Don’t Get SCREWED when investing from Out of State

 

You look at the numbers here in Kansas City (or many a Midwestern city) and they look awesome in comparison to the numbers where you live.

In the Kansas City Market you can purchase a turn-key rental property that is “all up to date” and renting for $700 to $900 a month for prices starting at $25,000 an up.  And on paper they are exceptional deals.

So you think “Sign me Up!”  You proceed to purchase 4 or 5 at once for the awesome cash flow.

But as I am here in Kansas City selling some of these turn-key properties AND also own the local real estate investor association, I get a ton of calls from people about 6 months to a year after they buy their first 5 to 10 houses here in Kansas City.  These calls are from people who want out and want their properties GONE.

Let’s take a look at a few of their stories.

Last week, a real estate investor was in my office who had purchased rentals in Kansas City, not directly from the owner, but from a 3rd party who comes to Kansas City, finds the deals, provides the management and seller finances the houses.  He had purchased several houses in what we consider a war zone here in Kansas City.   More on buying in the War Zone in a minute.

This particular third party seller advertises on his website that he is taking care of all the details and selling the houses for 50% of the value.  Now I agree the third party seller should make money for taking care of all the details and because he was offering seller financing, he should get a bit higher than cash price.

To put some example numbers so you can understand this better.  The third party buyer purchased a fairly renovated, already rented and managed property for $30,000.  They sold it to the investor for about $60,000.  The investor put 40% down $24,000 and financed the remaining $36,000 with a 5 year note that was interest only.  At the end of 5 years, the third party would have made a killer profit and the investor would still owe $36,000 on the house.  Now keep in mind that the cash value of the house was really only $30,000.  So now about a year later, when they have 12 of these deals, that they can’t keep rented and are not cash flowing, they want to sell and are very sad to learn that as a buyer, I would probably  pay $20,000 for their houses in good condition and tenanted and even less for those that were vacant or vandalized.

Again last week I attended a national event and met with two different people who help buyers purchase in the Midwest.  One was from California and the other was from Seattle area.  Both were running some names by me of Third Party sellers who were scamming their buyers, these sellers have their own REIA groups in their area and they maintain a list of blacklisted third party sellers, so you may want to join your local REIA group and talk to others in the group that invest in the Midwest and compare notes.  It could save you tens of $1,000s.

Now let’s look at war zone deals.

I am not saying you can’t make money on a house in the war zone, BUT you have to have a good team of boots on the ground to get good quality tenants, to rent them quickly and to keep the good tenants you have.

In the war zone as in just about any other type of rental market, if just any tenant with a deposit and a first month’s rent gets put in the property, I would be willing to bet that within 6 months the tenant has either abandon the property or needs to be evicted costing time and money.  And in the war zone, the property is a huge target for vandals to come steal at minimum the copper, the furnace and the ac.  And vandals will often steal the kitchen and the bathrooms and even the carpet and the light fixtures.

Now I have seen the huge third party mark up in better areas of Kansas City.  But at least the better areas have less crime, less turn over and at the same time a bit higher price, and lower cash flows. But again, quite often the third party seller is almost doubling the cash price – I have sold my houses to the third party buyer for $30,000, to see them end up on his website for $60,000.  Now I agree, he is within his rights to make as much money as he can, but I am thinking the $30,000 he is making is a bit much.

So I don’t want to turn out of state investors away from Kansas City (or other Midwestern cities), but rather I want to offer a few tips so they are not calling me or my counterparts willing to bring $20,000 to the table to sell a house that is just not working out.

Before you buy, do your homework:

  1.  Go to the local REIA group in that area and find 2 or 3 people that know the area of your potential property and ask questions about area, price, rents and make sure the numbers you are being quoted and not over inflated numbers.  Can’t find a REIA group, pick three or four landlords or realtors with houses for rent or sale on Craigslist.
  2. Have a team in place on the ground to deal with the property including the main person and a back up person for:  property management, home repairs, drive by the house for pics, trash out, tenant screening, evictions, and a few fellow investors to turn to for advice.
  3. Research the price you are paying.  While I agree some third party buyers are well worth the extra price for finding the property and managing the deal, make sure they are not over charging you.  If your deal goes south, are you going to be able to turn around and resell it or are you going to have to bring $20,000 to the table to sell it.
  4. Go drive by the houses you are buying.  Purchasing sight unseen is fine if you have a good team in place to go check up on your sellers, but at least once a year, come to town and look at the property before you buy.  I have seen scammers that have awesome photos of one or two rentals that they send out for every house.

And keep in mind that you might have a seller that hooks you with 1 or 2 great deals and then they sneak in a marginal deal or two because they can and the deals keep getting marginally worse as time goes by.

Here at kcInvest.com, we want to sell you a turn-key house today.  We want to sell you a turnkey house next year and again the year after that.  We do encourage our buyers to look at the numbers and make an offer based on the numbers and the photos, but then, once we have an agreement, PLEASE come to town or send your eyes and ears here to look at the property, do inspections, make sure what we are telling you is correct.

If you are not sure how to find a REIA group (a real estate investment group) in your area, I would start at NationalREIA.com as well as CREOnline.com or possibly BiggerPockets.com, all will have a list of RIEA groups nationwide.  And don’t just settle for talking with the person at the REIA who answers the phone.  Play around on the REIA site and find their member forums and social media.  Use those to find local members and ask them questions.

So before you invest out of state or out of country, PLEASE do your homework!!