Energy related real estate markets---Boom or bust?
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How to Buy a Property Without Seeing it First
June 2, 2020
Buying out of state can be a challenging proposition for many real estate investors but not viewing the property first is especially intimidating for some. The problem is it’s just not practical or feasible to hop on a plane and travel cross country to look at every property you are considering. Even if you could, there’s no guarantee that the property won’t be sold before you have a chance to see it, especially in a competitive market.
So how do you buy a property without ever laying eyes on it? After all, isn’t that part of good due diligence? As crazy as it might seem, investors are doing it all the time. In fact, it’s not just investors that are buying properties without seeing them first. A 2018 survey by Redfin showed that 20% of all homebuyers made offers without ever setting foot on the property.
Why viewing a property first can actually be a bad idea
Experienced investors know that the vast majority of what can go wrong can happen whether they personally see the property or not. Seeing the property first is no guarantee that you won’t get a bad tenant or that an AC unit won’t break. Experienced investors know that they don’t have to see a property to know if it’s a good investment. They know that they are not buying a house---they are buying an income stream. They focus on the numbers and the potential return on investment and they don’t let their own personal bias effect their evaluation.
That’s why viewing a property first can be a bad idea. It can lead to bad decisions because emotions get involved. When emotions get involved, one of two things usually happen. One, the buyer will fall in love with the property and see it from the perspective of someone buying their own personal residence. They’ll begin to evaluate it through the lens of their own personal tastes. The fact that they like it and could see themselves living there begins to seep into their evaluation and effects their judgement. Or the opposite can happen. They’ll nit pick it and find all the little things that they don’t personally like about it and talk themselves out of it regardless of whether it’s a good rental property or not. I have seen too many would be investors walk away from solid opportunities simply because they don’t personally like something about the house. Maybe the floor plan doesn’t suit their taste. Or maybe the bedrooms aren’t as big as they prefer. They start to focus on what they don’t like and lose sight of whether it’s a good rental and whether the numbers work. In either case, biased emotions can lead to bad decisions when you view the property.
Ask yourself why you feel the need to see the property.
It’s important to ask yourself what the real purpose is of seeing the property first. Other than getting a warm and fuzzy feeling, what exactly is it that you are looking for? Unless someone is a home inspector or appraiser, most people don’t really know what they are looking for anyways. Are you going to be able to spot the defects that a home inspector will somehow miss? Will you really be able to tell the value of the property better than an appraiser will? Unlikely. So, what exactly are you looking for that an inspection and appraisal won’t tell you? How many of us have to pop the hood and look underneath when buying a car even though we’re not mechanics and don’t know the difference between a radiator and fuel pump? We close the hood satisfied that we’ve done what we think we’re supposed to do but don’t know any more about the car than we did before.
How to mitigate the risk of buying a property you’ve never seen.
Everything in real estate is about mitigating risk, not eliminating it. There is no such thing as a risk-free investment, so your job is to reduce as much risk as possible. The first place to start is by establishing a clearly defined criteria before even evaluating any properties. Don’t rely on the “I’ll know it when I see it” approach which leads to indecision and mistakes. Know what you want and stick to it. A clearly defined set of criteria makes it much easier to evaluate a property and determine whether it is a good investment without having to see it firsthand.
Whether buying locally or out of state, thorough due diligence is key to the success of any investment but how do you do your due diligence on a property that you can’t see?
Here are the 2 biggest challenges of buying a property without seeing it.
1. Knowing the neighborhood
This is probably the most important piece of your evaluation and where out of state investors make their biggest mistake. Too often they rely on what someone else has told them about the neighborhood which can be highly subjective. What might be a C class neighborhood to one person is a D class to another. Without seeing the neighborhood first hand, an unsuspecting investor can easily be misled on the quality and characteristics of a neighborhood only to find out after the fact that rental property that they thought was in a solid working class neighborhood is actually in the hood. This can be particularly true in markets where neighborhoods can vary block to block and even street to street. A common mistake is to focus on zip codes however most zip codes are too geographically large to be homogeneous. It’s not unusual to have good areas and bad areas within the same zip code which makes it more difficult to know the area. Any other mistakes you might make can be overcome. A bad tenant can be evicted. A broken furnace can be replaced but a house in a bad neighborhood can't be moved. Successful investing starts with knowing the neighborhood.
Fortunately, with today’s technology, information is available at your fingertips that allows you to get a good understanding of any neighborhood without leaving your home. Google Maps can tell you a lot about the neighborhood. Are there a lot of apartment complexes, strip malls with liquor stores and check cashing establishments nearby or do you have a Starbucks and Whole Foods nearby? This will tell you a lot about the neighborhood. Google Maps street view lets you take a virtual tour of the neighborhood and street. You can see how well the homes are maintained and whether there is pride of ownership. Tools like Trulia’s heat map and Lexus/Nexus Community Crime Map are good sources of crime data in a designated area. Home prices and rents are another good indicator of neighborhood class. Use Zillow to get to know prices and rents in the area and compare them to the median for the market. How much rent an area commands is one of the best indicators of the quality of the neighborhood.
2. What’s the condition of the property?
There is no substitute for getting a property inspection. The inspection is your chance to have a look under the hood. It will tell you everything you need to know about the condition of the property including future Cap Ex expenses which impact long term cash flow. Get your own independent inspection rather than relying on one provided by the seller. If it’s a turnkey property that was recently renovated, get a copy of the scope of work for the renovation. Expect the inspection report to include several items ranging from minor to potentially major deficiencies. I have seen buyers walk away from perfectly good properties because the inspection report scared them off. You’ll need to understand how to interpret an inspection report and know what’s important and what’s not. You may need the inspector to help decipher what items are insignificant and which are of real concern that need to be addressed. Focus on the items that pose a safety hazard or can potentially compromise the structurally integrity of the property. Be sure to have an inspection contingency in your contract allowing you to cancel if there are problems with the inspection.
If you’re investing out of state, there is a good chance that you’ll have to make offers on properties that you’ve never seen. By learning how to evaluate a neighborhood remotely and knowing how to decipher an inspection report, you’ll find that you can safely buy properties without seeing them first just like experienced investors do all the time.
Are you buying properties sight unseen? If not, what are your biggest fears about doing so?