Buying a house requires some serious due diligence so you do not get burned. Based on what is said by an investor in Houston Texas he provides guidlines. Also for anyone that is asking you to buy my house. Ray who deals with houses for sale by owners in Spring TX, Cypress TX, Harris County, Montgomery County, Tomball Texas, the Woodlands TX, Sugar Land, Katy TX and anywhere in the Houston Metro area of Texas. One of the we buy houses websites is https://www.ezcashforhouses.com
When we say “We Buy Houses” most of what we talk about will apply if you are a lender or a partner or Principal in the transaction. If you get these elements right you will probably be okay. Ray who runs several real estate clubs says:
By My House Investors Due Diligence and Loan To Value (LTV):
LTV this term stands for Loan to Value. It is actually a misnomer. In the classic sense we would say on a 100k property, and we have a 70k loan (total amount of loans) then our LTV is said to be 70%. For most lenders and investors if you can be “all in” then you have a 30% buffer in the event you have unforeseen problems, like house not selling or if you are a lender, your borrower gets hit by a bus.
The inaccurate part comes in but perfectly valid is as an investment we might say we don’t want to be in the deal more than 70%. This would include repairs, loans, projected holding cost, purchase cost, etc. As an investor, partner or lender, this is a really good place to be and in today’s market if you live by this rule, I am sad to say you are sitting on the sidelines.
We Buy Houses with Due Diligence and Insurance:
First Rule, remember every insurance company is really made up of two divisions, the division that takes your money, your friend, confidant, drinking buddy. Then the other division, the Claims division these are the people who deny claims, don’t return phone calls, lets your units sit empty for weeks on end. This is the division that give the expensive we buy houses seminars.
Insurance for Real estate comes in several categories;
Title Insurance: Absolutely read and understand the title commitment. You want to verify the Legal Description, the names of the Sellers, Exceptions to title. This could be a long discussion but sit down with your title company and ask questions. If you are a lender then you have to understand Mortgagee’s insurance and make sure you get it.
Property Insurance: There is a difference in a Vacancy Policy, Hazard Policy and Builders Risk policy. Make sure this is paid for out of closing or before closing. This is where, if you get it wrong you will take the expensive seminar. Ask me how I know.
Survey: Okay, I know, its not really insurance, but its close. Do investors always get surveys, no, should you always get a survey? I don’t know, but I have personally been involved in problems several times because I did not get a survey. If the situation is flaky, get a survey. If it’s a normal lot and block situation and you can look at the plot map, maybe you’re okay. Notice I said Maybe.
There are other insurance like liability insurance, but some things to minimize losses are not to hire employees, in other words get a signed contracts with rehabbers, and don’t be doing stupid dangerous things like hauling trailers around (my attempt at being nice).
There should two times this is done and if you are a lender then three times. First time is when you first find the property. This is critical and there are several things you need to look out for but our main goal is to avoid the things that will kill your exit strategy. For example houses that flood don’t have a good exit strategy, period. This type of investment property is for criminals. There are many more and you either need to know what these are, or have a team member that does. The second inspection needs to be the day of the closing. Make sure the house and all of its parts are still there. The Third time is for lenders. Never, never, never give all of the rehab money out at one time unless it is, say about 10k. 20k then have one inspection before the second draw, and no, you don’t get to charge interest on this final amount until you hand it to the borrower.
Due Diligence and Exit Strategy:
I think there should be at least two viable exit strategies but not necessary. For example if this is a Fix-Rehab-Flip then how likely is this? There are many examples of where some houses sell and others don’t. There is a reason for this and understanding the market is crucial. Would you do a rehab with a sales price of 300k on a 10 year old house where they are building new houses, same size for 300k? In this case, not a good exit strategy. Your finished product has to have demand. We always want to look at DOM. Be careful DOM in the wrong hands could be sure death. In the above examples DOM could lie. They could show for the Subdivision the DOM is low but it may be that there were a lot of new home sales, but what is the DOM for 10 year old houses competing against the new houses. Backup plan, if you don’t sell, then what. Can you refinance? Can you owner finance?
Due Diligence and Documents:
Get this right. When you are buying an ugly house or any house for investment. Make sure you have the documents necessary in every single transaction; Deed, Settlement Statement, Purchase Agreement (these are mandatory in every transaction) If there is a loan then Promissory Note and Deed of Trust. In addition we want insurance policies. Also remember the Title Company Attorney does not represent you and I almost never use them. Your Real Estate Attorney can prepare the docs and send the title company the docs. Also remember most attorneys are not investors and to ask the Investment advice is probably not in your best interest, on the other hand they can probably keep you from making technical blunders.
I could probably write a book on each one of these with just my mistakes. We have to understand all of these elements, but there are a lot of smart people around if you just ask the right questions.
So make sure that you handle very carefully the details of due diligence when buying a house. Follow these guidelines and you will protect yourself and your investment.