Fixer Upper To One Is Cosmetic To Another

I receive emails regularly from people wanting to find the diamond in the rough so they can walk away with tens of thousands of dollars in one transaction like all the people on the infomercials.

Everyone wants the quick fixer upper resulting in the quick buck. In some communities, that's very doable, while others are just unaffordable even when the house is about to fall in. Even I would take such a treasure. I toured one such property recently with a fellow investor and the house truly needed a lot of fixing up.

It had been a rental for several years by the sight of it. The carpet was in a mess with bare spots throughout. It was simply filthy -- there's just no other way to describe it. It wasn't even "broom clean" which is what most contracts require when a renter or former owner moves out.

The walls had needed painting several years ago and the flooring in the kitchen had cuts and gouges all over. On the back deck, we had to be careful not to step too firmly as to not fall through and the back yard (it was a townhouse) was overgrown and unkempt. The fencing was fraught with rot and mold.

The bathrooms were also filthy with rust in the sink and tub, and the faucets needed replacing. The owner had turned off the water, so we couldn't test if it was working or not. There were only a few light bulbs throughout the house so that we could get a good look at the crevices of the dwelling.

In the basement, the ceiling was drooping from previous water damage from above, the carpet needed replacement. There was also a smell of mildew throughout.

We were drawn to the property because the listing remarks said: "Priced below other comps. Needs cosmetic fixes."

Well -- what I was seeing was more than cosmetic. In addition, when you see that the interior is in such disrepair, you have to wonder about all the stuff you can't see in a casual visit -- the attic, roofing, rot around the base of the house, termites, etc.

The investor-owner used the house truly as a commodity and did not take care of the product. However, in our escalated market, the asking price was $359,000. So is this the type of fixer-upper you're looking for? A comparative market analysis of that area today -- 60 days later -- shows properties of that type selling for upwards to $410,000. In a market such as the Washington, D.C. area, such a gamble may be worth it.

The problem with this target property is that the owner was not offering the property up as a fixer upper, but the market showed it could be moving up to that level. The property needed at least $25,000 in repairs and then the marketing costs would be about another $20,000 to $25,000 -- so there goes the equity and your quick-turn profit.

If you're in a more normal market, you need a lot more equity to walk into before being willing to start polishing that diamond. There should be a projected profit margin of at least double your expenses -- thus after fixing up a property and selling it, all those expenses should equal your profit.

Example: You purchase a fixer upper for $150,000, put in $25,000 to fix it up, and sell it for $225,000. Your gross profit would come in at $50,000, subtract commission and closing costs of 7 percent and you're down to $34,250. To be sure that you're going to get the amount of money here that you want, you MUST insist on a thorough home inspection by a qualified (preferably, certified) home inspector. This person will be key in finding out how much money you're about to put out in return for your investment. In addition, you want a Realtor involved who can give you comps of the area so you know what your target price will be.

When it comes time to your first fixer upper investment the key point here is patience and don't let dollar signs in your eyes blind you to the reality of the return on your investment.


Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Lien Holders Must Get In Line for Payment

A title search is one of the most important activities of the real estate transaction. Without the ability to convey title, a property owner cannot sell his or her home and a buyer would not want to take possession without this most basic exercise.

"Title" is the right to own land. Thus a title or settlement company conducts searches at the courthouse to determine if one owner has a "clear" title so that they can pass the property over to another owner. If a title has liens or judgments against it, then it creates a "cloudy title" and that's not a good thing, unless the liens are the most common sort, such as a mortgage.

Liens are "a charge or claim against a person's property, made to enforce the payment of money," according to my old principles of real estate text book, "Modern Real Estate Practice," published by Dearborn Real Estate Education. These liens are broken down into two major groups: voluntary (you actually created the lien intentionally, like a mortgage) and involuntary (it was forced on you, like taxes or a creditor's lien seeking payment).

Beginning investors need to be careful that when they go to the courthouse steps to bid on a property, that when they "win" they haven't just purchased a bunch of liens, which are attached to the property and convey with the property. Keeping in mind that if someone has allowed their house to go to foreclosure, then they've had financial problems and that means they could have had liens placed on the property from vendors seeking payment.

As mentioned above, mortgage companies place liens on the property for the mortgage amount. Other liens could be placed on the property for taxes, fees outstanding to contractors (mechanics lien), and even homeowners association dues. You may even find liens for utility companies and local creditors.

When a house goes to foreclosure, the lien holders must get in line for payment. The first one with a hand out is the government for taxes. This lien is the first in priority, even though the general rule is "first-come, first-served." All other lien holders better hope they placed a lien on the property early on.

For example: Mr. Smythe is ordered to go to foreclosure on his home and is able to receive $275,000. He has a tax lien for $5,000 the current year, a first trust mortgage from 1998 for $125,000, a judgment lien from a creditor for $100,000 from 2003, and a mechanics lien for work done by a contractor on his deck for $20,000 from 2002.

The order of payoff would be as such:


Taxes: $5,000

1st Trust: $125,000

Mechanics lien: $20,000

Judgment lien from creditor: $100,000

Mr. Smythe: $25,000
The seller receives the balance of the proceeds (and that's assuming the creditors have not sued him for the cost of the foreclosure or any fees they've incurred that they are allowed to because of the foreclosure).

If Mr. Smythe goes to foreclosure in a down market and only receives $200,000, the roll out of the proceeds may look like this:


Taxes: $5,000

1st Trust: $125,000

Mechanics Lien: $20,000

2nd Trust: $50,000

Mr. Smythe: $0
In many foreclosure cases, the mortgage company will pay the taxes just so they can get first in line for their own money. The only other way a creditor can move ahead in the line may be through a "subordination agreement" between them and another lien holder to change the priority (you might say these are also considered a "fat chance" agreement or "snow ball's chance" agreements). Not too many companies are willing to subordinate to other creditors if they don't have to.

If you find yourself in a must-sell situation, it's best to let your agent know immediately that you might have liens on your property -- she'll find out about it eventually during the title search. For those facing foreclosure, you may have creditors judgment liens on your house and not even know it. The only way to find out about them is to visit the courthouse and look at your records. Obviously, the only way to remove the liens is to pay them off.

Transaction Management Tracking Moves Online

Your next real estate transaction may be managed from an Internet-based transaction management system (TMS). Plenty of companies are beginning the trek toward being the first in line for servicing the transactions of real estate agents. These TMS providers, so far, include title companies, software companies, real estate companies and multiple listing services.

It's the natural progression for the industry; however, standardization and acceptance by various real estate professionals to use the same system (especially if their own company is designing its own program) will be the key to success for any TMS. The fact that so many type of companies want access to the information is what muddles the development and launching of this highly touted tool.

The basic description of a TMS is a web-based software that manages the transaction, beginning with either the buyer or seller and goes from listing the property or approving the loan through settling the transaction. The system allows service-providers to enter new data into the transaction from any place the internet is accessible. Each transaction has plenty of service providers touching it -- real estate agent, title coordinator, settlement agent, home inspector, loan officer, legal firm, insurance agent, pest inspector, etc. Each would input data about their piece of the transaction into one web-linked file hosted by the TMS company and controlled by the subscribing agent.

The challenge in today's paper-intensive real estate transaction file is to keep up with each aspect of the transaction, while ensuring that each task item is completed according to a legally-binding contract. Most times, this is monitored by paper through faxes and emails back and forth from all the above-mentioned parties.

Who owns the transaction is up for debate -- is it the listing or buyer agent, loan officer, settlement/title company? The objects of the transaction are obviously the seller and buyer -- however, they don't have the access, nor expertise, to keep up with the scores of documents, tasks, scheduling, etc,. necessary to move the transaction from contract to settlement.

The National Association of Realtors has designed a Realtor Secure certification for organizations that use the "best online security practices in the real estate industry." So far, only one TMS provider has received certification for its program -- SettlementRoom.

While this certification may give the Vienna, Virginia-based software/web developer a competitive edge in implementing its program with real estate companies and MLS services, there are so many other TMS providers on the horizon that it will be a messy battle to see who wins out or at least becomes the primary TMS service in any given jurisdiction.

NAR reported recently that "SettlementRoom … is the first transaction management vendor to complete the rigorous Realtor Secure program. SettlementRoom successfully demonstrated that it met program requirements to have policies and procedures in place to protect real estate, employee and customer information from internal and external threats and to prevent business interruptions."

NAR based its certification on security standards from the International Standards Organization and the National Institute of Standards and Technology.

"Realtors are harnessing technology to help consumers and making that technology secure. So it's encouraging to see an industry firm like SettlementRoom demonstrate that it takes seriously the security of data from Realtors, consumers, and others involved in the transaction," said Mark Lesswing, NAR vice president and director of CRT, in a press release on Realtor.org.

Of the 42 transaction management sites listed by web directory site ReBuz.com, several are already caput while others redirect the click from the original site URL to another entity altogether. The battle is fierce and the field of winners has already begun to narrow.

Waterfront Investing May Require Road Trips and Investigation

Investors are once again on a record pace of purchasing in 2005, matching their pace from 2004. The National Association of Realtors reported in March that "twenty-three percent of homes purchases last year were for investment and another 13 percent were vacation properties."

LoanPerformance, a subsidiary of First American Corporation, reports this year that investors have made up 7.19 percent of all mortgagees through the end of April 2005 -- which is more than a 300 percent increase since 2001, according to a brief in the Wall Street Journal.

The obvious is obvious: despite fears of a bubble, real estate is the hottest investment tool in the 21st century to date. Outside of a real estate meltdown, it appears the advent of retiring baby boomers will be looking for real estate to purchase, both close to home and out of state. Some of those targets are waterfront properties. Since there's only so much coastal property, you may be in competition with buyers/investors from all over the world for land on the water.

The good news is you don't have to be a millionaire to invest in coastal property, but be wise in your selection process. I heard a radio ad the other day touting to residents in the Washington, D.C. region (three states in all) to come to North Carolina to buy waterfront land for as low as $99,900 per lot.

Now, for many would-be investors, purchasing a piece of property without a house on it for a hundred grand is ludicrous. But when you're in a market where a 2-bedroom bungalow goes for $700,000 – well, a lot in another state for $100K seems real affordable. So, I called.

The property in question looks great on the internet. The lots are from a quarter to a half acre in a 600-acre development that's two-thirds sold. By the time the development is complete, there will be a man-made lake, boat launch, community center and canal-front properties throughout.

The sales person even talked about how all the developer's other communities had sold out in just 3 to 6 months. Wow … better get on the appreciating bandwagon while I can, right?

Well, that's the question I put to one of my investment mentors. (I have several.) He owns land in North Carolina, Florida, Hawaii -- plenty of coastal areas. I haven't had the opportunity to purchase coastal land, yet, so I'm hoping this will be my first dive into the land pool. He was excited for me when I described the slick brochure over the phone. And wisely said, "You need to go down there and check it out."

So my chief investment officer (who's also my beautiful bride) and I are heading down there this weekend to check it out -- along with the tips handed to me from my mentor and I pass them on to you:


Walk the land -- don't buy sight unseen. There are so many things that can go wrong with land. Look it over closely. Get a hold of the site plan -- where are you're lines, what's on your land, what's on your neighbor's land, where are the septic fields, etc.

Read up on the history of the land development (local newspapers, internet). Was this a friendly undertaking or was there a lot of grief from neighbors? What was on this land before? A farm, wooded land, mobile home park, etc.

Visit homeowners in the community who have already built a house. What do they think about the developer? Don't be afraid of this. Just go up, knock on the door and ask: "I'm considering purchasing a home at the Lucky Ducky Water Resort next door. How have you liked living here? Was the house built to your satisfaction? Has the community amenities been developed as promised?" The current owners will know and will gladly tell you either good or bad.

Will the land percolate for the size house you want? Don't buy a piece of land on the coast you can't build on unless you just want a camping/fishing lot.

If you're excited about owning water front property, go ahead and look at waterfront property in the area you're searching that already has a house on it. Instead of waiting to build, you may be able to get something now that can actually create a cash flow.

Don't shop just in one waterfront development. Look over developments in the same area and search for land through local MLS search engines.

Check out the economic growth of the county. Who are the employers? Are they growing? (Seek out this information from the Economic Development Authority -- local or state level). You want to purchase an appreciating investment.

When was the last drought and what happened to the water levels then? Did the waterfront properties become beach front homes?
Just like any other investment, a waterfront purchase requires due diligence and a commonsense, step-by-step approach to finding out if this is a boom or a bust.

Property Snatching: An Ancient Government Practice

The country received a group lesson last week on eminent domain, the practice of government taking property from private land owners for public use. In review, the U.S. Supreme Court ruled in favor of the town of New London, Connecticut, to condemn private homes for private developers to demolish an older community and redevelop it into a multi-use project, to include business, shopping and upscale housing, primarily for economic reasons.

It was funny, in a dark humorous kind of way, to read the opening paragraphs of the nation's newspapers and websites the day after this ruling. Reporters denoted how the high court has now given localities new police power to take land. One in particular was from the Associated Press: "Cities may bulldoze people's homes to make way for shopping malls or other private development, a divided Supreme Court ruled Thursday, giving local governments broad power to seize private property to generate tax revenue."

But the U.S. supreme court didn't "give" localities this right, it's been in the constitution from day one. Eminent domain has always allowed this type of taking. This was just the first individual case to make it to the Supreme Court.

If you ever decide to get your real estate license, you'll learn about this practice about halfway through the course. "Modern Real Estate Practice," the premiere real estate licensing text book published by Dearborn Real Estate Education, discusses eminent domain in its definition of "taking."

"Taking comes from the takings clause of the Fifth Amendment to the U.S. Constitution. The clause reads, 'nor shall private property be taken for public use, without just compensation,'" the book states in chapter 19, "Land Use Controls and Property Development."

While we all have a constitutional right to property ownership, the government also has a constitutional right to take that property. We've all signed up for it, whether we knew about it or not … even in a free society, the government at times must have the ability to make decisions for the greater good. The real question comes down, then -- is this ruling really for the greater good?

When I first heard of the New London case, my stomach cringed, just like it always does when I hear of the government taking land for any reason. While it's legal and probably in some cerebral way, the right thing to do, it just doesn't seem right. The ultimate land grab for "the greater good," was demonstrated in the recent movie release "Hitchhikers Guide to the Galaxy," where a federation of planets condemns planet earth and blows it to smithereens for the expansion of a galactic highway. The whole Earth population gets about a 30-second notice before the space bulldozers come in to clear the path to new development.

Every time you read about the taking of land, it's not a good scenario. The earliest one I can recall was 874 BC when Samaritan King Ahab took a vineyard next to his palace. He wanted the vineyard of Naboth the Jezreelite (I Kings 21). But Naboth wouldn't sell it to the king because the land had been in the family for so long. Naboth, being the spoiled man he was, got depressed, wouldn't eat his supper and went to bed to pout.

Enter Jezebel. Ahab's wife, Jezebel, told Ahab not to worry, she would deliver the vineyard -- "Do you now govern Israel? Arise, and eat bread, and let your heart be cheerful; I will give you the vineyard of Naboth the Jezreelite." (21:7)

She commenced to plot a false accusation of blasphemy against Naboth, leading to his execution by stoning. The land was left for taking -- which Ahab took. And thus, one of the first recorded incidents of eminent domain.

Thankfully, the taking of land today is not as drastic as this. In modern days, we weigh out the pluses and minuses of taking land and it's usually actually for the greater good of the community, however, the emotions will always run high when a private owner is told, "your house is now my house."