Buying Investment Property - Research and Inspections
Property market (Photo credit: Alan Cleaver)
If you are interested in making an offer on an investment property, your goal should be to learn as much as possible about the property before you make the offer. Â There are a number of free online resources, including Redfin.com, Zillow.com and other sites where you can get sales history, property tax data, information on comparable sales, etc. Â Your real estate agent may also have knowledge of the area or be able to help you obtain sale/lease comparables and property reports prepared by title companies/other information providers. Â Property reports are based on public record searches and include mortgage history, owner of record history, foreclosure status, etc.
With all the competition in the market today, your best bet is the "shotgun approach," where you submit offers on multiple properties. Â You will need an agent who is technologically savvy and can process offers electronically (using Docusign or similar technology) to do this. Â Also, you do need to do your research to evaluate comparable properties to develop an offer price. Â The more you try the better your chances are of landing a good one. Â
Once you are in escrow, you need to quickly learn as much as possible about the property to make an informed decision to continue with the purchase before your right to cancel the contract expires at the end of the inspection period (17 days in a standard California Association of Realtors form):
First, make arrangements to view the property with your agent - you may not have had time to view the property before you made the offer, since it may take many offers to get a property into escrow. Â You should be able to quickly assess whether it is worth continuing or better to cancel the escrow. Â
Review all publicly available information about the property, including information on the real estate websites, property tax records, Google search, etc. Â Walk around the neighborhood and talk to the neighbors. Â
Location, location location - If you are afraid to get out of your car, you might not want to buy there; however, a good rental property is not necessarily somewhere you would want to live - it just needs to work financially for you
Carefully review rental comp's on Craigslist and what your agent provides you from the MLS - don't be overly optimistic about rent and do assume a discount to market; it's a lot cheaper to discount the rent than it is to endure months of vacancies while you test the market
Next, check with your banker to make sure there are no issues with the property that would preclude getting a loan.  Be especially careful of condos - lender requirements have become very stringent for these types of properties.  For example, owner-occupants must make up 51% or more of the total units in the project and Fannie Mae, Freddie Mac, and FHA won’t guarantee loans in condominiums where more than 15% of the home owners are 30 days or more overdue on home owners association fees.
If it looks good, I recommend a professional inspection of the property. Â The inspection report can help highlight areas of concern that you might have missed and also provides a "to do" list of repairs that may be required prior to being able to rent the property. Â Make sure you budget funds to do the initial repairs/renovations and plan to get them done quickly so you can start showing the property to prospective renters as soon as possible.
If you are buying a condo, perhaps the most important information is provided by the Homeowners' Association. Â Carefully review meeting minutes, CCR's, HOA budget and audit report and also the statistics on owner-occupancy percentage as well as delinquency rate. Â Ideally, you want an HOA that does not have litigation, is financially strong and does not have a history of special assessments or dramatic increases in monthly HOA dues.
Check in with your insurance agent for a rental property rate quote - maintaining adequate insurance on the property is critical; especially liability coverage - you may want to have excess coverage in an umbrella liability policy. Â
Update your cash flow projections to make sure that the numbers still make sense. Â Keep updating and reviewing the numbers as you get additional information.
If you don't have positive cash flow, look for another property. Â Don't bet on appreciation saving the day.
Related articles
Every Home Buyer Must Read These Four Things Before Closing
Purchasing Real Estate? Check Out These Helpful Tips!
