How to Reduce Risk Fast When Buying High Return Rental Income Homes (Fifth in a Series)
- By George Beardsley
- Published 07/30/2011
The four elements at this stage are:
1. Who really owns the house now? It better be the person you name in your contract as the seller.
2. What is the house really worth? Location, amenities, market and rental value, condition?
3. How much money leaves my pocket now and later?
4. Who will be responsible for the house after you buy it? Most folks think it should be them.
For the majority of people these may seem like pretty simple requirements. Most people buy a few houses in a life time. The more houses you buy and especially the more you buy at really cheap prices where you will be able to have double digit profits by renting the houses, the more likely you are to run into someone trying to sell you a house they do not own.
Sometimes this is really innocent. The person trying to sell the house to you did BUY it, but something went wrong then or there are liens or other “strings” attached to the house since then.
In a few cases in my experience, the seller did not own the house, but thought they did. For me this has usually been the case where a husband or wife has left and has no interest in what happens to the house and the spouse that is living in it thinks they own the entire house.
In one case, the seller told me that his lawyer (who was now a sitting judge) had told him that he did not need his wife’s approval to sell the house. Hard to believe that any attorney does not know real estate law, but frequently that is the case. A family law attorney or personal injury attorney will not know all the details that a board certified real property attorney will know.
Fortunately for you, you also do not need to be an expert in real estate law if you follow this one key rule: Never close an agreement to buy real estate at the seller’s kitchen table. Get the contract signed and turn it over to a title agent or attorney who specializes in closing real estate transactions.
They will do a “title search” and find out who really owns the house and who needs to sign the deed transferring the home to you. Good news! This should also be free. Check with the attorney or title agent first, but the examination of title should be free. If the “seller” does not own it, they cannot sell it, and I have never paid a title agent or attorney when we were not able to close the sale.
So how do you know what the house is worth?
First ask the Realtor who put the offer in for you to do a CMA. This stands for competitive market analysis. The Realtor will do it by searching the real estate agent computer of similar houses that have sold within the last three months in the area and comparing your specific house to the average sale prices in the neighborhood.
If you are getting a loan the bank will want an appraisal and want you to pay for it. It’s part of the price of getting a loan from a bank. Better suggesting two articles later.
If you are close (not on the moon or in Two Rivers, Wisc) use one of the most powerful real estate tools ever: Talk to the neighbors. Probably the best power tool ever for home buying is a nosey neighbor.
And let’s face it. Most of us are exactly that. We want to know the problems our neighbors have and we noticed that the plumber’s truck was there far more than anyone should need.
Don’t interrogate the neighbors, just chat. Tell them you are thinking about buying the house and you hope they can help. Ask if they know how much it could rent for. They may say “no.” If they do, you say “I know you are not a rental agent, but if you did know how much houses are renting for?” You will be surprised.
And! Google the address and the name of the seller. That has saved me thousands of dollars. Frequently it has let me know how flexible the seller is willing to be and why. If a few attorneys general are looking for the seller, the price just went down.
Look the rental value up in rentometer.com as well.
Be sure to have a clause in the contract to purchase that your offer is conditioned (or subject to) your total personal satisfaction with the findings of a home inspection.
Do not do the home inspection until you have a contract approved by the seller and you have decided you want to buy. The inspection will cost $300 to $500 (it is negotiable) and the money should not leave your pocket until you are as sure as you can be you want the house to rent out.
If you are in the area, go with the inspection. If you have never bought an investment house before, it will be a great education and will give you a good idea of how much repair and maintenance will be for the next few years. Crank this estimated expense into your offer to buy.
You may want to abandon the offer to buy or renegotiate the price based on the finding of the professional. Your Realtor may have a recommendation on who to hire for the inspection or you can use Angie’s List or the web for home inspectors.
At every step of the way, keep your cash close. Earnest money for the contract, if you are buying from an individual should be $10 to $100. You will probably have to put $1,000 down if it is bank owned, which is a good reason to try to buy from an individual.
In addition to willingness to accept less earnest money, real people are easier to deal with and can usually give you an answer to counter offer or questions much sooner.
They also are more likely to be bright enough to understand any creative features to your offer.
And finally, once you have gone thought all this effort to purchase, do you want to be responsible for the house? I suggest that there is a legal way to own the house that takes a lot of financial responsibility off of your shoulders.
In the next article in the series we will look at that legal loophole to cut your liability for the ownership of the house and in sixth article in the series we will explore some of the “creative” elements you can put into your contract to buy the house.
George Beardsley has written extensively about finance and business starting with the Chicago Tribune. He has been buying, fixing and renting houses is Florida for 20 years and has a FREE report on Beating CD Rates at with income properties done for you at http://www.easy-rental-income.com.
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