The Ugly Truth About Real Estate Investing
People make real estate out to be the greatest investment you could ever tap into, but we all know there's a risk. What are some of the pitfalls in land investing? Some of these are due diligence periods, investing in wetlands or flood zones, dealing with tax liens or HOA liens, the shape of the property, and land-locked properties. So how do we solve these issues?
Should You Invest In Complicated Properties?
So let's go ahead and cover this. Really there are multiple ways to solve these issues. Let's go line by line here. First, we’ve got wetlands and flood zones. If you're new to land investing, you may want to avoid these. I'm not saying you can't make money investing in flood zone areas and wetlands; we’ll cover that in the end. But initially, you may want to avoid this type of property. Before jumping into complicated properties, you should get your feet wet and build your buyers list. Let’s move on to tax liens. So how do we avoid investing in properties that have tax liens against them? It’s actually really simple. Take advantage of the due diligence period. The due diligence period is the time period where you can back out of the deal, usually somewhere between seven to fourteen days after your offer is accepted. In this time period, check out the property and make sure you want to move forward with the deal. So you send out direct mail, and your offer gets accepted. The owner comes to you and says yes, absolutely, I will sell you my property for $500. Your next step is to check the tax roll to ensure there's not a ridiculous amount of back taxes.
When I do direct mail marketing, my offers are extremely low. I want the person to be a highly motivated seller who wants to dump that property quick. So I'm already thinking worst-case scenario. When I check the tax roll, if there's a bunch of back taxes owed, but I could still make a phenomenal profit on the back end, I'll absorb the extra cost. However, if you add it all up and you're like, whoa, we got a lot of taxes here, this deal is no longer profitable—then it’s time to dip on this deal. You could also renegotiate the purchase price so it remains profitable. Go back to the seller and say, we want this, but had no idea there was $1,000 in taxes owed. I cannot pay you the $1,000 (or whatever you offered) I offered initially. I could give you X amount for the property. If you still want to move forward, great. If not, I apologize, but I cannot close on this deal. Then just play it from there. If you get them to close and agree to a low price, let’s say a $200 purchase price, then absorb that tax bill, and you could still flip it for a profit.
If they say absolutely not, tell them you totally get it; maybe they should put it out to the open marketplace and see if they can get a buyer. Let them know that if for some reason they can't get another buyer and the back taxes don't grow any larger, circle back to you, and you will cash them out at that $200 agreed-upon purchase price. At least that's how I would roll with that particular situation. So that's how you can handle tax liens and things like that. Also, if thousands of dollars in back taxes are owed, and everything still makes sense on the surface, you want to reach out to the county. Just make sure it's not at a foreclosure auction, and you're about to buy this thing, and some other buyer is buying it at auction. That would create a lot of additional paperwork. It creates a mess you don't want to deal with. So that would be the only other step for that situation; reach out to the county, and make sure it's not an actual foreclosure. That way, you don't have to deal with any nonsense.
Build Profit Into Any Deal
The next issue is HOA liens. There are two parts to this. I try to avoid investing in properties with large HOA fees attached. But sometime I think, worst case scenario, if I can't flip it for cash, I can do seller financing. If the monthly HOA payment is so big that I can't do a seller-finance deal, I won't do it. But if it's a small HOA, like maybe $50 to $100 for the whole year, I'll usually take the deal. At that level, I could even absorb that monthly payment of $10 or whatever for the HOA fee. This is because the profit margin I will get on seller financing makes it worthwhile. For example, if I sell for $50 a month, it covers all the fees, and I’m good to go. But if the HOA fee is like $200 a month, then I won't even deal with those properties unless it's something I could get under contract and just sell the contract to the end consumer. But I personally don't close on those because I don't want to be stuck with that bill. And believe me, you'll get stuck with the bill at some point.
Let's get on to the next. So shape of the property and land-locked property. I honestly don't worry about those. I don't sweat things like this. However, when you first start land investing, you should be aware of these issues. It might be good to pass on them until you get your feet wet and know what's happening. So first things first, I make ridiculously low offers on properties. If you buy anything ridiculously cheap, you can always flip it for a profit. In the case of a land-locked property, if you get that for $200, you could always flip it for $500. Most of the time, even if it's landlocked so bad that you can't get to it—if you only have $200 in the game, you can probably still flip it for $500. Now you should be able to flip it for way more. But worst case scenario, you could still profit on those.
The other part is the shape of the property. Not only does it help with buying properties ridiculously cheap, but also, there's a buyer for everything. So know what your buyers want. I have a massive buyers list that's just hungry to buy cheap land. They're okay with funky-shaped properties; they’re okay with landlocked properties. In many cases, they just want to know they can own a solid asset. Their money's parked, it's safe, and they got it below retail value. Now, if you're targeting home builders or the end consumer, then yes, you want to avoid these. So get clear on what buyer you're serving in the marketplace, and you'll be fine. Just know that you can always build in a profit when you buy anything for next to nothing. Worst case scenario, you sell or finance a deal for $25 a month until you get the profit you want as the term continues.
Wrapping Up
So I hope this has been helpful. These are some of the quote-unquote pitfalls of land investing. Remember that anytime someone says they've never lost money in the land game, run for the hills! The reality is even if you structure things well, it may take you longer to profit. But you could almost always profit on every single land deal you do. Just create some favorable financing and be patient. It may take a lot longer to become profitable; it’s not going to be a few months turn around. So just keep that in mind when you're getting in the game. You have to be patient and work hard.
Check out my YouTube channel if you’re interested in more land investing tips. Also, if you have any questions about the land investing business and need some coaching, shoot me an email at michaelalder34@gmail.com or check out landflippingmichael.com. Then, we can see if we are a right fit for each other and lock you in for a coaching call.
