A DUE DILIGENCE GUIDE FOR REAL ESTATE INVESTORS
As with most businesses, starting your real estate investment empire begins with developing a strategy and researching those investments that most closely align. While you might end up finding the deal first and basing your strategy around that transaction’s success (for instance, purchasing buy-and-hold rental properties in high rental demand markets that can be bought for the price of a car), in the best-case scenario, you’ll want to outline your strategy first, and then select properties based on that strategy (with refinements along the way, of course). The research that you conduct, both on the strategy and property ends, is known as due diligence. Due diligence is the process of performing a systematic and detailed analysis of a given opportunity. Due diligence is particularly important when you’re buying a house for the price of a car, as the return on the investment during the early years rests entirely on your ability to renovate the house quickly and efficiently and make it move-in-ready. In addition to due diligence being an activity— that is, the process of analyzing, digging in, and discovering the pros and cons of a property— it is a period of time. The time is not absolute, it is subjective and defined by the investor and seller. For instance, the investor and seller may determine that the seller can take up to two weeks to complete a property inspection and submit a firm offer. That two-week period is called the due diligence period. During this time, the investor will also request all disclosures on the property. If the investor finds any issues with the house, either because it turned up in the property inspection or it was revealed in the disclosures, the investor can back out of the deal and be refunded their earnest money, with no further obligation. THE PROCESS OF DUE DILIGENCE Due diligence is beneficial for you as the buyer in minimizing the role of emotion in your decisions and reducing decisions down to numbers and facts. But should you find yourself as the seller, for instance, of a property that you are flipping, you will want to undertake these same steps in determining a sales price? The due diligence checklist comprises the following components: Evaluate the neighborhood Assess the physical condition of the property Estimate the renovation costs Determine your potential returns on the investment Review the contract The Neighborhood Location, location, location is the guiding star for real estate agents, as they know the true value of a home lies in its neighborhood. All things being equal, real estate agents will tell you that you’ll get more bang for your buck buying the worst house on the best block than you will buying the best house on the worst block. This holds true with real estate investments as well, though with a bit more gray. In the case of a buy and hold, value accrues both from the appreciation of the property, usually realized over the long-term, and the rent from the property, realized as soon as the home is renovated and occupied. While there will be some indications of whether a neighborhood’s fortunes are on the way up (check the minutes of Planning Board meetings and the master plan for your city or town of interest), the steady-eddy indicators will be crime rates, school performance and employment opportunities. The Physical Condition of the Property Conducting due diligence on the physical condition of the property is best-accomplished through a property inspection. The purpose of a property inspection is to highlight the good, the bad and the ugly of a house. The Smart Cousin Definitive Checklist on Property Inspection offers a checklist of items specific to real estate investment properties. Key areas to evaluate include: House infrastructure: the foundation, roof and basement Major systems: HVAC, plumbing, well, septic and electrical system Exterior areas: drainage system, driveway, and sidewalk. Renovation Expenses One of the largest maintenance expenses that should be considered when evaluating a property investment is the cost of materials. Materials include everything from lumber and drywall to paint and flooring. Another significant expense is the cost of labor. This can include both skilled and unskilled labor, such as electricians, plumbers, carpenters, and painters. Depending on the work that the electrician, plumber and/or HVAC technician will have to do, permits will need to be pulled, so factor permit costs into your renovation estimate as well. The Financials Once you have your arms around whether the location of the property can attract buyers (for the buy and flip crowd) or renters (buy and hold investors), and can be renovated quickly (aim for no more than two months) and cost-effectively, next it’s time to get out your calculator to begin determining what your return is on the property. Your return means how much money you earn on your investment. Returns are usually framed as percentages. Thus, if you purchased an investment property and collect $10,000 a year in rental income, then your return is $10,000 / $100,000, or 10%. The saying, ‘it’s not what you earn, but what you keep’, holds doubly so when considering your return on real estate investments. So when calculating your return, base it on your net rental income, meaning the rental income that’s left over after financing expenses, property taxes, property insurance, property management expenses and property maintenance expenses are backed out. While there are additional expenses that your accountant or tax preparer will take into consideration (for instance, amortization and depreciation), the above expenses capture those items that stand between what you start with and what you finish with each month. LEGAL DOCUMENTS If you hire an attorney to draft or review documents related to the purchase or sale of an investment property, you may well feel that you don’t need to read these documents as this is what you pay your lawyer for. Nothing could be further from the truth. Yes, your lawyer is paid to make sure that the agreement is legally enforceable and won’t be thrown
THE DEFINITIVE HOME INSPECTION CHECKLIST FOR REAL ESTATE INVESTORS
As any seasoned property investor knows, real estate is a tough business where all that glitters definitely is not gold. This is why the details really matter when taking a look at your first property. Case in point: the property inspection. Aspiring homeowners need little convincing regarding the value of a home inspection, what with the twin requirements of their lender demanding one and their better-judgement knowing they can’t afford to risk their nest egg without one. Investors, however, often stand at the threshold of a property with a false sense of confidence, guided by their ‘instincts’ or ‘gut feeling’ on the potential upside of the deal, which can cloud their ability to spot issues during a walkthrough. There’s no denying that today’s market is red-hot, which, together with an appreciating neighborhood, can cover-up a multitude of sins for a poorly-selected property. Most properties, however, won’t be so lucky to have an upside material enough, especially in the first five to seven years of ownership, to conjure large returns out of thin air on their investment. As such, the condition of the property is crucial, especially during the first 12 to 24 months into ownership when cashflow is thin and expectations are high. Imagine for a minute buying a new home, only to have the roof leak the next day, literally raining on your parade. Or having your tenant point out large ruptures in the wall that you hastily wrote off as ‘settlement cracks’, which now seem to threaten the very foundation. These are the issues that a thorough home inspection can uncover, providing you with a clearer path to returns on your investment. To this end, My Smart Cousin has developed a Definitive Home Inspection Checklist to arm you with your own toolkit for your first or twenty-first home inspections. Before diving into this, let’s understand what a home inspection is, and those areas it should cover. WHAT IS A HOME INSPECTION The word “inspection” may sound invasive and even induce some knee-knocking, but it’s not as frightening as it may seem. A home or property inspection is a physical exam or check-up to gauge the infrastructural soundness of the house. Home inspections work in favor of the property owner to-be, that is, lil’ol’ you, and are particularly important to use when considering houses that are vacant and have sat unoccupied for many years. The home inspection profession is regulated in nearly all states, and licensed in a few. Your first step in selecting a home inspector is to ensure that he or she is licensed and insured. You are able to accomplish this by requesting a copy of the inspector’s license and liability insurance policy for the current year. WHAT INVESTORS SHOULD LOOK FOR IN A HOME INSPECTION Investors should use a home inspection checklist when looking to purchase an investment property, even if the only one doing the inspection is them. With an inspection, you can identify potential problems hiding beneath the surface. Some problems might be minor, say holes in the drywall or doors, while others could require significant repairs and remediation, for instance, extensive mold, flaking lead paint, or exposed asbestos insulation. Grouping issues into major and minor categories can help determine whether there are any issues that are significant enough to walk away from the deal. As mentioned earlier, home inspections serve buyers’ interests and can be a great bargaining tool for investors. If a long list of items doesn’t pass inspection, the prospective buyer can use one, some or all of the items on the list as leverage to negotiate a lower price. This is particularly the case if the investor is working with a motivated seller— a bank or a house that has been listed for months on end. And if the seller doesn’t bite and offer concessions, well, no harm no foul, you can proceed on with the deal if you’re satisfied with it as is. WHAT TO DO WHEN THE INSPECTOR FINDS AN ISSUE Once the inspector completes their inspection, they will provide an inspection report. The inspection report is a crucial part of the home buying process that will likely uncover at least one problem. Minor problems won’t affect your offer much and should be placed in the category of ‘fix-it-yourself’ once you purchase the property. But heavy-hitters affecting the structural integrity of the property will require a conversation or two with the seller. If the seller agrees to accept a reduction to the price or some other trade-off, ensure that the concession is binding by having it enshrined in an agreement that your lawyer prepares. And, of course, if the issue is too extensive or costly to repair, even with a discount, then walking away might prove the better option. Pro Tip: If you are a new investor, your real estate agent and home inspector can be great resources in understanding how bad, or not so bad, things really are. After your home inspection, you’ll receive a comprehensive report numbering some 20 to 40 pages that includes detailed descriptions and images of each item in the house that was inspected. Think of your home inspector as your teacher or mentor when you receive this report— ask the inspector to go through the report with you. Once you sign the report, you’ve essentially agreed that it’s complete and you accept it as-is. As such, now is not the time for bashfulness. Put aside any qualms you have about not wanting to be a bother, and get all of your questions out of the way regarding the report. CONDUCTING AN INSPECTION ON YOUR OWN Self-inspections are the best way to go if you want an affordable home inspection, and the property appears to be in good shape. Properties that are currently occupied with a renter can be good candidates for self-inspection because the house is habitable at some level. A do-it-yourself DIY inspection can also be used if time or money is in short supply. If so, then
WHEN SHOULD I CONSIDER HIRING A PROPERTY MANAGEMENT COMPANY?
Whether you are an investor to-be cozying up to the idea of taking the plunge and buying your first house for the price of a car, or you’re a seasoned investor with many owned and flipped properties under your belt, property management is a key element that can’t be overlooked. In short, property management has the capacity to make or break the value of your investment portfolio as well as your success as a landlord. Taking time to dig into the ins and outs of effective property management can save you headaches, not to mention money, down the road. Which raises the question: what exactly does a property manager do, and when should you consider hiring one? Let’s dive in to learn more. WHAT IS A PROPERTY MANAGEMENT COMPANY? A property management firm is a company, a partnership, or sometimes just a single individual, who shoulders the responsibility, via a contract that you, the owner, signs with them, to ensure proper maintenance of your investment home. In the initial flush and excitement of buying a property, it’s easy to minimize the time and flat out inconvenience of maintenance. Until, that is, you get your first middle-of-the-night call or have to drop everything to find a plumber (have both of these scenarios happened to me?— yes and yes). A third party maintenance company serves as the chief point of contact and middleman between you and your tenant on such issues, as well as the the first-responder in addressing your maintenance issues. A second role that the property manager plays is finding tenants, collecting rent, and when required, taking a tenant to court who has not paid rent, for instance, or damaged the unit. Because property managers are often directly or indirectly affiliated with real estate companies, they have significant experience interpreting and applying estate regulations and conducting tenant screening. PROPERTY MANAGEMENT COST In exchange for performing the above roles, property managers are normally paid at least two fees: TASKS PERFORMED BY A PROPERTY MANAGEMENT COMPANY As illustrated above, two of the biggest values that a property management company provides is 1) peace of mind that your investment is managed professionally, and 2) distance between you and your tenant on day-to-day maintenance matters and court disputes. Skilled property managers can save you valuable time and increase your returns by providing the following services: WHEN SHOULD YOU HIRE A PROPERTY MANAGEMENT COMPANY? Hiring a property manager comes with benefit of someone else standing in the shoes of the landlord and the cost of having to pay them to do so. The following scenarios, in particular, are tailor-made for securing property management services post haste: Follow us @mysmartcousinsin
ONE STEP CLOSER TO LEVELING THE PLAYING FIELD FOR RENTERS: ADVOCATES CELEBRATE HOUSE COMMITTEE PASSAGE OF SB 101
WILMINGTON, DE—This afternoon, the House Housing and Community Affairs Committee voted to advance Senate Substitute 1 for Senate Bill 101 (SS1 for SB 101) out of committee and onto the floor for a vote by the full House. SS1 for SB 101 provides the most vulnerable low-income renters a fair shot during eviction proceedings by guaranteeing a right to representation in court for renters who fall below 200% of federal poverty guidelines. “Eviction proceedings, where landlords are usually represented and renters are not, reveal a massive imbalance of power,” said Dan Atkins, executive director of Community Legal Aid Society, Inc. (CLASI). “That imbalance frustrates the very purpose of our court system — the pursuit of justice. The practical implications are profound — too many evictions, families displaced, and communities destabilized.” Since the bill’s introduction in 2021 — sponsored by Senators Townsend and Pinkney and Representatives Minor-Brown, Lambert, and Johnson — advocates have listened to concerns from landlords and lawmakers. Changes to the bill reflect a desire to build consensus, while still keeping a strong bill for renters who will significantly benefit from it. In its current form, SS1 for SB 101: Creates a right to legal representation for renters facing eviction whose household income is lower than 200% of federal poverty guidelines; Places coordination of the program within the Delaware Attorney General’s Office, who will contract with appropriate legal service organizations to provide representation in proceedings covered by the bill; Requires landlords to provide notice of the right to representation at certain designated intervals of a tenancy and in eviction proceedings; and, Creates an Eviction Diversion Program designed to help resolve payment or other issues once a landlord files for eviction. In addition to those benefits, SS1 for SB 101 introduces a post-filing mediation program and mandatory referrals to the Delaware Housing Assistance Program (DEHAP), which creates more opportunities for amicable, quick, and satisfactory resolutions of disputes in ways that keep families housed and landlords paid. Public comment in support of SS1 for SB 101 came from a wide range of stakeholders, including a Delaware landlord. Pam Hill, who owns properties in New Castle County, submitted testimony that read: “To me, passing a bill that secures the right to representation for renters facing eviction is common-sense. It’s not an attack on my rights as a landlord; it’s about ensuring that the rights of my renters are also taken into consideration.” Now that the bill has advanced out of committee, it will go to a full vote on the House Floor, then will need to advance through the Senate one more time before it can go to the Governor’s desk. Advocates hope to see this vote happen soon. “Representatives in the House Housing Committee took an important step toward leveling the playing field between renters and landlords today,” said Javonne Rich, policy and advocacy director at the ACLU of Delaware (ACLU-DE). “We applaud the vote in support of right to representation today, and ask all members of the House to stand up for renters by voting ‘yes’ on SS1 for SB 101 when it comes up for a full floor vote.” The Delaware Right to Representation for Eviction Defense campaign is a partnership between ACLU, ACLU of Delaware, Community Legal Aid Society, Inc., Delaware Coalition Against Domestic Violence, Delaware Volunteer Legal Services, Inc., H.O.M.E.S. Campaign, and Housing Alliance Delaware. More information about the Delaware Right to Representation for Eviction Defense campaign can be found online here: http://aclu-de.org/rtr. Read our Other Blog : A GUIDE TO SHORT-TERM RENTAL OPTIONS FOR YOUR INVESTMENT PROPERTY How to Score an Affordable Investment Property in 2022 Reference : Click Here Follow Us at @MySmartCousin
A GUIDE TO SHORT-TERM RENTAL OPTIONS FOR YOUR INVESTMENT PROPERTY
If you have one or several investment properties that you’ve bought for the price of a car and want added income without building a bathroom, bedroom or finished basement, read on for insights on growing your cashflow in the short-term rental market. WHAT IS A SHORT-TERM RENTAL PROPERTY? A short-term rental property is a property that is rented out for an evening or a couple of days to a few weeks or months. In short, anything rented out for less than a year under an annual lease is viewed as short-term. The types of properties that can be rented out short term come in many flavors including: your home sweet home a tiny house or cottage that you place, either temporarily or permanently, in your backyard or a side lot next to your home a single family investment property a small multifamily investment property of 2-4 units an entire apartment building bought solely for the purpose of short-term rentals ADVANTAGES OF A SHORT TERM RENTAL INVESTMENT PROPERTY Short term rentals can provide you with increased cashflow on the revenue, expense and personal budget fronts, giving your pockets a wonderful case of the mumps. Your Own Vacation Getaway: If your investment property is located in a city that you frequent for vacations, family reunions or get-togethers, then a short-term rental can save you money by avoiding hotel costs, and generate income when you’re not using it. Also, having a vacation rental that you own makes it easier to block off vacation timeframes that work for you. Fewer maintenance headaches: Short term rentals are subject to less wear and tear than year-round rentals because: 1) they’re occupied in only short bursts of time (for instance, an evening or weekend), 2) the unit is furnished so there’s no wear and tear from furniture or other large belonging being moved to and from, and 3) the damage deposit for a short-term rental of a couple of hundred dollars usually invites a greater level of precaution from visitors than a long-term rental might. Additionally, because of the gaps between guests visits, repairs and minor cosmetic work can be done quickly before any issues turn into a more expensive problem. Higher overall monthly rental income: The daily rate for a short term rental is higher than the equivalent daily rate for a monthly rental. As an example, the average monthly rent for a 3-bedroom, 1-bathroom house in New Jersey is $1,800, which translates into an equivalent daily rent rate of $60 over a 30-day period. The average short-term rental rate for a 3-bedroom, 1-bath house in New Jersey is more than twice this amount, or $130-$150 a day. Although your investment property will certainly have some level of vacancy, over the long-term, your short-term rental will out-earn its long-term peers. Real-time Price Adjustments: A long-term rental under an annual lease offers the ability to adjust prices only once per year. Additionally, depending on the state and tenant population, the annual increase amount might be capped. In contrast, short-term rental investors can adjust their prices after each and every occupant, based on market conditions and opportunities. Thus, if a concert or sporting event is coming to your area on a particular weekend, you can raise the price for your rental unit based on the increased demand. DISADVANTAGES OF SHORT TERM RENTAL INVESTMENT PROPERTY Of course, as with most investments, there are always downsides that should be discussed. Short-term rentals will require more day-to-day involvement than annual rentals in terms of marketing and communicating with the revolving door of guests you will have. As such, before diving headfirst into short-term rentals the moment your annual leases expire, consider the challenges that come with this territory: Edging out Competition: In order to minimize vacancies and negative reviews, short-term rental landlords will need to consider as competition both short-term rental properties as well as commercial properties like inns, long-term stay hotels and conventional hotels. Investing both money and time on well-appointed furnishings will pay dividends in the short-term market more so than for long-term, unfurnished annual leases. Likewise, promotional discounts and other marketing sizzle will be required to keep your property top-of-mind with potential guests. Maintenance and Repairs: While renting out your property or a room in your house to a new guest each week may result in less overall wear and tear versus an annual rental, the frequent in and outs mean lots of mini and ongoing housekeeping on your end. If you are serving as the head handyman and housekeeper for your short-term rental business, this translates into a never-ending list of chores, honey-do’s and home repair purchases. Off-Peak Vacancies: Just as you factor in a vacancy rate for a traditional real estate investment property, you will need to price in the cost of vacancies for a short-term rental property. Do your homework to find out when vacation travel is down in your area and adjust your pricing and offerings accordingly. Alternatively, schedule large maintenance and capital improvement projects during off-season. Property Management: In many ways a short-term rental is like a traditional rental property that is located out of state. Both will require the use of a capable property manager to screen and choose tenants, address repairs and collect rent. Because of the added work, however, a short-term rental will attract property management fees that are significantly higher, from a low of 10% of the rent to a high of 50%, vs. a long-term rental where property management fees range from a low of 5% to a high of 15%. This added cost will need to be priced into the value of the short-term rental opportunity. HOW TO MAXIMIZE YOUR PROFITS WITH SHORT-TERM RENTAL PROPERTIES Short-term rental properties will provide returns throughout the year, but as discussed above, a more active engagement strategy is required. LOCATION AND CONDITION OF THE PROPERTY – The largest driver of profitability, more so than with long-term rentals, will be the location of the property because of it serving as a vacation residence for guests. Inspecting your property from the vantage point of guest will help ensure that
SHOULD A REAL ESTATE INVESTOR OBTAIN A REAL ESTATE LICENSE?
Real estate, even in today’s hot market, offers the opportunity to buy a house for the price of a car, both for new and seasoned investors alike. The decision to buy, rehab and rent or buy, rehab and sell often comes down to market conditions. Which raises the question of whether a real estate license is required or provides an edge in assessing market conditions and becoming a successful investor. A REAL ESTATE AGENT OR A REAL ESTATE INVESTOR? First, to the question of requirements: real estate investors are nonrequired to become or to be licensed as real estate agents. While some real estate agents invest in properties and property-related businesses such as property management, and some real estate investors sell property as agents, the two are separate activities, and the pursuit of one does not require engagement in the other. That said, obtaining a real agent license offers certain advantages and can serve as an asset for real estate investors. Deciding on whether to pursue a real estate license should not be considered lightly as a significant time investment is required along with licensing costs. To help better inform your decision, let’s take a look at the pros and cons of pursuing a real estate license. BENEFITS OF OBTAINING A REAL ESTATE LICENSE One of the biggest advantages of a real estate license is instantaneous and comprehensive access to information on upcoming and sold properties. If your goal is to spend significant time researching, buying and selling properties, not just on behalf of your own portfolio but on behalf of others, then obtaining a real estate license will serve you well. Likewise, if you intend to amass a significant investment portfolio or plan on selling a number of properties through the services of a real estate company, then representing yourself in these transactions as a licensed real estate agent may offer advantages, particularly in terms of the commissions that will no longer have to be paid to a third-party selling agent. Real estate licenses are issued state by state, with some states allowing holders of a license in another state to qualify to buy and sell property in their state through reciprocity provisions. As such, if you have or intend to build a multi-state real estate portfolio or real estate agency, the requirement for multiple real estate licenses and availability of reciprocity should be weighed. ACCESS TO MLS- THE MULTIPLE LISTING SERVICE: As mentioned earlier, the biggest advantage of becoming a licensed real estate agent is access to the MLS (Multiple Listing Service): Particularly in a hot market, receiving immediate notifications of new sales listings can provide an edge in getting ahead of investment competition. The MLS system also speeds your research, offering detailed information about recent sales, fast-selling neighborhoods, popular home types and comparable properties without having to check multiple sites. INCREASED INDUSTRY KNOWLEDGE: Another advantage of becoming a real estate agent is firsthand introductions to appraisers, title companies, lenders, inspectors and other key players in the real estate industry. This exposure increased your expertise in the many facets of the real estate process. Additionally, directly working with lenders and appraisers improves your negotiating position and assists in reaching quick settlement on terms and conditions. GET PAID TO BUY AND SELL YOUR OWN PROPERTIES: By becoming your own agent and representing yourself as the buying or selling agent, you can receive the buying agent’s commission when you buy a property for your portfolio, and likewise the selling agent’s commission when you sell a property. As an example, if you buy a property that has a standard 6% commission, a commission of $12,000 would be paid to the selling agent, who would then split it, 50/50 with the buying agent. Since you’re representing yourself as the buying agent, you receive the $6,000 commission, effectively lowering the purchasing cost for you for the house from $200,000 to $194,000. EXPANDED CONNECTIONS: As a real estate agent, you will work under a licensed real estate brokerage firm. The relationships you form with other agents at your brokerage will yield tips and lessons about the market. Additionally, through your colleagues you will build a strong network that helps you find and close good deals quickly and gain intelligence on recently-visited properties. DRAWBACKS OF A REAL ESTATE LICENSE While becoming a real estate agent offers many advantages, it is not without its challenges, especially for beginners. DIFFICULT TO ACQUIRE: Obtaining a real estate license requires a time investment on the order of 4 – 8 months for most in terms of classes, exams, applications and background checks. While the required courses differ from state to state, they generally cover topics including fair housing laws, ethical standards, real estate practices and record-keeping. In addition to time, an investment of a few hundred dollars to a couple of thousand dollars is required to obtain a license, along with ongoing investments icon continuing education and license renewal. TIME COMMITMENT: Once a license is in hand, it can take new agents several months before they obtain their first client or close their first deal. Marketing, advertising, showing and helping to stage homes can take many hours a week, all of which takes time away from searching for investment properties. MUST ENSURE NO CONFLICT OF INTEREST: Real estate agents have a legal obligation to prioritize the interests of their clients. As such, agents must ensure that they act in the ethical interests of their clients and disclose any conflicts of interests, such as if an agent is selling their own investment property to a buyer that the agent represents. A conflict of interest could lead to a lawsuit and/or penalties and damages. As such, it is crucial that agents who are also investors ensure that no conflict of interest, perceived or actual, occurs. Read my other Blogs: Click Here Follow Us at: @MySmartCousin
Community Development Block Grants (CDBG), a Gateway to Affordable Housing
The development of its citizens is the surest path to the development of a country. People who are homeless or who cannot afford to purchase a home can become property owners through a little-known program sponsored by the U.S. Housing and Urban Development Agency (HUD), the Community Development Block Grants program (CDBG). HUD’s CDBG program, established in 1974, was created to provide a path to homeownership for low and moderate-income families. Under the program, states, cities, and counties are able to apply for grants annually to revitalize housing stock and infrastructure in their communities. Eligible activities under the CDBG program Funds provided through CDBG grants support housing-related activities including housing repairs and rehabilitation, down payment assistance and closing costs, and the purchase or construction of rental housing or owner-occupied housing. Housing counseling and relocation assistance are also provided to help aspiring owners in their home buying journey. You can read my recent blog here: Click Here
REO Properties for First Time Real Estate Investors
What Are REO Properties? Real estate owned properties (REO) are properties that the bank or mortgage holder takes ownership of— often due to foreclosure or a reverse mortgage balance — underscoring why the moniker, ‘homeowner’, applied so jubilantly the moment closing happens and the bubbly is poured, is rarely ever so. Depending on when you pull the stats, 1 in 3,000 to 1 in 4,000 homes in the U.S. are in foreclosure at any given time. According to ATTOM Data, approximately 151,000 foreclosure filings were filed in 2021, down from 2.8 million peak during the Great Recession. Foreclosures processes differ across states, but generally the mortgage holder begins the process to foreclose on a home three to six months after the ‘homeowner’ (again, not actually) misses their mortgage payment. The Pluses and Minuses of Investing in Foreclosed Properties REO properties are often sold at a discount to a move-in ready home in the same neighborhood, largely because the home is sold both in as-is and unknown condition. A home being sold in as-is condition offers little to no room for negotiation since the discounted price reflects the disrepair. The unknown aspect of these properties means that what you get is not only what you see, but also what you don’t see. Has the basement recently flooded? Who knows— the seller, who is the lender, doesn’t know the home’s condition, and the homeowner is not required to disclose it. Additionally, the seller offers no warranties on the sale, meaning there is no recourse for undisclosed defects. Where to Find Foreclosed Properties The REO route to property investment has a sense of derring-do and inside scoop, what with its off-book listings and short sale structures. These properties, however, are often hidden in plain sight.Government agencies are a plentiful if overlooked market for REO finds. Agencies ranging from Fannie Mae and Freddie Mac to Veterans Affairs and the Department of Agriculture find themselves the unintended owner of foreclosed properties as a mortgage guarantor. Private sector entities such as auction companies and mortgage lenders are another channel for properties. Purchase Checklist: Before buying an REO property, ensure that you do a thorough inspection. Using a professional inspector is the gold standard but if you give the property the once-over yourself or with a contractor, pay particular attention to structural or foundation issues, the electrical wiring and panel box (copper is great, aluminum or knob and tube, not so much), the heating system age and type (a furnace that’s less than 10 years old and gas is great), the attic/roof condition, evidence of mold or water damage, and the plumbing. Appliances, drywall, flooring, cabinets and fixtures are cosmetic, easily fixed and much cheaper to remedy. See also: The Skinny on Fix & Flip Investments