You did it! You found a new home in the neighborhood you want. It's in the price range you were looking for, and you could flip it for a profit in a few years.
You sign your name on the contract, and bask in your accomplishment. But the afterglow doesn't last long.
You find out there's a lien on the property, and you didn't get title insurance.
Now, you could assume the previous owners' back taxes as your debt. $4,000 less profit, but problem solved!
Not so fast.
On top of the lien, you find out that the work on the property was done with subpar materials. You're going to have to pay a contractor to fix the construction mistakes of the last resident. Another $12,000! 'How am I supposed to know about liens and construction mistakes?' you ask yourself. It wasn't like there were holes in the wall.
The home passed inspection. The seller seemed reputable, so you didn't think about title insurance.
The fact is while investors may or may not know about title insurance, they likely will not know about construction mistakes. I can't tell you how many people I know who've had to correct home remodeling projects after they bought a home.
So what can you do to predict the unpredictable? Hire a Realtor.
Not hiring one can be the biggest mistake you can make when searching for real estate. They certainly don't work for free, obviously. However, for a percentage of the purchase price, they'll negotiate, help you pick a property based on appreciation value, help you verify repair quality, and help verify leasing contracts for rental properties.
But before you pick a Realtor, make sure they can really help you with your goals. Ask for referrals from family and friends who've also bought investment properties, says Pat Brewer, Tacoma-Pierce County Association of Realtors president. Then double-check via Google to see what comments have been made about each.
Then, once you contact a Realtor, the first question you should ask yourself is: Are they explaining details to you in a way you understand? If not, you should move on to the next Realtor.
But if you develop a rapport, then sit down for an in-person meeting. Buying a property is complicated. 'It's a lot of money and risk,' Brewer says. 'Those decisions should not be made on a cellphone going down the road.'
Once in-person, Brewer suggests you discuss the following if purchasing a property as an investment:
- How can they help you assess the neighborhood appreciation potential? A Realtor can pull up detailed reports of current and past home prices in the neighborhood. Especially important for negotiations are recent sales from nearby properties. They also need to have a good understanding of the local economy. Sales values don't increase when people don't have jobs.
- How will they help you assess the quality of repairs? A good Realtor will recommend you ask for receipts for remodeling repairs, as well as Schedule D of their tax returns that lists repairs as well.
- Will they run a title check? This is easy. All Realtors will do this, as well as recommend you have title insurance just in case.
- How will they help you evaluate rental property? If you're planning on renting a property, it's extremely important to get details on the current tenant situation. Is the lease enforceable post-sale? Did they pay a deposit? If so, you could be responsible for refunding it when they leave if it's after the sale. With first month, last month, and a security deposit, you could be looking at paying anywhere from $2,000 to more than $5,000 out of your pocket.
The Investing Answer: Don't even think about forgoing a Realtor unless you happen to have studied real estate yourself. But don't just pick one at random either, and meet in person after the initial contact. The Realtor you pick can make or break the quality and profit margin of your purchase.