Selecting Good Properties and Deeds
The Steps to Take
This article explains some of the steps you should take in screening, profiling and analyzing a property in order to make an informed decision on its purchase.
Obviously, not every property on every list you get will be profitable for you. Your research will help you determine whether or not you are willing to pay for the property. You will also want to decide whether or not you will be able to use it profitably once you own it – by selling it or holding on to it for income over time.
1. Decide on the Maximum Amount You Should Pay
You never want to let your emotions interfere with the auction process. People that do so end up over-paying and they lose money. Any time you participate in an auction, you need to leave your emotions home under your bed. To protect your own best interest, you need to work with your logical abilities without the clouding of judgment that your emotions bring to the process.
The most important thing to do to ensure you stay logical is to decide in advance on a precise maximum price you will pay on each individual property. This will not be a cut and dried estimate, because in most cases you will not be able to inspect the property closely. Some will be too far away, in those cases where the property is improved, i.e, has a structure on it, you won’t be able to get inside to inspect the interior.
Therefore we estimate – but we add structure to the estimate. A conventional real estate investor would normally offer Ed and Lucille between 70% and 80% of established market value minus cost of repairs. However, the real estate investor has the luxury of inspecting the property first hand – in fact, the investor could pay a professional home inspector to look for things that lay people might miss. Furthermore, the real estate investor can establish market value utilizing reports of comparable properties that recently were sold – in other words, they can know what people have actually paid for similar properties in the recent past.
Most of the properties that you find available through a tax deed sale don’t lend themselves well to this kind of scrutiny. You work with whatever is available, and what is available was what other people gave up on for lack of personal interest – not that the property has no value, but the former owner has no current use for it. A building lot in a resort area that you might pick up for $800 and want to sell for $2500 will not offer enough appeal to a real estate agent to give you the comparable reports of sold properties. On the other hand, it could be a very profitable deal for you.
How to Establish Value
Comparison is really the only way to know how much a property is worth. Conventional investors, who work with houses or commercial buildings, can appraise value by getting reports of comparable sales from Realtors, or they can pay for a traditional appraisal. If the property you are targeting includes such a building you may be able to get a Realtor cooperation for obtaining these reports. However, you should not expect an agent to give you these reports without getting something in return. Conventional investors promise the agent the listing on the house being purchased.
If there is a structure involved – an improved property – you might be able to obtain a real estate agent’s cooperation in the same way. Unless a vacant lot is a prime building lot in an up-and-coming subdivision, there won’t be enough value to attract a Realtor.
In such a case, we have ways of finding out what people are asking for similar properties. Many of the less expensive properties appear on such online auction sites as eBay.com and Bid4Assets.com, which allow visitors to check the results of completed sales. Bear in mind, however, that presenting a property for sale with an online auction is an art unto itself, which we address elsewhere on this site. Some people do it effectively, others do not. The fact that a parcel goes through the bidding process unsuccessfully speaks less to the value of the parcel and more to the ineffectiveness of the listing.
We can also check properties listing on www.Realtor.com. Once again, this only tells us what people are hoping to get for the property, not what it is really worth or what it would really sell for. But this can give us a reasonably good indication of value.
Once you have a close idea of the value of the property you can now decide how much your maximum offer would be. We offer some general guidelines for this:
If the property is unimproved, you are fairly safe bidding between 40% - 50% of your estimate of market value.
With an improved parcel, things get a little more complex.
In a situation where you have reasonable confidence that the house is in livable shape, you can probably use the same criteria as for an unimproved parcel – 40% - 50%. That way if it still needs cosmetic work or minor repairs, you could still sell it to an investor as a handyman’s special for a profit.
If you have reason to believe the house may not be inhabitable, limit yourself to 10% - 20% of value. That way, if the house cannot be fixed up, the handyman or builder can tear it down and build a new structure on the lot; you are able to offer it to the builder at a low enough price to allow the builder a profit, even in a down market.
Whose Money Do You Use?
We want to assure you that whether or not you have this amount of money in the bank or readily available on credit is not as important you may think. Our philosophy of real estate investing rests on the idea of O.P.M. This simply means that if the deal is good enough the money you need to do it will become available. It is not a mystical as it may sound. If it is a good enough deal, someone will want to get in on it with you. Another way to state the principle is that money always flows to good deals and it flows even faster to great deals.
Let’s say that you come across a property with a minimum bid of $10,000. It is logical to presume that such a property should have a market value of more than $50,000. After you research it, you feel it should sell very quickly for $30,000 - $40,000. Based on that fact, you decide that your maximum bid would be $20,000.
Now let’s assume that for some time now, you have been telling people that what you do is “we buy real estate and then sell it again for a profit.” This very simple and direct statement will always make an impression on people. Any time you get introduced to someone new and they ask you, “so Frank, tell me, what do you do for a living?” or you run into an old acquaintance who asks, “Hey, Betty, what’ya been up to lately?” you now know what to tell them. Buying and selling real properties will get a lot more attention than telling them you do taxes, or work on the loading dock at a warehouse.
Given that the transaction, if you can get it under your terms, would be a profitable deal, you would like to be able to submit your bid to acquire the property. On the other hand, the $10,000 “entry fee” might seem steep, and it may require twice that amount to get the property.
Clearly, you would like to acquire instant credibility so that people would be inclined to put their money into the deal. You may feel that you, as your self, might not have earned that kind of credibility and trust. So you will want to remember that this is not about you – it is about the deal. Remember how it goes? Money flows to good deals, not necessarily to good people.
It makes sense that your orientation and focus should be on the deal, not on you, so that your friends and acquaintances focus on the deal and not on you. This means that you want to put together some sort of written presentation that you can show people, either focusing on a particular property, or better, on the concept of buying properties at a tax auction. Research results from previous auctions (often available online or directly from the county), gather information about the location of the properties highlighted in the auction results, including demographics, economic information, recreational opportunities, etc., along with pretty photographs of the area with a variety of street maps and satellite image overlays.
Your conversation with a prospective money partner sounds like you are simply offering an opportunity to a friend, rather than asking for money. From your point of view, you are utilizing the philosophy that “half a pie is better than none.” Your friend’s price of admission to the deal is the capital to do the deal: $20,000. That is worth half, and your half is contributed through your great money-making idea and your work. If you sell the property for $40,000, you give your money partner the $20,000 off the top, and then the two of you split the remaining $10,000 profit 50-50 between you. Your efforts make you $5,000, and your partner’s $5,000 represents a 50% in less than a month (or 600% annually, if you prefer).
The numbers will vary, but the principle remains: if you offer an opportunity to make money to anyone who understands the wise use of money – that it is to work for you – they will want to work with you.
2. Become Familiar with the Area Where the Property Is Located
This serves two important purposes:
- It helps you decide whether this is a good area to purchase in
- It helps you provide information to potential buyers when you want to make a profit
The World Wide Web offers a number of good sources of location information. One of these you are probably very familiar with already: NACo – the National Association of Counties. This site provides direct information about counties but also links to other sources, as well.
Open the Web site, www.naco.org. Locate a button on the left end of the light-blue navigation bar near the top labeled "About Counties." When you select that button you will find a link on the drop down menu, "Find a County." Opening this link brings you to a page with an interactive map of the U.S.
Here you can select the state from either the map or the list below the map in which the property is located, and on the next page scroll down to the alphabetical listing of counties to select correct county. On the page for that county you will see a table showing population changes every decade from 1980 – 2000 and again for 2005. (soon to be 2010). A general rule of thumb is that declining, steady or increasing population numbers indicate declining, steady or increasing property values. Below the population table is a pair of bulleted text links, one listing locations and communities within the counties, the other linking to a chart of demographic-statistical information about the county; this link will tell you about the economy and the people of that county.
A direct link to demographic-statistical information about an area comes from the American Factfinder at the U.S. Census Bureau Web site, www.census.gov. You can compare statistics about the local median family income, education levels, home prices, poverty levels, age groups, etc. with the average for the whole country.
An excellent source of information about locations comes from Web searches for the name of the county. Any of the search engines will bring in thousands of results, from the county government site to a Wikipedia article about the county, to excellent information from the local Chamber of Commerce.
Certain Web sites offer the service of providing a profile for communities and counties and can be quite useful for determining what an area has to offer in recreational opportunities, cultural amenities, historical sites and educational facilities, even economic and employment data, etc. Some of these include:
You ought to review each of these to see how they work and how they differ; they all provide different angles on various data. We find that a county is a good place to start research about a specific area, since it is large enough to warrant a report on these information services, but is small and intimate enough to be relevant for your small parcel of land.
3. Analyze the Property
Check with Local Government Agencies
You will want some specific and expert opinions on certain aspects of the property you are screening. The agencies that can help you are:
- The county office that assesses real properties: Assessor, Appraisal District, Board of Equalization, or Revenue Department are some of the titles used by this office.
- The county office that records legal documents to public record: often called the Recorder, the Register (of Deeds) or the County Clerk.
- The local zoning department; if the property is in an incorporated community, this will be the city, town or village zoning department, otherwise it will be with the county or township.
Any of the information you need from these offices that you can locate on the appropriate Web site will save you time and effort. This is a good way to start, with a follow-up telephone call if needed. We will look into each of these offices in turn:
The Assessor’s Office
Each county has an elected official who heads the office that researches real property in the county to assess or appraise its value and assign an amount for taxes due. Names given to this office range from Assessor to Appraiser (or Appraisal District) to Board of Equalization. This means this office also serves as a repository for important information about a property, Basic information to get here includes:
- the property’s parcel number (also called property identification number or PIN, or tax identification number – this is the number the county uses to catalog or list individual properties)
- the property’s street address, provided an address has been assigned
- the property’s legal description, which may be a lot and plat designation in a subdivision, a PLSS description, or a list of metes and bounds. More information on legal descriptions can be found in the article about mapping.
We would like to know what the parcel’s assessed value is. Occasionally the county will show both and appraised value and an assessed value, with the latter much less than the form. However, neither can be trusted to represent the actual market value of the property. Before you utilize either value, you should ask someone in this office to explain how they arrive at this methods: what their assessed value is based on.
This department may also tell us the amount of taxes that have been assessed in the past – if not, just find the database for the corresponding tax collector's office.
Other information that the assessor’s office can provide include how they determine assessed value, size and dimensions of the parcel, and, in the event the property has improvements, information about size, use and age of the improvements.
A parcel map for a property provides very important information. This is a map that shows the individual property in its immediate neighborhood. Typically this is a reduced version of the plat map for a subdivision, or it may show the entire subdivision in one map. The value of this will be explained in more detail in the article about mapping. For now, we will just say it is essential to have.
Assessor's Information Online
The Public Records Web site at http://publicrecords.netronline.com/ would be a good starting point in your search for parcel maps and to obtain the information about the property that the Assessor maintains, such as size, dimensions and information about improvements. After you select the state and the specific county, check to see whether the individual county departments reported include Mapping/GIS. If so, the far right column will have a link labeled as “Go to Data Online.” A separate line connects you to the Assessor's database. If instead of “Go to Data Online' you find “Website Only,” you should still visit the Assessor's Website; it is not uncommon that the county has added a database of information or a GIS map and the link does not yet appear on the Public Records site.
As an alternative to the Public Records site at NetROnline, you can also use publicrecords.onlinesearches.com/ to find these offices and databases.
If you cannot find parcel maps on the county Web site, try calling the Assessor’s office to see if someone there will fax or send you one. It would help to explain that you are getting ready to buy a property in that county, but for due diligence, you need to get a parcel map. On occasion a rural county may have a policy against faxing outside the local dialing area and they may seem reticent to even pay for postage. If it is necessary to offer to send a self-addressed, stamped envelope, then count that as a cost of doing business. Without the map, you may buy a property that is only 2 feet wide or completely landlocked; it could be next to the county landfill or the sewage treatment plant. There may be uses for these properties, but you don’t want to buy first and find out later. If the parcel is not buildable, you will need a different exit strategy than if it is buildable. A non-buildable property will be harder to sell. However, it may be attractive to a neighbor looking to expand a property or a neighboring business that can control land that would otherwise go to its competition, especially if they can get the land inexpensively.
You have probably been looking for undeveloped parcels with no improvements, but occasionally may run across a property with improvements. In such an event, the Assessor’s Office can apprise you of what these improvements are. If a parcel has no more than a shed or a barn on it, we still consider that undeveloped. If there is a house or a commercial building, that brings about a new dynamic. You would want to ask about the improvements, regarding usage, age, and size (including square footage and number of bedrooms and bathrooms with a house).
Zoning and/or planning department
Once you know all about the size, dimensions and historical usage of the property, you want to know what restrictions local code and ordinances might place on it. The zoning department will represent the smallest incorporated unit in which the property sits: town or city if that has been incorporated, county for unincorporated areas. This department probably will not have much of an online presence, unless a GIS map shows zoning boundaries: most likely you will need to look up a phone number (find the general phone number on Public Records Online and inquire from there).
The Recorder’s Office
The office that records legal documents (generally called “instruments”) to public records goes by several names in various states. Most commonly we refer to the Recorder’s Office, but it can also go by the name, “Register” or “Register of Deeds,” occasionally as “County Clerk” or ”Clerk of the Court.” Access to public records is a good way to know that you can get clear and marketable title to a property – in other words, if you buy it, it is really yours and not subject to the claims of other liens, such as IRS or state tax liens, mortgages or mechanics liens.
We should clarify one important point here. The majority of the properties that go through a deed auction will be unimproved land parcels and lots. If you get a deed over-the-counter, you will find that an even higher percentage will be unimproved. The article on this site titled “Free and Clear” explains the reasons for this.
Most unimproved land parcels are not acceptable as collateral for a bank: they are considered to be non-liquid assets. Liquidity is the measurement of how quickly, easily and inexpensively an asset can be converted to cash.
Unimproved land is normally seen as illiquid. If the bank does not know how to liquidate a property, it will not take it as collateral. Considering that the IRS places a lien on a property for the same purpose as a bank taking collateral – an asset to be liquidated in case the amount owing does not get paid, the taxing entities will look at things in much the same way. Besides, why would either a lending institution or the IRS bother with the multitudinous steps required to place a lien on a piece of property for an amount owing of only a couple thousand dollars or less? On top of that, a mechanic’s lien is placed on a property when improvement is done by a trades person, but not paid for. By definition, that does not happen with these properties.
However, sometimes the information you would need to perform a title search on a property is readily available online. The first place to look would be the list of departments for the county found at Public Records Online. Find the appropriate office, and look for the link in the far-right column. If you find “Go to Data Online” there, you can look up the property to see what has been recorded against it. You will find a search tool for this which most likely will utilize the property address or owner’s name for looking up information.
If it is not possible to research online, you can call the county office. You should give your name first (this provides credibility for you) then explain that you are looking at buying a property in that county and since it is undeveloped with no improvements, you don’t expect that it has liens or encumbrances against it, but you want to make sure: could this person just take a quick glance to confirm that? This should only require 30 seconds of effort. County Recorder’s Offices will always declare that they do not do title searches, but this is hardly a title search – it is quick look to see if anything is there, without analysis of the nature of what might be there.
However, whether or not you get results will be up to the individual. If this person refuses to help, ask if the office has the names of any independent title researchers that work in the local area. These people are self employed and work under contract to various legal firms and title companies. Obviously they should advertise their services, or at least leave their business cards with employees of the Recorder’s Office, since they do a lot of their research on site.
If the county does not have names to give you, go to the membership directory for the National Association of Title Examiners and Abstractors at www.naltea.org/member_list.aspx (link found in “Useful Links” under “Documents.” Select the state where the property is located and find those individuals and companies that work there. In any case where you work with an independent researcher, you are not getting a full title search. They generally charge about $40 - $50 for this, but since all you are asking for is a quick check, you could feel good about offering $20 - $30.
But after all this, if you cannot get the information, remember that the risk is not great with inexpensive, undeveloped lots; they rarely have liens. If you consider that doing 100 deals over time would provide an income of anywhere from $100,000 – to $250,000, if one of those falls apart because you cannot provide clear title to your buyer, you may lose a couple thousand dollars, but compared to the six-figure income you earned, that won’t hurt too badly. Sometimes, just to get the business going, you have to take a calculated risk here and there.
If the property has a house on it or it is a building lot in a prime location where middle class type houses or better stand, the rules change. Here you definitely want to get a full title search done. For this you can hire a local title company for the research and to provide insurance of clear title when you sell it. This kind of deal is a little too complex to risk flying blind.
In reality we will include a government agency here in some cases, but not others. In essence, there are two kinds of states: disclosure states and non-disclosure states. This refers to whether or not the state shows the sales price of real properties in public records. In a disclosure state, you can find out what a property sold for from the office that records real estate instruments. This would apply to houses as well as land parcels. You can find out how much the property in question sold for at its last sale, and what surrounding properties sold for recently, as well. Just make sure that the size and features of all these comparable properties match up.
In non-disclosure states you will need to get this kind of information from non-government sources. I the property has enough value – an inhabitable house, a prime building lot in a growing neighborhood, you can get a real estate agent to help you in return for getting the listing to sell the property once you buy it.
However, a property that will probably sell for a small amount would not interest a Realtor because the commission on the sale would be too small to bother with. As a case in point, with a $5,000 sale, the selling agent’s commission on the sale would end up between $125 and $250 – not worth the effort. In that case, you would resort to information on what people are asking for properties now, rather than what the properties sold for.
A quick method of learning what people are asking for their properties is www.Realtor.com. You can specify a location and request an advance search, which would allow you to more closely match the properties you are analyzing. To supplement Realtor.com, you can also do a Web search for the name of the community plus the words “real estate sales.”
In selecting comparable properties, you should look at four basic features of the property. The first feature is relevant to all, the last three apply to improved properties – properties with buildings on them:
1.The size and dimensions of the property, and if the property is improved, the size of the structure or structures. You should also find and match up use of the property, age and type of construction of the structures, and in the case of a house, the number of bedrooms and bathrooms. Speaking of bedrooms and bathrooms – the one place you don’t allow any variation is the number of bedrooms and bathrooms – they must be exactly the same. If your target property has four bedrooms, anything you compare it to must also have four bedrooms
2.The neighborhood of the property is one of the chief indicators of relative value. You want to make your comparisons from the same neighborhood as the subject property (the property you are considering. More so in an urban area than in a rural setting, the neighborhood can change just two streets away. Obviously some of this will involve a little guesswork if the location is distant. If you look at the section on “Locations” in the useful links.
3.Make sure that the structures on any comparison properties closely resemble the structure on the target property. If the house has two stories and an attached garage, so should all comparisons. If the basement is finished, all comparisons should have finished basements.
4.The age of the house should be similar within about 10-15 years for anything built later than 1950. Earlier than that, they are all old houses, so age differences matter less.
Once you feel comfortable with an approximate value for the property, it is now time to decide what the maximum amount is that you would be willing to bid. The type of property will influence this decision. A piece of land, assuming you have done the necessary topographical, environmental and flood zone mapping checks, as described in the article titled “Mapping,” would not present many financial risks. A house, on the other hand, could be in excellent condition or could be uninhabitable and needing demolition.
The Guidelines We Use Are These:
you could pay up to 50% of what you deem to be a reliable market value, assuming you have good reason for establishing market value. However, in some cases with recreational lots, there may be such a surplus of lots on the market that establishing value would be difficult and any conclusions might be unreliable. As an example, we mention Horseshoe Bend, Arkansas, in the Ozark Mountains. It is a beautiful area, the community is great with several lakes for swimming, boating and fishing, a community center with swimming pool, tennis courts and exercise equipment, grocery stores, restaurants, medical facilities, even a Walmart Super Center nearby, but with several thousand unsold lots. With a very strong advertising campaign, people have been able to sell these kinds of lots on www.Bid4Assets.com and www.eBay.com for $4000 to $7000 dollars, but many get listed on these auctions sites without sales success because the marketing campaign is week. The article on this site titled “Sell a Parcel” will give you a few guidelines on how to do this successfully.
In the event you were looking at similar properties, be they in the Pocono Mountains of Eastern Pennsylvania, any number of similar communities near lakes in Texas, or in the Colorado Rockies, be sure to check out the sales activity on the two named auction sites to see what prices these parcels generally go for.
On the other hand, with a building lot in town or in a newer subdivision, your target market would be local contractors and builders who are always looking for an inexpensive parcel to buy in order to build. Furthermore, you will have better comparable information to work with.
Improved parcels are trickier:
What is the condition of the improvements? When everything indicates that the house is in good condition, needing no more than a few cosmetic touch-ups, you can feel comfortable bidding or offering as much as 50% of its market value, again so long as you have good solid comparables to look at. Your percentage of value declines as you become aware of any more need for repair. If you find evidence that the structure is no longer safe or usable – it needs to be razed – your highest bid amount should be no more than 20%. At that price you could still offer it to builders and contractors who could clear the lot and build a new structure on it.
All it takes to sell a piece of real property is to price it right. A house, a building, a piece of land offered at the right price will always find a buyer. If a property does not sell, that tells us that the price is too high. The trick is to know what the right price is. That's why we always get help, as outlined in this article.
You efforts in analyzing a property before purchase provide you valuable information to help you decide whether to bid on a particular deed or not. That action is a great stress reducer and will ensure you good profits on your deals.