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."

Eliminating Inspections: What Could Go Wrong

There are plenty of inspections a purchaser could select in the home buying process. The most well-known inspection, is of course, the home inspection. This is the one where you get together with someone that knows a lot more about houses than you do, who arrives with a flashlight, ladder, screwdriver, and hopefully a T-shirt long enough to hide any unsightly crevices during the process, and meander through your future home to find all the defects you care to discover.

After all, who would want to purchase a lemon, right? Who would be that stupid? It's interesting, in market's across the country, buyers are paying more attention to their car purchases (for roughly $20,000) than they are the house they're buying (roughly, average national price $200,000 -- but of course, in the Washington, DC, area, it's more than double that amount).

But what are you to do in a scenario where the ultimate goal of the purchaser and his/her agent is to get the house, period? Forget good price, condition and location -- just get the darn thing. How can a buyer protect him or herself?

It's not iron clad, but here are a few suggestions you can take with you in that next competitive home visit. Some Realtors are going to be very irritated at my answers, but, hey, this is war.

Treat your home visit more like an inspection when you walk through it.
Along with your agent, take a couple of tools -- a flashlight and a receptacle tester, at least. As you go through the house start testing a few things like you would while buying a car. No honest car owner would be upset if someone asked to look under the hood, crank the engine, goose the gas pedal and to take it for a spin -- you would be thought crazy if you didn't.

Since many jurisdictions are in seller markets, keep in mind this visit may be your only chance to make sure all the toilets flush. With your flashlight, start looking in crevices, nooks and crannies throughout the house.

While you don't want to "invade" someone else's property, at least do a little prodding to make sure the basics are in working order. Turn on every light switch. Try every faucet and spigot. Open every cabinet. Pull out all drawers and test all doors. If accessible, open a few windows. Look around the base of hot water heaters and furnaces for leakage of water or any other fluids -- oil, rust, etc.

Insist on an information-only inspection in your contract.
What this means is that you basically want to know what you're getting into, but you're not making the contract "contingent" on a satisfactory home inspection. What you'll be able to do with this contract, however, is to determine if certain items that are supposed to be working even without a contingent home inspection are actually in working order.

In the Washington, DC, area, that would be Paragraph 3 of the Regional Sales Contract. Plumbing, electrical, appliances, heating/air, etc., must be in working order even without a home inspection. Sellers would be well advised to accept such an inspection so that they don't receive letters from attorneys when the buyer moves in and finds problems with these systems later.

In conjunction with this type of inspection, the buyer should invest in a home warranty (roughly $350 - $500) to cover these systems in the first year of the homeownership. While the policy will carry various provisos and limitations, it can help provide piece of mind for the new homeowners.
I've seen many homeowners who's policies more than paid for themselves through the repair or replacement of an air conditioner, heat pump or certain appliances.

As the market continues at a heated pace, buyers need to take matters seriously and try to inspect what they expect in their home purchase.

Published: June 24, 2005

Ratified Contract: the Beginning of the End

Hot markets can sometimes oversimplify the real estate market. It looks like houses sell as quickly as they come on the market. The signs change each hour or day: For Sale, Under Contract, Sold. What's so hard about that? It appears that all you have to do is place your property in the local MLS, plug a sign in the yard, and voila, it sells -- multiple contracts, high prices, run to the bank laughing insanely.

If it would only be so easy. A smooth transaction guided by a professional Realtor is a lot like having an experienced projectionist at the movie theater -- you only notice him when something goes wrong.

Drawing a contract in a hot market isn't as easy as it may sound -- at least, not a good contract. And that's what Realtors battle with a lot today -- is this a good offer from a reputable buyer who can actually perform on the contract they have presented?

After the sale, it goes to settlement and that requires a lot of paperwork and expertise to ensure each step gets completed so no one gets sued. Here are a few of the items that have to be taken care of from Sold to Settled:
Ratified contract: first of all, you have to get everyone to sign off on every little item and remove all contingencies as soon as possible. Once all contingencies are removed (financial, inspections, sale of home, etc.), then your first step toward escrow has occurred. This one is pretty extensive because of all the forms required by law: agency disclosure, lead disclosure, property disclaimer/disclosure, RESPA disclosure, all the addenda (several dozen are possible).

Apply for mortgage. I mention this here only because it's assumed in most markets that you're already pre-approved -- but now you have to turn that lender letter into an actual loan.

File all the documents and get them to the escrow company. The settlement company is going to conduct title search and make sure everyone gets paid. Your agent couriers all the materials to the settlement agent who starts a case file and begins checking off who's going to be at the settlement table and compiles a list of names, addresses, invoices, etc., to pay everyone.

Order all inspections: termite, home, radon, lead -- any of these may be required depending on what's happening in your area. These have to be ordered quickly so that repairs can be completed or addenda can be written to agree who's going to take care of them.

Insurance: set up your insurance with the new property (both hazard and title). The hazard insurance is your homeowners insurance policy and must be in place the day you settle. The title insurance is also purchased at the table. Buyers be sure to find out how long the policy from your seller has been in place. You may be able to receive a discount if you can transfer the policy instead of purchasing your own.

Order/supervise repairs. If defects, termites, radon or lead is present in the house it has to be dealt with. Some of them must be corrected according to the contract, others must be fixed because of federal law, while still others may not have to be fixed at all if the house is being sold "as-is" or if the buyer agrees to not having it fixed. Just because you may be in a sellers' market doesn't mean you've relieved yourself from any repair jobs -- it just depends.

Draft post-contract agreements: this could be a pre- or post-settlement occupancy agreement; agreements to take possession of the property before settlement to start contract work on the place; or various other arrangements between buyer and seller.

Performing the contract: here's the hard part. Once the contract is ratified each step has to be completed:

• coinciding settlements
• seller purchasing a home of choice
• drafting a gift-letter for the buyer
• gaining a third-party approval of the contract
• drafting and pulling in all necessary powers of attorney
• getting home owners documents to the purchaser in a timely manner, then the buyer getting them inspected in time
  

There are scores of items that are required according to your contract and you and your agent had best be ready to coordinate them appropriately or lose the house.

If You've Got A Loan, You've Got A Termite Inspection

When a home buyer signs up for a mortgage on his or her property, that means a termite inspection will soon occur on the property. In most contracts, you'll find an order for a termite inspection. It's negotiable who will order and pay for the inspection, but you'll have one regardless, especially if you have a mortgage.

The National Pest Management Association (NPMA) estimates that termites cause nearly $5 billion in damage per year in the United States. Many times homeowners don't find out about this damage until they receive a contract on the house and have to order the inspection. By then the damage is already done and many times it's pretty expensive.

There are some tell tale signs of damage, according to the NPMA web site:


Swarming of winged forms in the fall and spring. (This has already happened in most areas, where you'll see a cloud of insects, much like a group of gnats in the summer – but these will be much larger.)

Mud tunneling in, over and under wood structures

Wooden structures exhibit darkening or blistering

Damaged wood becomes extremely thin and can be easily punctured by a knife or a screwdriver
EPestSupply is a provider of products for the industry and has some very descriptive photos and graphs about how to identify termite and other subterranean creatures that might be attacking your house. You can visit their site on termite identification for some good photos and advice.

If you see some of these pests around your house -- don't panic -- they may not actually be termites. Closer inspection can help determine what you're really looking at in your yard. Pick up the bug (they don't bite) and look at them under a magnifying glass. If they are red and black or dark brown, you may have some carpenter ants. If it has a solid black body, you indeed have subterranean termite swarmers – which feed off of wood that has comes in contact with water. If the creature has a solid red body, it's more than likely a drywood swarmer, which is a termite that feeds off of -- you got it -- dry wood.

You may ask, "Why all the concern about termites when selling a house?" The primary reason is that it's hidden damage. Termites eat from within and while you can find signs of damage, such as the blistering and darkening listed above, by the time you discover it, it may be too late. Just killing the insects may not be enough to satisfy the contract. Repair could include major structural renovation, meaning ripping out walls, replacing studs and joists, resealing the wall, spackling, painting, etc.

Since termites hit primarily in the foundation area, this is where pest inspectors will look first.

The University of Nebraska Cooperative Extension Service in Lincoln says, "Places to inspect for termite activity are wooden constructions in basement and crawl space, wood sills, joists, support posts, basement window frames and wood under porches. Scrap wood on the ground or a woodpile next to the house should be removed as these potential feeding areas may allow termites easier access to your house. Termites may also be found in dead trees or wood stumps after a dead tree has been removed."

Damage can be minuscule and cost just a few hundred dollars to repair, however, since the damage is usually done unseen, it could run up to tens of thousands of dollars once a full scale inspection is completed.

A home purchaser in 1998 found out the hard way in New Orleans. She had purchased her "dream home" using a large amount of cash she had been saving for years. A week before she was to move in, she found out how badly the house was infested. The story was covered by a local paper, The Times-Picayune, and run on New Orleans Net, which documented the horrifying truth.

"Work crews opened every wall and ceiling, exposing beams, rafters and studs so badly eaten that they crumbled at a touch. The bottom 12 inches of the wooden chimney supports had been eaten away from the foundation. The termites had eaten through all but two of the house's bedrooms," the story reported. The home that looked perfect on the outside, ate through not only the purchaser's house, but also her bank account.

Don't put off what is going to be an inevitable test on your house. Order the pest inspection early and often. Watch for the local pest control service appearing at your neighbors' houses. Termites know no boundaries and can wind up at your doorstep (or in it) just as easily as at your neighbors'.

Published: June 3, 2005