Is there any way to assure real estate success, to purchase real estate at the bottom of the market, sell at the top and face no risk in between? It would be great to say that the answer is yes, and greater still to have such knowledge, but the reality of investing is that such certainty does not exist. There’s always risk, including the risk of not doing anything and missing an opportunity.
But if it’s true no form of investing is risk-free, then it’s equally true that there are steps which can be taken to reduce marketplace perils, especially when considering insolvency sales, sales in execution and distressed properties in general.
So what are the keys to distressed property investing success?
“Each local market is unique and always changing,” says Rael Levitt, CEO at Auction Alliance. “While history is a guide, it does not guarantee how markets will perform down the road. The best way to profit as a real estate investor is to first identify the markets you think are best for you and your finances, do as much research as possible; and then look at factors such as pricing, rental rates, financing, population and job trends.”
Are there specifics to help you identify a potentially good deal? While we make no guarantees, here are 20 key factors to consider:
1. Property must be available at a substantial discount relative to similar properties in the immediate area. Otherwise why bother?
2. In a practical sense, expenses to repair a distressed property to make it saleable or rentable should be seen as part of the acquisition cost, even if such expenses are made well after transfer. The same is true of the cost to hold vacant properties. In all cases you must have substantial cash or credit for vacancies and repairs. More is always better than less.
3. The property market is large and it’s important to consider a wide variety of options. Most properties won’t work for one reason or another, the trick is to find the few that will. Track auction companies who specialise in distressed properties and follow web sites like auction.co.za to locate and compare local distressed properties.
4. Understand the term “distressed” in a general sense. It should mean not only homes which have been sold by sales in execution and insolvency practitioners and are now being sold by banks, but also Rapid Auction Programme(RAP) sales and other properties facing legal foreclosure.
5. Have financing in hand. You must be able to finance the property for cash or get long-term financing from a regular lender. In the case of bank-owned properties, the bank may have a program in place to finance their own properties in possession (PIPs).
6. Buy where you live. Why? You already “know” much about the local market, you have marketplace intelligence from the local media, brokers and conversations with friends and neighbours. Buy 200kms away and you lose these advantages.
7. Sometimes you can quickly buy and sell a property which is known as “flipping.” Sometimes it’s better to look at the option of speculating and making a quick return rather than holding, so look at buying cheap and selling cheap. It is often smarter, for at least the coming few months, to quickly buy and sell distressed properties.
8. A viable real estate market must be in place if you expect to quickly re-sell the property. There’s no sense buying in a down market with an intention to sell if the market is so slow that a profitable sale is unlikely, even for homes bought at a discount.
9. The local area must have a stable or growing population and job base. That is why urban based properties are always in demand, and it is necessary to assure there is demand for the property. For specifics, speak to local estate agents and ask for hard statistics, do not rely on puffery.
10. Establish reasonable definitions for success. Yes, it would be great to make R250, 000 on every property, but making R50, 000 is not so terrible, especially if you learn things which will help with the next investment.
11. If it’s your intent to quickly buy and re-sell property then always practice good investing technique: Make a photographic record of the property inside and out on the day of auction. Make another set of photographs once the property is fixed up and repaired. Why? For tax and insurance records, to show the condition of the property if it’s rented and the tenants later cause damage and to have evidence of the improvements you made.
12. Have a written contract in place before purchasing with others. Such agreements outline the division of profits, show who is responsible for what and explains what happens if one owner wants to sell and the others do not (or vice versa). Written agreements are especially important if buying with friends and family — if friendships erode or someone gets divorced you don’t want to have your investment compromised.
13. Surround yourself with professionals such as estate agents, conveyancing attorneys and valuers. Yes, there’s a cost to such services, but that cost in advance is minimal compared to the expenses you could face if preventable problems are ignored.
14. Know the rules and understand legal issues with regards to distressed buying. For instance, if you buy on a sale in execution you will be liable for arrear rates and taxes but if you buy on an insolvency sale you won’t pick up these costs. Be sure to speak with attorneys and auctioneers before entering the marketplace.
15. Buy in the path of future growth. This means you want to look for properties in areas where new roads, stores, offices and schools are being built and rebuilt, where there’s some excitement and verve.
16. A reasonable and obtainable rental rate for the property should at least cover cash costs for principal, interest, taxes, insurance, home owner levies (if any) and rental brokerage fees (if you use an agent). Alternatively, a monthly loss — negative cash flow — may be acceptable if you have sufficient reserves to carry the property and the end result is a profitable sale or a higher future rental rate.
17. Be aware of tax issues. Capital gains is something to consider if you’re quickly buying and selling.
18. Be careful with units in sectional title developments. In a complex with a large number of repossession or non paying units, you could be hit with a special levy if other owners are not paying their fees.
19. Spend time with local real estate brokers, attorneys, lenders and investors. What do they think? Where are they investing? What have been their biggest successes — and their biggest mistakes? You can sometimes meet such folk at real estate auctions, open houses, closings, etc.
20. Don’t be afraid to say no. There’s risk in real estate investing. If you can’t find the right property with the right advantages, if the risk is not right for you, then don’t enter the marketplace. Real estate investing is a business activity so forget about ego and status, keep your eye on the money (everyone else does), work with brokers and lawyers and always do what’s best for you.