Real Estate Investing Today - One Investor's Story

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.

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! 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 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 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.