Caveat emptor (buyer beware) from a buyer's agent. Protect your investors!

Real Estate Agent with Realty ONE Group

It seems as though everything is dropping in value. Most noteably, home prices. As Warren Buffet once said... "When the average person is getting out of the market, the real investor is getting in". As many of you buyer's agents out there can attest, there are some outrageous deals to be had in the marketplace today. Investors are out in force and are jumping all over the best deals. The multiple offer situation is alive and well (at least in Las Vegas) and new buyers are also being "priced into the market".

It is in this market that I have come across a major potential pitfall. Caution your investors from purchasing properties within neighborhoods with a low percentage of owner occupants. The primary reason for this is that if there are less than 55% owner occupants, the home will not be able to get a Fannie Mae or Freddie Mac approved loan. More importantly, the loan will be very hard to sell on the secondary market. This means you will have difficulties obtaining financing when you purchase, and more importantly, when you ultimately sell the property.

The inability to finance a property will significantly hinder it's ability to appreciate. The buyers that could purchase is limited to a select few that are able to pay cash. Those paying cash are only likely to do so if it comes at an exceptional value. That value will come at the expense of your future seller (your present buyer). That seller will not be very happy sitting on an investment they have a very hard time selling and you will likely be removed from their Christmas list.

In addition to the financing challenges, communities with a saturation of non-owner occupants tend to take less care of the home and surrounding areas. Simply put, the "pride of ownership" is reduced or is non-existant. That often times rubs off on the homeowner that gives up maintaining a pristine lawn when both neighbors on either side and across the street have let their landscape grow out of control. They often feel that maintaining a nice neighborhood and curbside appeal is futile if the rest of the neighborhood is generally apathetic. The result is a vicious cycle, with the quality of the neighborhood undergoing an often times dramatic decline. Then, as they say: ""There goes the neighborhood". 

I represented an investor that was interested in some condo's he'd seen on the internet. I was quite familiar with the condominium project as I had sold a couple of them in 2005 and had contemplated buying one in 2006 (when the builder was closing out and had offered some extremely attractive incentives to buy plus hefty commissions). I was alarmed to find that the prices had plummeted from the low $200K to under $70K and $60K (for the 3 and 2 bedrooms). I thought "what a deal!" and initially told my investor that the units looked promising. But upon viewing, everything had changed dramatically since I had last been there. Many of the residents appeared to be tenants and within the 15 minutes I was there, I believe I witnessed at least 2 hand to hand drug deals. I know this community had been through 2 homeowner's associations since I sold the units in 2005, and the current one had not been keeping up the grounds. The paint and stucco was coming off the exterior of the buildings, dog feces were strewn about the grounds, and weeds were growing rampant.  

Less than a quarter mile away, in a similar community (at least in regards to the physical aspects and comparability of units) that has a strict policy that prohibits non-owner occupants for a year from date of purchase, comparable units were holding their value at between $89,900 and over $100K (again for 2 and 3 bedrooms). The primary difference between these communities was that policy of the HOA regarding non-owner occupants (in my professional opinion).

So to avoid this scenario, a few tips to keep in mind:

1. Read the homeowner's association documents and pay particular attention to the conditions about investors and non-owner occupants. 

2. Obtain a property profile from your preferred title company.

3. Work in coordination with an experienced lender. Give the address to your lender and have him find out if the coummunity has an "certificate of occupancy" which is what Freddie Fac and Fannie Mae look for when determining the owner-occupancy threshold and subsequent financibility.

4. Have your investors look at crime statistics from the local police department. You can look at them personally, but make no representations as to the "safety" of the area, as you could be liable for such representations. Remember that it's our job to inform our clients so that they're able to make informed, educated decisions.

5. Be wary of buying in communities that are close to the 55% threshold of owner-occupancy. One must take into account that people buy new properties, move up and rent out the old property. Also, there is the loan fraud factor. Investors will obtain financing and claim to intend to occupy the property in order to secure the best interest rates. After closing, they rent instead.

6. The dip in prices is nearly universal, but if the deal seems too good to be true, find out why. If it turns out to be a good deal anyways... tell your client to buy, buy , buy!!!

I hope this saves a least one person (real estate agent or investor) from a future disaster. I welcome your comments and/or referrals! 

Comments (1)

Steve Zarry
House Buying Now - Austin, TX
Austin Central Texas, Real Estate

Excellent advice... Many investors lost a lot of money in the past, because they and/or their agents did not thoroughly research the properties before buying. In this area, we now have a lot of foreclosures that were the result of "impulse buying" and bad research by investors. Doing the research before you buy is a must in the present real estate market...

Jan 13, 2009 12:04 PM