When making a long-term investment real estate, determine your strategy, formulate a plan, and stick to it!
I had the good fortune to meet my client, Jan, randomly on the street one day. I was with my investment partner looking at a house that was scheduled for a probate auction. We hung around outside discussing the property for a while when 2 gentlemen walked up and began eyeing the probate property. We struck up a conversation and found out that Jan and his friend lived nearby, and Jan was looking for a home in the area for a long-term investment with rent potential due to its proximity to USC.
Being a fellow Trojan and local myself, I know the area very well and offered Jan my card. To my delight, he called me the next week and we began a property search in earnest.
Jan had a tight budget, particularly for the area, with the additional challenge of competing with cash buyers and big money investors. Development has been spreading, radiating from the University, and prices have been climbing rapidly. The new business model in this neighborhood is tearing down the dilapidated 2- and 3-bedroom homes to make way for modern, luxury-style apartment units. Those with prime real estate near the University center are not likely to part with it any time soon. Inventory in the area is notoriously low and houses don’t sit on the market long. We had a challenge on our hands.
Our first accepted offer was for a small 2-bedroom home within walking distance to the University. The price was excellent, primarily due it’s undersized lot. The inspection came back good, but Jan was concerned about the lack of outdoor area and the inability to make any significant improvements or additions. In the end, we didn’t have to decide as the sellers uncovered a complication with their loan, and escrow was cancelled so they could sort things out with their lender.
We only saw a handful of houses in the coming months; anything that was within Jan’s price range. It’s a waste of time and will only lead to disappointment if you start looking at homes beyond your financial limit. Even though the median market price was out of range, we were determined to find a solid investment within Jan’s budget. We must have made a half dozen offers, always being outbid by another buyer.
There was one house that kept popping up. It was out of Jan’s price range, but it had been sitting on the market for months without much interest. It was a Fannie Mae owned property, and they were allowing owner-occupants the first shot at purchasing. The pictures were unimpressive, and the house looked like it had a quick cosmetic facelift (we all know how those go!). Jan wasn’t particularly interested, but I mentioned they would probably be willing to negotiate on the price since it hasn’t had any offers, and since we hadn’t seen anything remotely viable in a couple weeks, we decided to check it out.
The day we visited the property, there was a HUGE price drop on the listing. That was good news for us – they were ready to sell – but also presented a risk in case the new price attracted new buyers.
The property itself was better than we had anticipated. There are some awkward things about the layout, but most everything is an easy fix, and the rest of the house looked brand-new. But even with the price reduction, it was slightly out of Jan’s price range.
Our initial offer was rejected and countered. We were also informed that they received an all-cash offer that was higher than ours. We negotiated a bit more and submitted a second offer. OFFER ACCEPTED! Even though we were still slightly below the cash offer, because Jan was willing to owner-occupy, the bank took Jan’s offer instead. This is one example of why it’s important to understand a seller’s motivation.
Getting our offer accepted was just the first step. Inspection and loan approval are probably the two most important tasks for the homebuyer.
The first stop was the Los Angeles Department of Building and Safety. We were interested to see if permits were on file for the remodeling. Los Angeles is full homes with un-permitted additions and repairs made by homeowners. For “flipped” properties, a lack of permits is usually a sign a low-quality workmanship and potential code violations.
Our investigation revealed the house had recently been consumed by a fire. The good news was that the insurance company rebuilt the home from the ground-up, including a new foundation, new framing, new roof, new flooring, the works! The work was permitted, inspected, and approved.
The physical inspection was a little tricky. Bank-owned properties usually do not have utilities connected. We still performed a full inspection with the help of a portable generator, a hose, and an expert.
Jan was satisfied with the results of the inspection and due diligence, and was ready to sign off on the inspection contingency. Only the loan was left.
Jan was working with a great loan officer who worked quickly to review Jan’s file, initiate the appraisal, and get everything into underwriting. Failing to get loan approval is the most common way home sales fall through. At some point, all the other work is done and it’s time to just wait for the call from your lender.
After just 30 days, the loan was approved and Jan was signing papers on his new investment! He has a lot of ideas for the home to make it more inviting and practical. Plant life and outdoor space are a big part of his vision, along with some other cosmetic updates.
The property seems to be a great fit for Jan. It is close to the University, has a fair number of rooms, and most importantly, has the potential for growth.
Congratulations on your new home, Jan!
For a virtual tour of this home, visit: https://www.facebook.com/myCAREagent/videos