It has been a busy couple of weeks. But good news: I’ve found my new investment property! By the time this post is published, I will have been in escrow for a week. Here’s how I narrowed the choices and made my decision:
I created my list of potential properties, ran the numbers, and whittled it down to a handful of choices. I took the top contenders and looked them up on Google Street Maps, so I could travel up and down the street and see what the neighborhood is like, and whether it looks like there is adequate street parking. By that point, I was pretty decided upon my front-runner. I ran the city demographics for that neighborhood, and was satisfied with the numbers.
The Final Test: The Drive By
My final check was to drive by the property myself. I went out there at 2:30 pm on a Friday. I wanted to see the property in the daylight, and I wanted to be able to put an offer in over the weekend, so I figured I had better just hurry up and get out to the property.
When I arrived, there was a middle-aged man standing on the curb in front of the property. He glared at me as I drove past. I was trying to scope out the building without attracting attention, but I couldn’t get a good look at the place with Captain Scowly-Pants standing guard. At the end of the street, I doubled back to try to get another look, but he was still there.
The street itself was just okay. On the east end of the street, there is a liquor store, and a handful of the buildings down toward that end are a little beat up. They get progressively nicer about a third of the way across the street, and then there are a few multi-family buildings, some of which are pretty nice, as you get toward the middle and western end of the street, where this building is.
Knowing that I couldn’t get a good look at the building without being noticed, because of that man standing guard at the curb, I took a mental break and drove to where our 22-unit apartment building is, about a half mile or so away in the same city. I wanted to re-calibrate myself in terms of neighborhood expectations and give the sour-puss guy a chance to leave.
When I got to the neighborhood where our 22-unit building is, I was reminded of how good that neighborhood looks. I drove back toward this new property, but I didn’t have my GPS on, so I overshot it and got a little lost. I ended up in a nice little neighborhood of single family homes. I was happy to see that all of the surrounding neighborhoods were good. That will likely help me get good tenants and will keep property values up.
Even better, when I doubled back to the new property, Angry Guy was gone. I pulled over and parked, and got out to walk the block. I pulled out my cell phone and called the boyfriend so I wouldn’t look so out of place. Walking by slowly, I could get a much better look at the building. It needed a paint job, and the garage doors looked pretty beat up, but apart from that, it didn’t look terrible.
Confirming Details with the Real Estate Agent
I called the listing agent and asked some questions about the MLS listing. Real estate agents are never 100% accurate on the MLS listing. It’s very frustrating. In this case, the listing agent made two fairly large errors: he listed the units that had 2 bedrooms and 1.5 baths as 2 bed/2 bath units. He also said that there were separate water meters at the property, in addition to the separate gas and electric meters. When I first started looking at the listing on Redfin, I was excited about those features. Having two showers in a 2 bedroom apartment makes it a good deal nicer than having only one shower.
But before I got really serious about this property, I pulled the actual MLS listing from the local MLS database. (You have to be a real estate agent or know a real estate agent with access to the local database to do this.) I also pulled all of the prior MLS listings on the property, from the times that it had been sold or listed for sale before this. In the 1999, 2007, and 2012 versions of the MLS listing, the number of bathrooms was stated accurately as 1.5 baths. But the water meters were listed as being separate for each apartment in the 2007, 2012, and 2015 listings for the property. I figured it was somewhat unlikely that the water meters had been separated, since hardly any buildings do that, but it was listed enough times that I thought it was a decent possibility. During my phone calls with the agent, he checked with the owner and found out that those portions of his listing weren’t true. Grr. It drives me crazy when listing agents lie to try to get a property sold.
Consider Getting Your Real Estate License if You’re Going to Buy a New Investment Property
One quick side note here: when you’re shopping for a new investment property, nearly all of the sellers out there are offering some commission to agents who can bring in a buyer for the property. The seller-offered compensation can be anywhere from a flat fee to about 3% of the purchase price of the property, but in most cases these days is about 2% or 2.5%. If you’re buying in an area that has fairly high prices (like Southern California, for example), you can potentially earn a lot of money on the transaction by getting your real estate license and taking that buyer’s commission for yourself. Alternatively, you can use it as a bargaining chip, and negotiate a reduced price on the building by reducing or waiving your commission.
Check with your own state’s department of real estate to see if you think it’s worth it to get your real estate license. It usually requires some college-level courses, a background check, a credit report (looking only for evidence of fraudulent activity, not screening potential agents for stellar credit), and an exam. There are fees for those things, and they take time, but run the numbers to see if the payback might be worth it.
In many states, attorneys can skip the college courses and go straight to the background check and exam. That’s what I did. We used to be able to hop the line in California and go straight for our broker’s license, but I think the Realtors must have lobbied in the past handful of years, because the rule changed and now we’re limited to becoming sales agents. But in any event, you can still hang your license at a discount real estate brokerage and have a lot of the commission to keep for yourself, which gives you most of that negotiating power. On a $1 million fourplex (not uncommon in Orange County, CA), at a 2.5% commission, you can give yourself $25,000 to play with. That’s a decent chunk of money for getting your license!
Negotiating the Purchase Price
Before making an offer, I reached out to the real estate agent to ask the questions about the bathrooms and water meters. I wanted to introduce myself and just chat a bit, to get on his radar screen. You can learn some good information just by talking to the real estate agent in advance of putting in an offer. You can pick up on clues about the agent’s negotiating style, and about what things do or don’t matter to the seller, so you can tailor your offer accordingly.
You can also get some good insight about what other offers might be in the hopper already, and what you need to do to jump the line. Some of that information may be bogus, of course. But if the agent tells you he’s got a lot of interest and an offer expected to come in over the weekend, you might think it’s worth it to visit the property early to determine what you might offer. If you get to the property and see a few lookie-loos checking it out, then you might get a sense of whether there will be competition or not.
In this case, the agent was pretty candid about some important details. He said there were other interested buyers, and he had just sent back a counter-offer to one of them. He said the seller didn’t want to fix ANYTHING at the property, so pick your price up front and then don’t even bother asking for repairs later. He also said that the seller, who lives at the property, is moving because his wife wants to live in a house, instead of a 2-bedroom apartment. He had already identified a property that he wanted, and the agent was desperately trying to keep the seller of that other property on the hook, so the property wouldn’t get sold to someone else in the meantime.
Based on that information, I knew that an all cash offer with a fast closing (30 days or less) would get him interested, even if the dollar amount of the offer was a bit lower. But sending in an offer for a higher price, and expecting that the seller would make concessions after a building inspection, would be a no-go.
After the drive-by, I talked with the agent, and made my fairly low offer. I did it over the phone, so the agent and I could talk through the numbers and I could get a sense for what the seller might take. If I were just sending in the offer without talking to the agent about it first, I would have been tempted to pick a higher number to try to beat the competing offers. But by running the numbers over the phone, I was able to start much lower, and get a sense from the other agent of whether the seller might take it.
We agreed upon a number, and he said that he would present the offer to the seller the following day. The agent had to meet with the seller to discuss the numbers, but then they got back to me: offer accepted! The agent opened escrow, and I sent in my earnest money deposit.
About the New Investment Property
I’ll give you more details as we get further along into the process, but here are the bullet points about the property: it’s a fourplex in North Orange County, built in 1981, which is a good 20 years newer than nearly anything else out there. Three of the units are 2 bedroom / 1.5 bath townhouse style (those are all in one building) and one is a 2 bedroom / 1 bath carriage unit above the garages (the second building). All of the units have a significant amount of tile flooring, which is great. Tile is virtually indestructible and easy to clean, so turnover costs should be a lot less than they would be if all of the units were mostly carpeted. The roof has a good amount of life left in it. The windows are original, but functional, although I will likely swap them out for newer dual-pane windows over the next year or two, because the older windows can be hard to open and close, and many of the screens are missing. Also, I think it will bring in nicer tenants that might pay more in rent.
Coming up: the building inspection.