The lender wanted and needed a
sale and a closing. Period. The asking price on this home was $249K in December
2008. The lender dropped the price to $199K in March 2009. I decided to put in an
offer. With the short time available to close it had to be a cash offer in order to get
the bank excited. The property was a 4 bedroom 2 bath in a nice area where people
want to live. I did a cash flow analysis, some research and determined it would get
between $1200-$1500 a month in rent. I ended up putting in an offer of $130K cash. I
would figure out how I would get the cash later, but at least I had an offer in with a
deposit that the bank could review. In the past, that would be enough for the bank. In
today's market my cash offer and deposit were not enough for the bank. They
wanted verification that the funds were to be immediately available before they
would accept the offer. No verification. No acceptance. Another lesson learned. This
is not the financing that seasoned investors are used to. You better have the cash or
financing in place before you go shopping. With the economy what it is, the banking
industry in turmoil, the tightening of all markets, and the average credit score falling
to 651 (according to Trans Union, one of the three major credit reporting companies),
banks want cash.
They just don't want to be the ones to give it to you! In the end I did not get my offer
for the house or the bank accepted. I decided to go home and look locally, develop
relationships with those investors who have something to sell at the right price,
establish local lender connections. Focus on other strategies besides short sales
where it may be easier to get my offers accepted and not compromise my
investment strategy, which is to buy single-family homes in neighborhoods where
people want to live. The real moral for me in all of this and a lesson I learned was to
12/3/23, 4:44 PM
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not think the market I focus on is on sale; that I can just waltz down to an area on a
one time trip and buy whatever I want for the price I expect to pay for it and in the
end nothing is as easy as it appears.
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