Foreclosure Question – Part 2

Question:

Thank you also for the insights on the property.  I do understand that I should not consider purchasing until I have all the solid facts in front of me.  I wonder though so many people have said to us make an offer you can always change it as you discover things in your inspections, if its a good deal you will miss out if you do not move quickly.  So how do you balance that?  Having all the info but not missing the deal because as a rookie you are trying to confirm what the seasoned investor can see without getting all the info first.  Or is that just not good advice in the first place?  I also wonder about the foreclosure aspect of this property will the bank even be able to confirm things like the rent was getting paid prior to them taking over and what the expenses are.  If the tenants pay all the utilities do I need to know what that number is or do I just need to confirm that they are paid up to date?  I understand that I do not have to assume the tenants with the purchase of the property but I do have to give them 90 days notice do you find that tenants that are maybe not great and thats why your not assuming them tend to just not pay the final 90 days?

I also wonder about Condo’s, we have had so many conflicting opinions about condos and the value of them as a rental property especially for beginners like us.  In the Rein seminar we attended last weekend a lot of investors there really liked condos and felt that they never would have been able to get a start without them.  I found it interesting to learn that here in Alberta it is illegal to put a rent cap on any properties so although condo boards will write rules saying only so many can be rented they dont have a legal leg to stand on, that being said it does not stop someone from just plan making your renters life hell so they will leave.  I have come across a lot in Edmonton under the 70k mark and some in areas that are close to NAIT and Grant McEwan so I am thinking that they would be worth looking into.  I have some info here on buying condos for investment and what you need to look at to do proper due diligence but was wondering what you would consider to be some of the most important things you need to really watch for when looking at condo purchases? Laura.

 

July’s Answer:

There are many answers to your questions because there are many styles of investing. What are you comfortable with? There is a balance between being the first one in with an offer to tie up the property while you determine if the property works for you. But if you do this all the time and let the property go, you will start to get a reputation as someone who ties up properties and doesn’t close. In a small market like Edmonton, word gets around and there are names on the Realtor’s black list of people they will not work with.  So be professional. Realtors and mortgage brokers need to make a living and they don’t want to waste time on a lookey-loo.  If you are a novice investor, you need to study up and know your comparables inside out. Research the area that you are interested in buying. You should be familiar with the past ten year trend of that area, list price, rents, demographic profile, economic drivers, traffic patterns. Then when a property comes on the market, you will know instantly if the profile fits your criteria. Then you can act swiftly. This is why the experienced investors can act quickly. They’ve already put in the groundwork. They know how much money they need in contingency for deferred maintenance. They know the market and how desirable the neighbourhood is.  When it comes down to moving quickly on a deal in order to not feel like you’re going to miss out on a deal, this is not sound real estate investing in my opinion. I missed out on lots of deals when I first started but the problem was … I didn’t know what a good deal looked like. Build your solid foundation first.

Dolf de Roos says that out of 100 deals, you may make offers on 3 and buy 1. So I set out to analyze 100 deals. It was at property #68 when I found the deal of the decade.  It took me 6 months to find it.  That’s 180 days, looking at approximately 2 -1/2 deals per day. I knew it was a great deal because the previous 67 deals were all duds. I knew by looking at the list price and the rent amount that the property was a fantastic deal. How many deals have you analyzed so far? I used a spiral bound note book and listed the numbers on top of each page. Keep your notes because sometimes the same deal you’ve analyzed will come back a year later.

I am not concerned if I lose out on a deal. I do not play that game. I walk away from bidding wars. I play my own game. You need to ascertain what your game is. This will be determined by your personality, values and philosophy.

If you’re playing the MLS game, then you are in the running with hundreds of other investors including the people who just want to find a place to live. This is why I prefer not to use the MLS listings to find properties. I have created a network that refers properties to me before they get listed. Before that, you can go through your neighbourhood and find properties that you like, and make an unsolicited offer. You would do this strategically of course so as to benefit the owner. After all, what owner likes having hundreds of people invade their abode.

As for foreclosures, you are purchasing the property in “as is” condition. You need to conduct thorough due diligence on all the expenses. This means that you must independently verify all these costs through a third party that is not related to the owner or the Realtor. Preferably at source such as call City Hall Tax Department and confirm the property tax. Get written permission from the trustee to release the utilities information. If there are tenants, get permission from the Realtor to conduct a Tenant Acknowledgement Confirmation. You would go through the property, with or without the Realtor, to confirm that the tenant actually lives there, how much rent they pay, if they paid a deposit, who pays utilities (landlord or tenant), if there are any rental incentives in their current lease.

When it comes to taking vacant possession of a building, remember that an empty building is a worthless building. If you are going to float the mortgage without rental income, then you must be prepared with your renovation budget and double the time frame. If you think it’ll take 3 months to renovate, then make it 6 months. If you think it’ll take a month to rent a unit, factor in 2 months. If you have the cash flow to sustain the property throughout this time, then go for it. I never buy a property with no tenants. I am buying the property for the income. And from what I’ve seen from the experience of other investors, their renovation projects are rarely on time or on budget.

I buy underperforming buildings because I have the expertise to deal with the deferred maintenance issues and undesirable tenants. Who is going to handle your renovations? If you farm this out, you will pay a premium versus being the general contractor yourself. Sometimes undesirable tenants turn out okay. It’s because they were mis-managed by the previous owner/manager. Once you put systems in place and explain your policies, tenants will have no excuse to pay rent late and will be responsible for damages. Sometimes it is necessary to evict and it’s a great learning experience. You will gain a lot of intangible skills such as renting to the right tenant and filtering out the unqualified tenants.

Okay, my take on condos in the Edmonton area.  Read the Bylaws and the Condo Reserve Fund Study. There are some condo associations that are making it difficult for investors to rent their units. I know of one association where you must submit the tenant applications to the condo board for approval. You know what that means. The applications could be held up for weeks or months. The best way to get a feel for the condo is to interview the condo board, specifically the President and the Treasurer. Preferably not by phone. Meet them in person. They are much more personable face-to-face when they see a real person instead of talking to a mysterious investor over the phone. Also, condo associations don’t like dealing with absentee owners especially when it’s their tenant that creates disturbances or infractions.

The most important thing to look for is management. Check out the credentials of the property management company that takes care of the condo. Check out the reputation of the managers. What other properties do they manage in town? Check those properties out. Talk to the tenants, owners. What are their impressions, experience dealing with them? You’ll find out soon enough.

And before you buy anything, you must know your exit strategy. Are you planning to hold the property for 5 years, 10 years, indefinitely? Are you buying the property on your own or with another investor/partner? How many properties are you planning to purchase? Have you planned how to make multiple purchases of single family dwelling units? Are you planning to refinance in 5 years or sell? What are your plans if the market goes soft in 5 years? If the market goes up in 5 years? How do you plan to get financing for your 4th property, 5th property, et cetera? Who is going on title on which properties and why? When you go on title, this will affect your total debt service for future financing. Your partners can become beneficial owners without being placed on title. Are you aware of this?

This answer is not meant to be complete. It is designed to get you to Think and Plan.

Just know that once you have about 80% of what you need to know, the other 20% comes in the doing.

 

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