You Don't Need a Real Estate Agent to Buy Real Estate!

I constantly hear customers, who walk or call into our office, ask about homes we have listed or could we show them some homes.  Being the sarcastic person I am, I tell them; we don’t sell homes, we sell real estate.  The blank look on their faces or the silence at the other end of the line is priceless.  Very soon the smile appears or I hear the smile on the other end of the line, I introduce them to an agent who will show them, real estate (homes).  Many don’t understand my blunt sense of humor or directness, a home is what you make it or where you live and what they are actually buying is real estate, not a home.  What I'm really amazed about, in this date and age, most people don’t realize; you don’t need a real estate agent to buy real estate.  There, I said it and now I will start receiving nasty emails from agents, all over the country, telling me I’m wrong. For all the doubters and those too scared to do a little research, I’ll give you the inside to buying real estate. With over 40 years’ experience of buying real estate, I have to admit, I made a terrible mistake buying my first piece of real estate.  Like millions of people, who have bought real estate, I believed I needed a licensed real estate agent to help me pay top dollar on a piece of real estate, that would not cash flow if I had to rent it. If I had known there was another way, I might have done something different and possibly made a profit on the sale of my first home, instead of giving it all to a real estate agent in commissions.  There are no secrets to buying real estate and having the ability to make a profit, the day you buy your first piece of real estate.  If you follow just a few steps in the paragraphs ahead, you can make a profit on the day you close on your real estate purchase.

Buying real Estate without using a real estate professional

1.       Just knock on the front door. Buying real Estate without using a realtor is you doing your due diligence, walking up to the front door of somebody’s home and asking them if they would like to sell their house. What you will get is either a solid no or they may ask; what will you pay?  If you have done your homework, you know what the comparable sales are, done a cash flow analysis on the comparable rentals in the area, you make a direct offer and wait for an answer.  Most homeowners believe their home is worth more than what it’s worth, or they are so far underwater in value from the real estate correction or 2nd mortgage, they do not understand how to short sale their home and have no idea they could sell their home and start fresh somewhere else, so typically, you get a quick answer of no.  With all the public information online, there is nothing to hide from anyone.  I know what somebody paid for their home, how many mortgages they have, what their taxes are and if there are judgment’s or liens recorded on their property. All the information is available in public records. 

2.       For sale by Owner. You see their signs in many neighborhoods and when you knock on their door and ask them about their home, the first question they ask; are you a realtor?  After convincing them you're not, they invite you in to have a look around, they follow you tighter than a shadow and let you know how they are convinced, their home is far more valuable than their neighbors is and how they will never pay a commission to a realtor.  Once they show you how much they are asking, you have the opportunity to either advise them of what you will offer or excuse yourself and head to the next overpriced, 20 year old, out of date home with blue and pink carpet.

3.       Foreclosures on the steps.    Foreclosures have been happening on the steps of the Court house for many years, even in the best of financial times.  You must be very careful to see what liens are being foreclosed out at the time of the sale and understand, municipal liens are never foreclosed and delinquent association dues will have to be paid by the lender.  If you are the winning bid, you are buying the property “As-Is” and you will have to provide your own title policy* (covered in future paragraph).  You will receive a “Special Warranty Deed” and when you transfer title, the next buyer will receive a “Warranty Deed”.

4.       Tax Deeds. There is nothing mysterious about tax deeds or forcing a tax sale on a piece of real estate and as in many other direct sales/purchases of real estate, it takes the due diligence of the person pursuing that real estate to insure they understand what they are buying.  The great thing about tax deed sales is if you don’t win the bid, you get all your money back with interest, (up to 18% on "over the counter" tax deeds in Florida).  If you want the property, you can bid it up to what you are willing to pay for it or you can let someone else walk away with it and collect your interest.  What you have to understand on a tax deed is, you either have to hold onto the property for four years or do a "suit to quiet title" in order to have a warranty deed.  Buying a tax deed does not relieve you of any municipal liens on the property.  Before you even buy a tax deed, investigate whether it has municipal liens and if the local board, or magistrate is willing to negotiate the liens down to a reasonable amount. If it has a lien and you buy the deed, you are responsible for that lien and bringing the property into compliance.  Depending on how long the lien has been in place, typically, municipal liens are dismissed after twenty years but if the property is not in compliance, you could find yourself confronted by a Codes Officer. The local government has the power of escheat to acquire the property and it may be in your best interest to push local government in that direction and attempt to buy it directly from local government.  

5.       Lease Options. Similar to a For Sale by Owner, except you are in a lease to purchase, the property may have an underlying mortgage that will have to be paid off, (or assumed), at the time of closing.  This allows a buyer time to save a down payment or do updates to the property prior to closing.  There is always the chance the mortgage holder could default and lessee could be left with a worthless contract.

 In all the above instances, I recommend the use of an attorney or title company, draw up all the closing documents to protect both parties.  Tax Deeds are delivered by the local clerk and if you pursue a "suit to quiet title", have an experienced attorney in this procedure to handle the entire case.

Using Real Estate Professionals

There is nothing wrong with using a real estate professional, I know, I am one.  There are three types of real estate professionals which anyone can refer to, too purchase real estate and I will describe them as follows.

1.       Realtor.  A realtor is a member of the National Association of Realtors and is usually associated with a local board of realtors. Realtors usually list real estate with their shared Multiple Listing Service where all members of the local board share their listings, have direct knowledge, access and private information about real estate listed for sale or lease.  A Realtor is licensed and are independent contractors through the broker they work under.  It is the responsibility of the broker to supervise the agents who hang their license within their agencies. 

2.       Real Estate Agent. There are small communities who do not belong to the National Association of Realtors or are independent brokers who choose to not to be part of the Multiple Listing Service and can legally sell real estate throughout the state.  All real estate professionals are sanctioned and licensed by their state and have strict guidelines in which they have to follow as well as Federal regulations. To make this simple; all real estate agents can sell real estate but not all real estate agents are Realtors.

3.       Auctions.  Many banks are using auction services to market their REO’s, (Real Estate Owned).  Auctions are also working with REIT’s, (Real Estate Investment Trust), large investors, wholesalers or individual sellers.  Typically, auctions bundle and market a volume of properties with an initial upfront cost for marketing, the seller sets a minimum sale price. As a buyer, you would typically pay a buyer’s premium to the auction service, above the cost of the bid price.  Auctions are very popular and there is a licensed broker who represents the auction within the state in which they operate.

When you are dealing with a real estate professional, you must understand what type of agency they are providing you. When you work with the typical agent, you can expect them to act as “Transactional Brokers”.  They "do not" represent the buyer, you or the property, they represent the transaction.  If you want to be represented by an agent; they will ask you to sign a form of "Exclusive Agency" which will make them a “Buyers Agent” and you will have committed yourself to that specific agent through the entire process.  It is the responsibility of the buyer to advise any other agent, they are working with another agent and have an "Exclusive Agency" agreement with any other agent.  If you have signed an exclusive agency agreement, you may be responsible for additional commissions or fees, to the broker, for such services.  You may also be responsible for future commissions to a broker, if you buy a property in the future which your agent initially showed you.

How do you plan on paying for real estate?

There are several ways to purchase real estate and how you choose to pay for it.  You may not have to use your own money to acquire real estate, so here are a couple ways for you to think about how to pay for your real estate.

1.       Cash is king and if you have available cash, you have the ability to negotiate a great price and you must also understand, you can’t go to closing with a briefcase full of cash.  Whether you inherited your cash, did well in the stock market, won the lottery or just saved the cash, you have to provide documentation of where the cash is being held and where it came from. When you go to closing, you will have a couple options to pay for your real estate; provide certified funds from the agency which holds your cash, (could be a bank, credit union, trust company, IRA), or have the amount wired from your account to an escrow account of the closing agency.  Paying cash may not be in your best interest if you have the ability to leverage your purchase.  If you want a high,"cash on cash return", use leverage but if you are buying a solid real estate investment property and projecting a solid Capitalization Rate, then go ahead and pay cash.  Currently, over 50% of investment real estate is being purchased with cash.

2.       Borrowing the Money from Primary Lending Institutions is what many buyers do every day to leverage the purchase of real estate.  Who and how you choose a lender depends on your credit rating.  Before you start a borrowing process, check out what fees you will be paying for using their service.  Not all lenders are equal and the ones who advertise they have the lowest fees are not always the lowest.  Banks, Credit Unions, Mortgage Brokers can offer many programs but where they actually make their income is from the upfront fees they charge.  I would encourage you to have as large a down-payment, (25%-30%), you can handle without wiping out your savings.  Some programs offer you the opportunity to put as little as 3.5% down but it comes with a caveat; Primary Mortgage Insurance with a hefty upfront cost with an additional monthly premium to go along with principle, interest, taxes, insurance and possibly association fees.  If you are a military veteran with an honorable discharge, you are entitled to a VA mortgage with no down payment.  You still have to come up with cash for Insurance and tax escrows but that should be affordable.  There is no PMI and it was established to help returning military veterans become homeowners but you must understand, there will be a funding fee associated with the mortgage that will be applied to the mortgage, before you you sign any documents or applications, ask what their funding fees are. Another 100% financing is USDA home loans, these will be for specific rural areas and you will have to search out lenders who participate in the program.  For FHA, VA and USDA mortgages, please be patient and don’t get into a hurry for the closing to happen.  There will be many “I’s” to dot and “T’s” to cross before you get to the closing table.  Also get your wrist muscles built up for the forms you will have to sign at closing for any of the government back mortgages. There are different lending standards for primary residence and investor financing so ask before you go shopping.  Many lending institutions will only provide mortgages on 2-4 investment properties per buyer and there are specific guidelines you must meet with reserve funds prior to the purchase of an investment property.  I currently have a lender who will make a mortgage on an investment properties of up to a 95% LTV on the, (ARV) after repair appraised value, but a licensed contractor must do the remodel and will release up to 50% of the repair cost after the three day waiting period.  There are other programs out there, you just have to do your homework to find what will fit your business plan.

3.       Hard Money Lenders may be the way to go for the flippers but they come with a hefty price tag. I have some local lenders who will charge 16%-18%, so if you are working with on a 15% margin: you only have nine months to flip the property before it starts eating away at your profit.  If you hold that property for a year with a hard lender, you might think about getting a mortgage and coming out of pocket with additional funds to close the deal. 

4.       Owner Financing may work for you and the seller who wants to put off short term capital gains for taxes. This may be a tool to provide an retired person, long term income.  The interest rates are usually a little higher and the down payment is negotiated between you and the seller but there are no more additional fees in securing a mortgage.  You will need to have an attorney or title company draw up the closing documents, do the title search, provide title insurance and record the mortgage.  Many owner financed mortgages have a balloon clause in them that will require to pay off the mortgage in 3-5 years but the amortized mortgage will be for the 20-30 term and negotiated between you and the seller.  If you have blemished credit, this may be the way for you but if you don’t repair your credit or do not qualify for a re-finance in the 3-5 years, the seller has no obligation to extend the terms of the mortgage and you can be evicted regardless of how you paid your mortgage. 

5.       1031 Exchange can be used to hold off paying capital gains on the sale of the property.  This procedure is used when you sell your property and you only have a limited time to contract and close on a like property.  There has to be an approved mediator to hold the funds during the exchange, (you cannot touch the money), and you will have to determine if the fees the mediator charges are less than any capital gain taxes you may offset.  Pay now or pay later, If you have a large sale, it may be in your best interest to exchange but if the fees are more than the capital gains tax, pay the tax.

6.       Self-Directed IRA’s is one of the best ideas of offsetting taxes that our government has come up with.  If you have an IRA that is earning very little, transfer your IRA to a company who does Self-Directed IRA’s, (I currently have a list of over a dozen companies).  That company will hold your funds until you direct them to purchase a property in the IRA’s name.  The property you purchase has to be an investment property and cannot be used by anyone directly related to the owner of the IRA, (Arm’s length).  All rents will be sent to the IRA and all repairs to the property must paid through the IRA and must be managed by a third party property manager.  The beauty of the program is; when you sell the property, there are no taxes paid on the gain in value and all the profits go back to the IRA to start all over again.  This is a simple explanation of the program and you will need to do your homework before venturing into a Self-Directed IRA.

You found a property; now what?

What kind of experience do you have in real estate and construction?  I have years of experience in buying and rehabilitating properties. Before I make an offer on a piece of real estate, I already have a plan on what I’m going to do with property.  If you lack experience, I encourage you to develop a team who will assist you in making reasonable decisions.  Don’t try to be the person who tries to do everything themselves. Try to determine the time value of money, what is your time worth and what are you good at doing.  The following is a list of people you need to make part of your team.

1.       Certified Home Inspector is the person who will give you a complete overview of the property without an opinion.  I suggest the inspector you choose, have experience as a licensed contractor and has done remodeling or building in the past.  All Home Inspectors are not created equal and many have just attended seminars on what to look for.  Many Home Inspectors are franchised and have their “Check the Box” forms which offers little information about the property.  Many of inspectors have relief clauses in their forms, releasing them of any liability of anything you or your contractor may find after you close on the property.  Choose wisely and don’t let price be your guide, get referrals before you make the call.

2.       Licensed Contractors who will work in conjunction with a home inspector, can make a valuable team when having to negotiate a lower price on the purchase of a property because of deferred maintenance or damage.  As a contractor, I have helped buyers negotiate over 20% lower prices on the purchase of real estate.  Several times, after an inspection and my bid to remodel, brought the property cost beyond the value of the neighborhood, the customer walked away from the purchase and found a better deal down the road.  Not all contractors are created equal, choose a contractor who has experience in remodeling as well as repairs.  The contractor who builds new, typically does not bid repair projects well, get referrals or go to your local building department and ask which contractors do mostly remodels.  They cannot refer individual contractors but they can show you the list of recent permits of who is doing remodeling work.  Be leery of the contractor who does a lot of insurance work, they tend to be extremely expensive. If you can find a contractor who works with their own crew, they typically will offer you better quality and pricing.

3.       Attorney representation is very important for anyone purchasing real estate, especially if they are going to be developing your contract. If your plan only includes buying a home for a primary residence, you may not need an attorney but if you plan on buying additional parcels of real estate, find an attorney who specializes in real estate transactions.  The attorney you choose may also be the one who counsels you on what kind of corporation or LLC you should be in. 

4.     A  Title Company can be used instead of an attorney.  They can handle all the closing details but you will have to provide your own contract.  (Be careful using generic contracts, they can increase your liability).  Title companies provide title insurance, document preparation, recording without the representation of an attorney.  There isn’t much difference in the cost of closing between an attorney and a title company and most title insurance policies are underwritten by attorney.

What happens at the closing?

1.       The closing Agent is typically chosen by the sellers of the real estate and you have a minimum of three days to review the HUD-1 statement.  The HUD-1 is the document which explains where all the money is going, who pays for what and all the charges are explained.  This is where you have the opportunity to question any additional fees, (junk fees), or unreasonable charges.  Keep this in mind; you do not have to close if you have a disagreement concerning the HUD-1 and I encourage you to postpone the closing until you have clarification on any questions you may have.  The closing agent will prepare all the documents that are pertinent to you purchase along with the HUD-1.  Any mortgage documents will be explained to you at closing and if you do not understand what document you are signing, please ask for a clear explanation.  Your mortgage documents will include a signed HUD-1, the application for mortgage, the note and the deed.  You may or may not receive keys to the real estate you just signed for because the lender has to fund the mortgage and the seller will not release keys until they have clarification from the closing agent.  If you are buying an investment property, you have three working days "right of rescission" period prior to gaining possession of the property.  The closing agent collects your initial escrow amounts for your taxes and insurance, if they will be part of your mortgage payments.  You typically have to provide a one year homeowners policy for the mortgage provider as a loss payee, if you home is destroyed, the bank gets reimbursed and it takes the pressure off you if the lender pays your taxes.  Title insurance is a policy that covers your title in case there happens to be a cloud, encumbrance, missed signatures from the past that will be resolved by the title insurance company if an issue is to be resolved.

What you need to know before getting to closing.

1.       Survey of the property shows the boundaries of the property, setbacks, easements, position of the buildings on the property, ingress/egress.  The survey begins a known point to the point of origin of your property and will include meets and bounds, the length and width measurements of the property and existing structures. 

2.       Setbacks and easements are invisible boundary lines on the property that you have access to, build on or within.  A typical setback would be the distance you can build or place a shed on your property between an adjoining property.  A side setback can be ten feet and the rear setback can be fifteen feet, (which is typical for my area).  If you place a building, pool, deck or an addition to your property within that that invisible line, you have just created an encroachment.

3.       An Encroachment effects not only your property but the property you encroached upon.  The setback lines are decided upon by your local elected officials and if you have encroached upon a neighboring property, you will have to remove the encroaching item or make application to the zoning board for an exemption to policy.  If you bought a property “AS-IS”, you would be responsible for bringing the property into compliance, even if the seller of the property never disclosed to you of such a violation.  When buying real estate, it is upon you to determine the facts and it is still “Caveat Emptor”, Buyer Beware.

4.       Building Permits are a matter of good housekeeping for the community as well as insuring any modification to a structure is compliant to the building code and standards.  Many owners bypass the system by doing work on the weekends or if not a main road, out in the open.  When you purchase real estate which has had modifications, (additions, or additional structures built, wells drilled, septic tanks installed or drain field repairs), the responsibility becomes yours to bring into compliance, if it becomes known to the local building officials.  Your home inspector should be able to advise you on any upgrades to the property which have not been permitted and your contractor will be able to advise you of the cost to bring violations into compliance.  The deal of a lifetime, can cost you thousands of dollars in fines, restorations and attorney’s fees in the future.  Buy wisely and use your team, and by paying a few hundred dollars up front can save you many sleepless nights as well as your bank account.

5.       Associations often have standards for the community.  Some have limited authority and typically only maintain small community property but others have strict conditions which can force liens on the owner’s property or possibly into foreclosure.  The fees for an association range widely to what the association offers it members.  There may be a clubhouse, pool, tennis courts and even a golf course.  When making an offer to buy within an association, the seller has to provide the buyer a copy of the association documents and the buyer has the right to withdraw their offer based upon the association documents.  Restrictions within an association may include the color selection of your home, the types of bushes you can have, what type of vehicle you can park in your driveway or the maximum length of grass can be.  They can also restrict the conduct of the members as controlling what you can wear, (must wear a shirt when mowing their yard), must remove oil stains from the driveway, how much you must spend at the clubhouse each month or whether you can rent your property.  I recommend you contact your attorney and have them assist you in the review of the association documents and advise you of what the documents really say.

6.       Condo Associations are similar to the home owners association and often maintain the exterior of the buildings.  Condo associations’ fees vary to the amenities being offered and the number of units in the association.  Keep in mind, many condos do not qualify for financing due to; the number of investors within the association or not having enough reserves for future repairs.  You must also keep in mind, there may be multiple associations you will have to pay fees to; as a master association fee as well as the condo association fee.  If the condo does not have enough in reserves for maintenance or repairs, a special assessment can be charged to each owner until the maintenance and repairs are complete.  You must figure all of this in if you are planning to use your condo as an investment property. Just as with the association, the seller must provide you with the condo association documents for you to review within three days after writing an offer.

7.       Planned Unit Developments can be confused as condos as they have association documents and have common areas to be maintained and that’s where the comparison ends.  PUD’s typically do not maintain the exterior of the buildings and you can often have mismatched roofs, colors of exteriors as well as the complete maintenance of the interior.  Special assessments can be applied for major repairs of common areas, (pool, parking garages, drives).  The seller has to provide you with association documents within three days of writing an offer.

What about buying land to build on in the future?

1.        Buying land can be a great investment for the future, especially if you are planning to build a new home.  Here are just a few things to keep in mind when buying lots or acreage; make sure you can build on the property using your builder.  Many areas have owner builder sites but you are limited to which builder you can use.  Does the property have limitations of the size you can build, (minimum or maximum).  Are there environmental overlays or conditions which would restrict you from building on the property? Are there unresolved boundary issues and is there an ingress/egress to the property? What zoning restrictions are there?

2.       Zoning is determined by elected officials with recommendations from the building and zoning departments, through a planning board. Very often decisions are made by recommendations from the state as per the local Comprehensive Plan.  Zoning restricts the building without prior approval of the local elected officials.  An example may be the rural zoning policy of only one home per ten acres of land.  It may include where a business can be operated or what kind of businesses can be operated.  Environmental overlay restricts the use of property and may only allow an owner a small footprint for a homestead, no trees can be removed, no fences built or livestock allowed to roam.  The location of wells and septic tanks may leave a vacant property the inability to be occupied or built upon because of adjacent properties current location of wells and septic tanks.  Rules of building and zoning are policed by the local Codes Enforcement officer.

Short sales

1.       Short sales has nothing to do with the length of time it takes for a transaction to be completed.  The average buyer or seller does not have the training to go through the short sale process and you should rely on an attorney or title company to work through the process.  A short sale is a lender accepting an offer which is less than the current mortgage balance, the lender is selling short.  The owner cannot receive any funds at closing and there is a package that has to be prepared by the seller for submission.  It may or may not be in the best interest of the seller to short sale because of deficiency balances on mortgages may have to be repaid.  We have had a short sale transaction take over three years to close.  If you have the patience and are ready to ride the roller coaster effect of a short sale, jump aboard and try to enjoy the ride of frustration.

REO Properties

1.       Real estate owned are bank owned properties which are generally listed through auctions and real estate brokers.  If you know a local bank that does portfolio lending, you may have the opportunity to get a backdoor purchase of one of their REO properties before it’s turned over to an auction or broker.  Some good deals can be had and the majority of the properties need some remodeling to get them up to marketability.  During the last real estate downturn, many properties sat vacant for extended periods of time.  During that time, vandals stole water heaters, HVAC equipment, appliances, cabinets and light fixtures.  Varmints also made homes in the vacant properties, bringing in parasites, fleas and I have found the carcass of their last kill.  Have your contractor do a good evaluation of the property to determine if the plumbing, wiring and structure are sound enough. 

Time to go shopping

As I told you in the beginning, you don’t need a real estate agent to buy real estate.  If you do your homework, learn about zoning and building that is pertinent to your community, understand how to do a comparable market analysis, rental market analysis, cash flow analysis and can determine the capitalization rate for an investment property you are on your way to becoming a buyer who knows the community and can buy a property in good conscious.  If after all the information you read, you decide that buying real estate on your own is not what you really want to do, then I encourage you to find the right real estate agent who fits you.  Not every agent understands investment real estate.  Not all real estate agents make good first time home buyer agents and many more agents do not work full time in real estate and can not make time available for your schedule. If you have read this entire blog, you probably are more aware of the real estate industry than many licensed agents. You can use the web to find information about almost any home or neighborhood but; do you have the time it takes to do all the research on a property, that will meet your needs? I suggest you interview several realtors and hire the best one for your situation.  You don’t need a real estate agent to buy or sell real estate; but why would you not want to use an experienced professional, if you have never purchased real estate before?