How to Protect Yourself When Buying Investment Property
Suggestions for prospective buyers of investment property.
Here are my recommendations to people who want to buy investment property in the Atlanta area. These recommendations are general in nature and may not apply to specific properties.
These recommendations will help to minimize your risk when buying investment property in the Atlanta market. Each of these recommendations should be completed as part of your due diligence.
Read and Keep Signed Purchase Agreement
The purchase agreement, when signed by all parties, is a legally binding contract. It should be read by the buyer prior to signing. Keep a copy for your records.
Verify Rent Rates on Income Producing Property
If you are buying income producing property (in contrast to fixer-upper homes to renovate and resell for full retail value and capital appreciation), verify the rent rates.
If the rental property currently has tenants, have your agent obtain copies of the current leases. The seller should provide rent rolls to document the past 12 months of rental payments.
Also have your agent provide rental comps so you can see the current market rent for the area the property is located.
Verify Property Taxes, Insurance Costs, and Property Management Fees
The costs for these items should be verified.
Taxes. The public tax records can be provided by your real estate agent which will document the previous year’s tax rate.
Insurance. Contact your insurance company to get a quote for the actual costs for property insurance on the particular property you are considering buying. Your insurance company will also be able to verify if the property is located in a flood zone which carry very high insurance rates.
Property Management. Most companies will charge a fee to market and move tenants into your rental units and also charge a monthly fee for the day to day management tasks. Some companies will add other fees, such as charging a fee on top of every service call and repair made by vendors in addition to the actual costs. Shop around for property management companies and learn about their fee structure.
Have the Property Inspected by a Professional Home Inspector
While some investors with experience in the construction industry do not always hire an independent, professional home inspector, I recommend this to all my investor clients.
I also recommend this step for experienced investors because it never hurts to get a second set of eyes on the property.
Getting a home inspection is absolutely critical if you are an out-of-state buyer who does not intend to personally go and view the property.
An independent inspection by a professional home inspector can help give you peace of mind about buying the property as an investor.
Do not rely on the description of the property in the real estate listing which is written by the agent representing the seller. This is merely marketing copy designed to promote the house for sale and is not an accurate representation of the property condition.
The cost for a home inspection usually ranges between $250 and $350 or more.
In addition to a typical home inspection, several other inspections may be conducted such as the following:
In the Atlanta area termites are an issue. Most home owners should get an annual termite inspection. Sellers are often expected to provide a termite report and the annual contract they have with their termite vendor will transfer upon the sale of the property along with a termite bond to cover any termite damage that does occur. Therefore in most cases, the buyer may not need to pay for a termite inspection out of pocket.
In general, having a radon test may be a good idea. If the results come back positive, the transaction can usually be negotiated so the seller pays to have the issue remediated prior to the sale of the property. Many buyers in the Atlanta market do not have a radon test done on the property they are buying.
Normally a mold test is not necessary unless the home inspector notes the possible presence of mold in the home inspection report.
Lead Based Paint Testing
Homes built prior to 1978 have a high probability of having lead based paint. The purchase contract will include an exhibit with a lead-based paint disclosure filled out by the seller if the home was built prior to 1978.
In most cases the seller discloses that they have no knowledge of lead based paint (usually they bought the home from the previous owner who also claimed to have no knowledge of lead based paint in the home).
It is safe to assume that any property built before 1978 had lead based paint. The costs for having the home tested for the presence of lead based paint may not be an expense that an investor will want to pay, unless the investor only wants to buy properties that do not have lead based paint.
Learn about the Location, Neighborhood, and School District
It’s good to know the area where you are buying. And it’s important to make sure that the location meets your expectations for your investment goals.
The school district is almost always an important factor to most investors.
Other important things about location include the particular neighborhood and subdivision, placement of the property in relation to nearby real estate (other homes or nearby businesses and industry), and governmental jurisdiction (county, city, town, etc.), and nearby zoning.
Get a Survey of the Property
Most buyers of homes in subdivisions and well established neighborhoods do not get a survey of their property. As a matter of fact, a real estate attorney in the Atlanta area told me it’s probably not necessary in these types of neighborhoods.
Most of my investor clients who buy rentals do not get a survey of the home they are buying.
However, I recommend getting a survey. This is especially true of properties that are not in a traditional neighborhood.
One of my clients who decided not to get a survey on a property they bought, later learned that when they sold the property the new buyer got a survey and learned that the land included 50% more area than what the tax records stated! My client lost out on getting more money for their property because they didn’t know how much land they actually owned.
In traditional neighborhoods and subdivisions, neighbors put up sheds and fences. It’s a good idea to get a survey to make sure a neighbor is not encroaching on the property you intend to buy.
Consult with the Closing Attorney about Title Issues
Closing in the State of Georgia are conducted by real estate attorneys.
The attorney will alert you about any issues on the title that may delay the closing if they are not cleared from the title prior to the scheduled closing date.
In any case, the attorney’s office will arrange for a title insurance policy on your behalf which you will pay for at closing. Ask the attorney about options for title insurance. In some cases an enhanced policy may be a wise option for you.
Purchase a Home Warranty
Sometimes a home warranty can be negotiated in the transaction so that the seller pays for this.
I recommend to my clients that they purchase a home warranty if the seller does not provide one.
A basic home warranty is about $500 and more than pays for itself if a high ticket item, such as the furnace, breaks down and needs to be replaced.
Work with an Investor Friendly Real Estate Agent
Most real estate agents do not understand real estate investors and the basics of real estate investing because they devote most of their time and training to represent traditional home buyers and sellers.
An investor friendly agent will be able to guide you through the process of buying investment property, will understand the importance of your investment criteria, and has a network of relevant contacts (vendors and professionals) who provide specialized services to investors.
Real estate agents who are also REALTORS® also promise to abide by a code of ethics and use the contract forms provided by the Georgia Association of REALTORS (GAR forms).