I want to share my experiences as a Real Estate Investor (REI) and expert in the engineering field as a way to help novice real estate buyers. My wife and I made a lot of mistakes when we started buying properties. Now, after a few years we’ve gotten it down and are ruthless when evaluating a property. We’ve bought a house from auction, written short sales documents for banks, bird dogged, and researched flood prone properties as a way to get smarter about being real estate investors.
Being a Real Estate Investor is a unique blend of researcher, handy man/woman, and visionary of what could be. While that sounds all nice, you can still make some serious mistakes that you can recover from. This isn’t like buying or starting a business! For couples or single people, the first real estate purchase, whether it’s a house for you live in or invest in, mistakes can have big consequences.
What I share below is taken from two viewpoints, one is buying your first house to live in. Your very first property to be purchased. The second view, and much later below, is written from a real estate investor’s viewpoint. Despite these two view points, every bit of information I share here counts toward your research phase in property evaluation.
Your First House
Buying the first house is stressful. There are so many questions you need to ask and answer.
- Where do you want to live?
- Will you like the neighborhood?
- Is it close to public transit?
- If I have kids, what’s the school system like?
- What are the market prices?
- Does it make sense to rent instead?
- Am I looking for a fixer upper?
- Do you have a decent sized down payment?
- Will I have money to furnish my house after I close?
- Do I need an attorney to close?
- Can I buy a house from auction, or is that a scam?
- What’s a septic and should I buy a house with one?
Your very first house is a life changing event. It feels like a huge commitment and, let’s face it, shows the world that you’re setting your roots. Of course, people buy and sell houses in the US like crazy, but your first house feels like a HUGE commitment.
We sacrificed items 3 and 4 for a lake community in semi-rural New Jersey.
It’s all about location, seriously. Don’t skip over this part and buy a cheap house in a bad location. You’re just gambling here. Your needs and current arc in your life will dictate the location you’ll need. Here are some key things to think about.
- What does the surrounding neighborhoods look like
- Do you have access to public transit
- Is it a walkable community
- Are there grocery stores, restaurants, bars, etc on a Main Street
- Would you want to spend a Friday or Saturday night there
- If you plan on having children, what are the schools like
You should never buy a house in a low point or where you can actually see a year round flowing stream.
These were the questions my wife and I asked each other when we selected where we live. We sacrificed items 3 and 4 for a lake community in semi-rural New Jersey because it works for us and our careers. You should do the same.
Now that you have the town, city, and neighborhood pinned down, let’s talk about another crucial point: the actual location of the property.
We live in semi-rural New Jersey and the important thing for us was to live in a wooded area surrounded by trees, wildlife, and lakes. The area is somewhat hilly with small hilltops and several streams.
As a former civil engineer and site developer, I always looked the how the property was situated to the surrounding area, most notably I was concerned about flooding.
You should never buy a house in a low point or where you can actually see a year round flowing stream. There’s a high probability that you will be in danger of being flooded out. There are two bits of terminology that you must understand about flooding and it’s called the Floodway and Flood Hazard Area (FHA).
The floodway is where the most dangerous flooding occurs. It’s where the water has its highest velocity and it’s where you see houses float by. It’s normally against the law to allow houses to be built or sold in the floodway, but every state will be different.
A lot of people make the mistake thinking that a 100 year flood will occur once in 100 years and then wait another 100 years.
The FHA is where the flood waters spread out to because of the elevation. If the floodwaters reach 100 foot elevation mark and your property is 99.5 in elevation, then you will have 6 inches of water on your property.
Insurance companies will sell you flood insurance for properties in the FHA but it’s an added expense and it really sucks if you have to clean out your basement on a semi-yearly basis.
100 Year Floods vs 10 Year Floods
There are different types of floods and they depend on the ‘return year.’ The return year is a statistical measure that says a 100 year flood has 1% chance of occurring once a year at that level of intensity. Likewise, a 10 year flood has a 10% chance of occurring once a year at its level of intensity.
A 10 year flood will usually have a lower flood elevation than a 100 year one BUT they can occur both in the same year. A lot of people make the mistake thinking that a 100 year flood will occur once in 100 years and then wait another 100 years. This mistake has been the undoing of many a homeowner, don’t make the same mistake.
In fact, Hurricane Sandy rewrote ALL the flood rules for New Jersey.
The best bet is to always buy a property above the 100 year flood elevation AND out of the FHA. The 100 year flood elevation and FHA are always two different elevations. You should always take the higher elevation and add 1 foot to it, this way your house will be out of it for years to come.
Example Flood Calculation
You’ve determined that the base flood elevation for a 100 year storm along this gorgeous stream is 150 feet. They FHA is a 152 feet and your house floor elevation is 151 feet. Should you buy it? NO! A double NO would be if the house has a basement below 151!!
Another scenario: The base flood for 100 year storm is 150 feet, the FHA is 152 feet, and your basement elevation is at 152.5. Should you buy? Perhaps and it depends on the local laws. In New Jersey you need to have a minimum of 1 foot above FHA to comply with the law (always consult a licensed engineer in your state for review).
…if you find a great property and it appears that it’s on the edge of FHA then I suggest you consult a local licensed surveyor to give you a ‘Flood Certification.’
Why is there a 1 foot minimum? It’s a requirement because people develop, rivers change, etc. The earth is dynamic and I’ve seen properties that were 1 foot above the 1970 FHA only to be reclassified as being in the FHA after Hurricane Sandy in 2012. In fact, Hurricane Sandy rewrote ALL the flood rules for New Jersey.
FEMA and Flood Locations
FEMA has a great website so you can check if your future property is in Floodway or FHA. This is just a tool for you to check and you can quickly eliminate any potential contenders. However, if you find a great property and it appears that it’s on the edge of FHA then I suggest you consult a local licensed surveyor to give you a ‘Flood Certification.’
A Flood Certification is a detailed measurement of all your property corners and comparison to the FHA. The FEMA maps are always approximates and the ‘Cert’ will give you an accurate measurement. This is usually done as a matter of course for properties the mortgage company feels are ‘questionable.’
No Flood, No Problems, Right?
You’ve found a property and it has all the great qualities you want, plus it’s nowhere near a flood area. Great! What else can trip you up?
Is the basement waterproofed?
You should look at how the property is situated to the road. Is your driveway long or short? Is it hilly? This is something to consider if you live in cold climates as ice and snow removal are a pain if you have to shovel uphill or you can get your car out of the garage because you’ll slip into a ravine.
Some other things to consider is will water flow toward the house when it rains? If it does, will it flow around the house? Is the basement waterproofed? Does the basement have sump pumps? As a rule of thumb for me, I never buy a house with sump pumps. If power fails and it rains heavy, your basement will probably flood.
Improper site drainage can cause a lot of problems for a homeowner. Always look for good site grading (how the land directs water) away from the house. This can be a money and sanity saver.
Trees, Retaining Walls, and Landscaping
This section is for people who’re buying standalone properties but you should be aware of this if you buy a Condo and become part of a Condo Association. Not so much for urban (city) dwellers.
The location of tress can bring about very welcome shade in the summer and make for a good quality of life all around. While this awesome, we must always remember that trees are alive and can get sick and die rather quickly. How the trees lean and their location relative to your house can be of concern. You don’t want dead trees close to the house.
At first glance it looked like a jungle, but that’s because the previous owner died and the house went to auction.
The house I live in was struck by two trees before we looked at it. There was slight roof damage from one in the front and the rear deck was completely taken out by the second. The deck was repaired in the back but the front roof needed work. When we moved in we decided to remove all potential trees that were leaning toward the house. Sure it cost a few $1,000 for tree removal but we saved several more $1,000’s in repair costs later.
Another costly headache is retaining walls. Depending on your land is (typography), you might have retaining walls to ‘retain’ the soil and your land. Usually retaining walls are a last option because they’re expensive to design, install and maintain. If a retaining wall fails a few years after you bought the house, then you’re probably looking at $50,000 or so to replace and fix.
However, some retaining walls are generally better than others. If you see boulder retaining walls, run. These walls are typically not designed by an Engineer and were ‘built in the field’ by a backhoe operator. They’re commonly referred to as gravity walls because the mass of the stones hold back the soil. They commonly fail by sliding out or sinking into the ground they’re sitting on.
If you see engineered block walls like Allan blocks and they’re over 4 feet tall, then you should check with your local building department to see how they were built. If there’s a building permit for them, then it’s a good sign. If they use something called geotextiles, geogrid or a term like MSE wall, then the walls are very typically robust. You’d have to check for signs of damage or erosion though, thats important with any wall and can give you a clue if it’s a $100 repair job or $30,000.
Engineering walls, or MSE (Mechanically Stabilized Earth) walls require a lot of thought and design behind them. The Engineer will evaluate the soil and its strength, how deep the reinforcement runs. This makes the walls strong and last a very long time. These walls are designed to handle soil and water pressure and they look really nice IMHO.
The last thing I want to mention is landscaping. A house that’s nicely landscaped is a good thing. Someone took great effort to make sure that their surroundings were pleasing and it’s usually an empirical measure that the property has been maintained.
There are few guidelines to always consider if the property has a well and septic.
Old landscaping is something I look out for when looking at abandoned properties. The property my sister lives in had underground sprinklers and overgrown flower beds and a messy backyard. At first glance it looked like a jungle, but that’s because the previous owner died and the house went to auction. After examining the property, we saw the weed covered flower beds and the sprinkler system. Sure enough the house was retirement home for the previous owner and he spent his time working in the garden. He was quite handy inside as well and you can see that he took care of his property. The property was a fantastic ‘diamond in the rough’ and after consultation with me, my father made one of the best purchases of his life.
Electric, Sewer, Water, Internet, Oil
Perhaps the biggest ‘deal breaker’ for many first time home owners is utilities. I’m not so overly concerned with electricity but access to a reliable Internet provider is crucial for me. Chances are, it will be for you too.
There are a few more other gotchas here as well and they have to do with your water and sewer service. You have nothing (usually) to worry about if you have municipal water and sewer, you just have to pay the taxes. However, if you have well water and septic system (as I do), well then things get a bit more interesting.
A lot of people shy away from wells and septic systems because it sounds so complicated and dangerous. There are few guidelines to always consider if the property has a well and septic.
The water is treated with coconut fibers and shells and comes out clear.
Wells can be a great source of delicious tasting water BUT you should get it tested. A test runs about $200 and it will tell you the pH and if there’s any potential oil tank contamination (see Oil tanks below). Check to see if the well is ‘cased’ or lined. That’s a good sign because it means that subsurface contamination, if it’s shallow, has a lower likelihood of contaminating your water.
This leads me to another side bar that is very, very important. If your house is heated by oil, make sure the oil tank is above ground. Removing an underground oil tank that’s leaking is a massive cost and nightmare. Just don’t do it.
A lot of people are scared of septic systems because they get abused and fail after 30 years or so. Every house’s mileage will vary but the cost of replacing a septic system in NJ ranges from $20,000 to $50,000. I’ve designed and installed a few septic system with the most recent one being an EcoFlow unit.
The EcoFlow units are cool and these types of ‘mini wastewater treatment plants’ are becoming the norm in lakeside communities. The water is treated with coconut fibers and shells and comes out clear. It’s not safe to drink but these systems use almost no electricity (depending not the design) and the water goes into the ground very clean. They’re reasonable priced but your underlying soil structure will drive the design and cost of a new system.
I suggest always getting a qualified septic system inspector to check out the system before you buy the property.
Additional Location Notes
I focused mainly on single family dwelling above, but the same things will apply in an urban setting, especially the proximities to schools, grocery stores, transportation, etc. Flooding does occur in cities, especially the ones near large rivers so being aware of where you are and how the water drains off is important.
Granted, the problems of water, sewer, and other utilities might be less important as living out in the woods, you should at least be aware of their status and how they hook up your building.
I will probably add to this post over the coming weeks as I remember more things BUT I will make this disclaimer: Always consult a licensed inspector, local professional engineer, surveyor, and attorney before you purchase a house. Your Realtor will help you in this regard.
Seeing your House infrastructure is a skill that you need to develop. This is another great way to ‘qualify’ if a property is worth your time to invest in.
What do I mean by House Infrastructure? It’s the house itself. How does it heat itself during the winter? Where does the water come from? Is it on septic? Etc.
These are critical things you should know before you even look at the house. All this information can be gleaned from the real estate listing, Zillow, or whatever other tool you are using to find property.
For example, in the area where I live there are some towns that are completely on septic systems and well 1⁄2 the time. The other 1⁄2 comes from a local water utility. Why is this important? If the house is 30 years or older and in bad shape (i.e. distressed or just bad upkeep) and is in an area where it’s only septic systems, then I already figure the system will need to be replaced. The usual cost is somewhere around $30,000 in my area. That’s already a big ticket item that I need to be aware of.
Water supply is a big one too. If you’re on well you’ll need to run water softeners over the life of your house. While that’s not a big thing in my eye, buying the salt in 50lb bags can be a drag every few months. The easiest route is to find a house on public water.
Next is how the house is heated. The majority of houses are on natural gas but some can be on oil, propane, and even electricity. If they’re on oil, you should find out if it’s an above or underground tank. Underground tanks are a huge risk for leaking and contaminating the soil, so when we find that out we pass on that property fast.
If it’s on propane or electric, prepare to spend a lot of money heating the house over the winter. This may require you to upgrade the windows or insulate the house. That’s a cost that you should estimate and keep in the back of your head.
Somethings, like the roof condition, you have to see yourself but once I’ve done the basic infrastructure qualification. I look for multiple layers of shingles, wood rot, are the soffits hanging down, etc. Is there a paved driveway? Does the driveway look like the lunar surface and require fixing?
Often overlooked but are there large trees leaning toward the house? We’ve removed trees from around our house when we moved in and it was the best decision we did. It’s a scary noise in the middle of the night during a storm when you hear a tree come down. It’s even scarier when it hits your house.
A tip for tree removal. Tree removal companies are very busy right after storms or during the Spring, Summer, and Fall. If you can wait, try to get them to come in the Winter. That's when they're the slowest and prices are a lot lower.
Before you schedule any inspections, you need to visit the property and get inside. Inspections can cost anywhere between $500 and $2000, so only get one if there’s a high probability you will be buying this house. If there is a septic system, make sure to schedule a septic inspection. If you have a well, make sure to get the water tested. If there is an underground oil tank, get it pressure tested. You can see that inspection fees can add up fast depending on the type of infrastructure you have.
Once the inspections are done, you should get a report. From this report you can refine your offer price, haggle for items to be fixed, and make the most important decision of all: continue or abandon.
Alot of first time homebuyers will be scared to walkaway (abandon) the property at this stage. They say they have too much time and money already wrapped in in the property to just give up. Then they buy the property and end up with years of problems or hassles.
Remember, before you sign the papers the problems of the house are not yours. If you spend $2,000 on inspections and 100’s of hours of searching and evaluating properties, it doesn’t compare with a $30,000 price tag to repair the roof or septic system.
My wife and I have walked away from houses after the inspections and in hindsight, it was the best thing we ever did. There was on particular property that we had our eye on a few years ago and it was in bad shape. It was a short sale but in a wonderful location. We were negotiating with the bank and almost had a deal. Then a storm hit and we finally got to see how the septic system drained. Septic system disposal beds should remain fully drained after a storm. If groundwater comes up, it compromises how the system works and eventually you might have black water pooling in your yard.
In our case, the septic system disposal bed was completely saturated with groundwater for days! Not only did this mean we’d have to replace the septic system (est $30,000) we’d have to re-engineer it and possibly move it to a new location. The costs started to add up in our head and we had to go back to the bank to renegotiate. They told us ‘no dice, take it for the price you offered or get lost.’
We struggled and argued over what to do but in the end we walked away. We spent countless of hours inspecting the house, finding out information, and writing a short sale document only to walk away at the last minute.
This was the best decision because 3 months later we found our dream house and bought it for a steal at the auction house.
Fixer Upper or Move in Condition
This is a tough question. I’ve noticed that the demand for ‘move in’ condition houses is very high these days. Of course, you will pay top dollar for these properties and even get into a bidding war. The choice of buying a fixer upper or move in condition house will be largely dictated by how much money you have to spend.
I don’t know about you but I never had enough money to buy a move-in condition house right away!
You’ll need to break up your money into two piles, one pile is for the actual purchase of the property and the other for the immediate repair. If you buy a house with a leaky roof, you have to fix that leaky roof right away. The more the roof leaks, the more damage it will do to the strcuture and cost you more money to fix in the long run.
If the house you buy happens to have an ugly but functional bathroom, you might want to consider prioritizing the upgrade for later.
Our last property was a great entry level bi-level house that was perfect for the two of us. It needed some light work like ripping out the carpet in the basement and fixing the wood floor. When we started having kids we began to notice that we had to upgrade the kitchen, bathroom, and some of the other rooms. That’s when we prioritized the upgrade of those rooms, but we lived with functional rooms first.
The same idea applies to things around the house, inside and out. I’ve found that a good coat of paint, cleaning, and elbow grease can do wonders for the general condition and curb appeal around your house. Yard work is a great exercise and you should learn to love it if you move to suburbs, it’s one of my favorite things to do in the Spring, Summer, and Fall. Plus you can work together with your partner(s) to create an eye catching property, all helpful for the resale of your house in the future.
Tip: You can try to get plants for landscaping on the cheap by going to the big home improvement stores and looking for dead and dying plants. They usually throw them away but you can ask to buy them for a few dollars. Break a twig to see if the inside is still alive. If it is, the chances are you can revive it, you'll have to give it lots of water and care.
When I first moved into my current property the grass wasn’t cut for months, it was 2 feet tall and I used 10 gallons of gasoline just to cut a small yard into shape. After that it started to look a lot better. Our new neighbors were really excited to see that and introduced themselves, all thanks to a bit of elbow grease.
Expanding the House
Real Estate Investing (REI)
The topic of real estate investing or REI for short, probably deserves it’s own post. I spent years in the trenches and it ain’t easy. You can do it from the ground up as long as you don’t get suckered into what some REI guru is selling you. There are SO many REI gurus out there hawking their courses on REI, telling you it’s easy money. It’s not. REI is not a fast buck, even if you’re a flipper. It’s hard but it can be very lucrative if you do it right.
One of the things I noticed when I got into REI was that every guru said “you need to spend money to make money” and I fell into that trap. It’s really easy to send a check buy hard to earn that back. When buying a property for yourself OR investing, you’re going to be paying everyone at every turn. If it’s not lawyer fees then it’s title insurance fees. Got a problem with a septic? You’re paying for that and an Engineers design time, etc.
You can make money real estate investing only if you watch your costs and make smart choices. Properties aren’t as easy to sell like a stock, so your hold time horizon is longer.
Short Sales / Foreclosures & Court House Deals
One of best thing to do, if you have deep pockets, is to buy a house at auction. I won’t get into the moral ramifications of it (I did see an old woman cry in court when her house was auctioned off to an REI), but if you’re a contractor or really handy with a hammer, you can find good properties for the cheap. The only caveat? You have to put 20% cash down at the auction and come up with remaining 80% cash within 30 days.
Interested to find some properties? DO a Google search for Sheriff Sales for your particular County and State. There are tons of websites out there, some are run by private companies that are looking to sell you a subscription fee. However a lot of Counties have their own government based site that lists upcoming auctions for free. So do a bit of research.
Buying a house at auction is different that a short sale. Short sales are when you act as a middle person between the homeowner and bank. What happens is that you offer to bring the homeowner’s delinquent payments up to current in exchange for them selling you the house or ‘clouding the title.’ You take over payments of the house and have the homeowner move out. I remember the first time I did this, the REI at the closing told me ‘we are now in control of the property’ and I got my $2,000 bird dog fee.
Something like this makes sense if YOU want to move into the property, fix it up, and then sell it. It will require you to essentially put a lien on the property and have the owner move out so you can move in and work out a deal to secure the property later. It is a bit risky and will require you stay on top of it, if you don’t you can blow out fast.
Ancillary House Stuff
From around the Social Web!