The Tycoon Report

Would You Journey 300 Miles To Buy Investment Real Estate?

Friday, June 27, 2008 | Ethan Roberts

Prologue:

Today I'm going to share with you the story of a six day journey I have just finished.  It was a journey of almost 300 miles, looking to find investment property in an area of newer homes where prices have been decimated since the peak of the Real Estate market in late 2005.  The last time I bought an investment property anywhere was in early 2006, and I sold four that same year.  Since then I have been content (well, not so content) to sit on my hands and wait for the market to come down to price levels where it makes sense to start buying again.  In my own area, inventory is up and prices are nowhere near the bottom yet, so I decided to seek out an area where the values will justify a purchase. 

My goal in sharing this story with you as investors is to show you how sometimes when the value is no longer to be found in your usual investing niche, you just have to look elsewhere to grab it.  This is true, whether we are buying real estate, stocks, ETF's, bonds, commodities, etc. 

This is my story:

Monday:

I leave my home in Northern Florida on an overcast morning, about 11 AM.  I am heading south, destination almost 300 miles from my home, to a moderate sized town on the Florida Gulf coast.

I'm cruising down Highway 301, through the ridiculous speed traps at Lawtey, Waldo and Hawthorne, past the Taxidermy museum, the farm stands, the cows near Lake Sampson, and the orange groves at Citra.  These are small towns with small names, with major financial support from the revenues gained from speeding tickets, and not much different than they were 30 years ago.  I watch the CSX freight train plodding on by, and I wonder how, in such a fast paced world, that stodgy old CSX stock continues to outperform the general market.


Of course, I could have taken the major highways to reach my destination, but then I would miss out on the America that I love to see -- the America of back roads and small towns, where you are more likely to see an old feed store than a McDonald's.  Leaving Citra, I pass the "Moondance Farm".  I have been listening to a dozen or so of the many songs on my MP3, but unfortunately Van Morrison's classic, "Moondance" was not playing at the moment I drove by.

Soon enough I reach Ocala, the land of sprawling green hills and magnificently beautiful horse farms.  Yet marring all this natural beauty is a roadside billboard showing a woman holding up a pile of cash, with a caption that says "Fire Your Boss, Get Rich At Home!"  Then there is some web site address with words like "Free" and "Rich" in the title.  Gee, I wonder, why am I traveling all this distance to find opportunities, when I could have just stayed at home?!

After Ocala, the quaint part of my journey ends, and I shift over to I-75 for the remainder of the afternoon.  About 50 miles north of Tampa, it begins to pour.  The newly wet roads are slick, and visibility is greatly reduced.  What's worse, there is now a Jeep right behind me with the slogan, "No Control" embossed on the front windshield.  I'm not really hip enough to know what that phrase means, but I pull over to the right lane and gladly let Mr. "No Control" slide on by. 

As I pass the exit for I-4, I see a sign that says, "No Trucks In Left Lane Next 61 Miles".  I haven't been on this road in awhile, but it looks like somebody finally had an attack of common sense.  Aretha Franklin is belting out "Freeway of Love", and I'm loving the freeway.  A few hours later, I arrive at my destination, ready and eager for what lies ahead.

Tuesday:

Tuesday I awake to beautiful sunny skies, and about 85 degrees.  My initial strategy is to go online and pull up some real estate listings, then to set out with GPS in hand to drive by at least a dozen homes.  Although I am familiar with this area, and have been coming here for over a decade, I want to get a feel for the various neighborhoods, and assess the better locations.  Unlike my own area, I don't have lock box access to view the insides of these homes, without calling a local Realtor.  I am not opposed to using one later on, but for now I am determined to do all the ground work first on my own.  Unfortunately, I am using one of the larger Real Estate web sites that provides ID numbers, but does not give addresses for all of the homes.  When I call the various Real Estate offices to trade ID numbers for addresses, I can feel the seductive pull of various agents on "desk duty", trying to snare me as a potential customer.

However, I want to work only with the listing agent for each home, because as the "selling agent" (even though I am also the buyer) I am therefore entitled to a 3% commission on the sales price.  The various agents with whom I am speaking become the selling agent if I employ them, and I lose the potential commission, perhaps having to settle for a small referral fee.  The commission is important because it will pay for travel expenses, and any repairs or improvements that are necessary for the homes purchased.

When I explain my dilemma to the desk agents, their warm and friendly manner suddenly disappears, and my own industry begins to treat me like a leper. 

There are hundreds of local streets to traverse, and fortunately for me, my trusty GPS seems to know them all.  The soothing female voice with the English accent keeps telling me to "turn left at the end of the road," and "Turn right in 300 yards!"  Who says men won't ask for directions?!

One by one, I drive past the homes that I have selected off the Internet.  Some I rule out for being too small.  Some are eliminated due to the poor condition of surrounding homes.  At one home, I walk around to the back yard and a group of mean looking, large dogs leap against the neighboring fence, wishing to have my bones for breakfast.  As I peer through the windows of vacant bank foreclosures, some are eliminated for having terrible floor plans.  One property meets my inside criteria, but the back yard is enormous, and I know that most tenants will not want to mow all that lawn.  There are a lot of variables to consider when purchasing investment properties.

Most of these homes were built within the last five years, and are in remarkably good shape.  There are the usual cosmetic imperfections, such as stained carpets and scuffed, dirty walls.  But from what I can see, the homes are structurally sound.  Unlike Northern Florida, where homes are mostly frame built, these homes are all concrete block, with a stucco finish.  Very few have been trashed by their former inhabitants.  I feel like a kid in the candy store.


The homes I'm seeing are generally between 1200 and 1800 square feet.  The asking prices range from $79,900 to $120,000.  In my area, homes like these would sell for at least $40,000 more, depending on location.  Yet, my research shows that the difference in rent between my city and this area is only about $50 a month.  What that means is that the ratio between home prices and rents is superior in this Gulf Coast area.  As a landlord, one must be able to produce positive cash flow on properties each and every month.  When the ratio between sales and rent prices becomes too large, as was the case in recent years, one loses the ability to generate a cash flow.

Out of the dozen homes that I see today, only about three are worth calling the listing agent for a showing.  But there are still more to see in the next day or two before I begin to set up appointments.  One of the nicer homes that I see is a "short sale", meaning that the owner will ask the bank to accept a sale price that is less than what is owed on the mortgage, in order to prevent foreclosure.  But these short sale homes have become a joke among Realtors.  Banks are taking anywhere from 45-60 days to decide on the offers they receive, and that is far longer than I care to wait.  While waiting for their answer, other buyers can also make offers on the property, and I do not want to tie up escrow deposits until some Rip Van Winkle in the bank finally wakes up and decides my fate!


Wednesday:

The morning begins well enough, but today will become a frustrating day before it's over.  I find several more properties of interest among the various Internet sites, but getting through to the listing agents continues to be a difficult process.  One snooty agent on desk duty tells me that a property I am interested in already has a contract.  I can tell she is lying to me, and a couple of days later her lie is confirmed when I ask another agent to inquire whether it is still on the market.  Still available, she is told!

My options are limited.  It is an ethical violation for me to try to hide that I am a Realtor.  But when I make it known, I am persona non grata.  Still, I am determined and will not let these minor mishaps, nor snake in the grass agents, stand in the way of what I am trying to accomplish.

Speaking of snakes, the low part of my day comes when a long black snake wriggles across the road directly in front of my car, and I have to slam on the brakes to avoid hitting it!  Now maybe some of you might say I should have run it over.  But snakes keep the rodent population down, and a black snake is not one of the poisonous varieties.  Besides, I don't think my editor wants PETA to be picketing in front of the Tycoon Report office!



Thursday:

Today I grow a little wiser.  I have discovered that several of the foreclosures here are being sold through an Internet site in which agents simply place an online bid for their customers.  The bids are opened daily and the highest net to the bank is the winner.  I register with the site, and then I simply call the regional office to access the lock box codes.  In this way, I am able to get inside the homes on my own, and I am automatically the selling agent on any home for which I bid.

Today starts off with a huge thunderstorm, so I head to the local Panera Bread restaurant for some breakfast, and connect my laptop to their free Wi-Fi service to check for new listings.

After awhile, the rain lets up, and I set out once more in search of potential investments.  The first two homes I see are bank foreclosures from the web site where I just registered, and it's a pleasure to access the inside of the home, rather than peering through windows like some sort of Peeping Tom!

The first home is only so-so.  It's a small three bedroom and the kitchen is directly off the entrance, certainly not my favorite floor plan.  What was the builder thinking?  The list price, at $83,900, is tempting.  It needs paint, new carpet, a refrigerator, several ceiling fans, and has a broken window.  I decide to put it on my back burner list, but the more I think about it, the less excited I become.

But the second home does excite me.  It's a three bedroom, two bath, 1532 square foot ranch, built in 2005 and is in excellent shape.  The asking price is $108,000.  A similar property back home  would be $150,000 or more.  It has a two car garage and a screened porch.  The kitchen and baths have beautiful ceramic tile floors.  Like most homes in SW Florida, there is an inside laundry room, and the backyard is just the right size.

I assess the repairs and improvements needed.  A fresh coat of paint and a few ceiling fans would help.  Also, the carpet could stand a cleaning, but is otherwise in very good condition.  I don't like the front door and would change that, and I may even paint the exterior another color (the trim reminds me of raspberry ice cream).  But other than these minor cosmetic changes, this house is really "turn key".

This is the first home I have seen that is worthy of a bid.  Later today, I will look at another half dozen homes, but none of them are as nice as this one.  I have some lunch, go to the bank to get a cashier's check, and then go online to put in my bid.  My first bid is a cash offer for $98,000, or $10,000 below the list price.  From years of experience with on line foreclosures in my own area, I know that offers that are too low will always be rejected.  However, I would like to test the waters a little bit.  Since offers are made on a daily basis, if they don't take this offer, I will just re-bid higher on the following day.  Making a cash offer is always the best way to bid on a foreclosure, as the banks prefer that to offers that are contingent upon loan acceptance.  If there are multiple offers on a deal, a bank will usually consider the cash offers before mortgage offers, even if they are slightly lower in price.

I am feeling happy now, as I head over to the pool where I am staying.  I don't know if my offer will be accepted or not, but at least I am making progress.  I found a solid home in a good location and was able to do everything necessary without having to rely on another agent.  I opted to take the 3% commission, rather than foregoing it and reducing the price by the same amount.  It's a trade off.  On the one hand, I will have to pay taxes on the money, but it also gives me additional cash to make repairs or cosmetic improvements as needed.  After a tenant is secured, I will write my own mortgage so to speak, putting down somewhere between 20 to 50%, depending on how long a term I want to take and whether or not I want or need the cash flow.  There is no one method that is best.  The down payment and mortgage amounts should be geared toward each investor's unique age and situation. 

Friday:  

The lead article in the local newspaper today is about how the Real Estate market is improving in the Gulf Coast areas.  I have previously written in The Tycoon Report about the public relation spin that you often hear from the Real Estate industry, but this article includes legitimate statistics about decreasing inventory levels and increases in closed sales.  This was not exactly what I want to see in the paper when I am trying to snatch up some homes at bargain prices, but nevertheless it's nice to see.  The Gulf Coast areas were one of the first in Florida to begin the big decline, and it stands to reason that with prices as low as they are now, some improving conditions will become evident before long.

I spend the morning checking my e-mail to see if the bank has responded to my offer.  Since they have not, I decide to go look at a few more homes.  I drive the area, but most of what is now left are the culls of the litter!  I do schedule an appointment with a listing agent to see a home that I drove by the other day.  It's 1586 square feet, with a list price of only $95,000.  I figure it for a short sale, and sure enough that's what it is.  However, the agent tells me that the bank is willing to provide an answer within a week, and that all of the leg work has already been done.  I am tempted, until she tells me that the home never received a Certificate of Occupancy and that the buyer will have to pay the unpaid impact fees.  Although I may be passing on a good deal, something just doesn't feel right here.  I trust my gut enough to walk away.

Just after meeting the agent, I again call the office that handles the foreclosures online.  They have countered my $98,000 offer at $103,000, down from the original $108,000.   I think about it for a few minutes, then decide to do something that I rarely do.  I choose to accept their counter offer without further haggling.  The weekend is coming and I want to lock this deal up before someone else puts in a better offer.  One important lesson of Real Estate investing: Never lose a terrific deal by being piggish.  I merely click on "accept offer" on the site, and in an instant the property goes into "pending contract" status.  Mission accomplished!

Tycoon readers, this is the bank foreclosure that I bought for $103,000:


Having secured the property, now it's just a matter of completing the paper work, and checking into dwelling insurance and a home inspection.  I have been told that the newer homes are less expensive to insure because of the updated hurricane standards and concrete block construction.  While they could still sustain some damage from a strong hurricane or tornado, at least they offer more protection than a wood frame home.

Saturday:

Saturday morning I look at one more home, meeting the listing agent there.  I am not impressed with the home for various reasons, but the agent seems more personable and knowledgeable than the other agents I have talked with before.  Since I am planning on leaving the following day, I ask her to send me foreclosure listings as they come to market, and I promise to forsake the bulk of my commission for any homes that she finds for me that I couldn't have found on my own.

I spend the next few hours revisiting the property that I have purchased, measuring rooms, making a list of the features for marketing purposes, and writing down everything that it will need in the way of repairs or enhancements.  Due to the decline in property values, it's been a long time since my last foreclosure purchase, and it feels good to be in the "game" again.  Only this time the "game" is in someone else's stadium, and it feels strange to not be the "home team".

Sunday:

I leave the Gulf coast and drive back to North East Florida.  This time I take all the boring, lifeless highways in order to make better time.  A month from now I will return to the Gulf Coast, to close on the house, and to make the repairs and improvements necessary in order to secure a tenant.  I usually manage all of my properties, but due to the long distance from my home, this rental will have to be handled by a property management company.  I am tired, but happy, and I am looking forward to finishing the very article that you have just been reading.






Ethan Roberts
Contributing Editor
The Tycoon Report