Details NOT To Overlook When Buying Real Estate

Virtually every real estate investor and home buyer out in the market competing with you to find their next property will consider curb appeal, asking price, comp sales during the past six months, interest rates, estimated cost to update the property, resale viability, etc. But they may not be thinking of some other very crucial details.

1. Deed and Ownership Research

Did you know that in most counties nationwide, it is extremely easy to look up deeds to real estate? Why does this matter? If you are an educated investor and home buyer, you will want to find out as much as you can about the current and previous owners, including what they paid for the house when they bought it. More often than not, by looking up the deed, you can identify what the current owners borrowed to buy the house. Granted, this may not include what they put on the table as their downpayment, but if you know what they borrowed, you can reasonably estimated what they currently owe on their mortgage, thus increase your negotiation power by predicting what their bottom will be on the ask price.

Combine that with estimating the cost of what their upgrades to the house was, and then figure what their out of pocket closing costs (i.e. agent commissions) to get an idea of what their breakeven point is.

For example, let's say you're looking at a home that's listed for $250K, and it was built in 2007. The sellers are the first owners, and you also find out that they bought the house for $220K. You also find out they borrowed $176K to buy the house then, which is 80% of the purchase price, so you assume they did conventional financing (20% down).  Let's say that they put $15K in upgrades. 

From 2007-2015, let's estimate that their mortgage principal has been paid down to $147K (assume 5% interest rate at the time they borrowed). Also assume the industry standard 6% for agent commissions upon sale (for both Buyer's and Seller's agent).

My take on what the seller's bottom ask is would be estimated by adding the $147K owed on the mortgage, plus the $15K in upgrades that they want back, plus covering agent commissions, plus a reasonable return on appreciation of the property (let's say 3% per year, so 24% for eight years of ownership-which would be an expected return of about $58K). Add those together, and you get about $233K. 

It turns out that $233K is 93% of the ask price of $250K. That is not a bad place to start your offer. In fact, you might even come down to about 85% if the property is a foreclosure or HUD owned. I can tell you from experience that 85% is the magic ratio for HUD's asset managers.

2. Ratios, Ratios, Ratios

Ratios work. They are far more reliable than dollar amounts, and easier to cross reference when using actual market data to come up with the maximum you are willing to offer on a property, and how hard your negotiating will be.

I believe the price per square foot ratio is very useful, particularly if you have strong comparable data from other properties that are legitimately similar. It doesn't make sense to agree with a seller's valuation at $125 per square foot if it is basically the same as a handful of other properties that have sold recently for $80 per square foot.

3. Regional Comparisons of Year-Over-Year Appreciation (Or Depreciation)

Evaluating an entire region's real estate market can be daunting, particularly if it is a large metro area with dozens and dozens of different types of neighborhoods. But, still, you can pick a couple recently-sold properties from each major area in a regional market and research what the year-over-year appreciation in value has been.

From there you can get a reasonable average appreciation percentage, and then use that as a benchmark against what you evaluate the properties you are looking at. If a seller is expecting to get 10% return per year for each year they owned the house, but you find that average appreciation has held more along the lines of 3%-4%, then you have some real data to use in negotiating.

4. Ask For Previous Appraisals

This may or may not be feasible, depending on how willing the seller is to cooperate. But if you are able to get your hands on an appraisal that was done when the seller purchased the property, this is extremely valuable to you in negotiating.

5. Buy Extreme Value

This goes without saying, but there are situations in certain states (such as South Carolina which is a judicial foreclosure state) where there are short windows of time where a property owner has defaulted on the mortgage, but the lender has yet to initiate foreclosure proceedings. Banks do not want to spend the gobs of money to go through foreclosure, especially in judicial foreclosure states.  So if you can get details on the law firm that is being retained by the bank to conduct the foreclosure, you may be able to contact the firm directly and negotiate either a buy-out arrangement or simple cash deal that takes the troubled asset off their hands.

Do not be afraid to play hard ball and know when to walk away though. Banks (and their corresponding foreclosure law firms) play hard ball all day long and are used to it.