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The Role of Real Estate Investors

What is the Role of Real Estate Investors in the Real Estate World?

I recently came across an incident that made me decide to write this article.  I generally don’t find the need to explain myself nor my profession, but I suspect a good percentage of people just flat out don’t know what role real estate investors fills, so please let me explain by my recent experience.

Like most real estate investors, I seek leads via a multitude of sources.  Some of my best leads come from real estate agents – that is, those who you traditionally think of when selling a home.  However, I also have alerts on various MLS sites to give me a heads up on some potential deals, though this channel is the most challenging for a variety of reasons, and as you’ll see why from below.

I recently took interest in this house:

Front of house with no windows

This house is over a 100 years old.  All the house’s windows were busted years ago, or in other words, rain, snow, winter, summer heat and humidity, wind, animals, etc. have been coming into this old house every day for the past few years.

Below are some more pics to give you an idea what this does to a house.  Here I can see the ceiling, which is also the floor for the room upstairs.

Ceiling falling down

If it looks like the walls are both leaning in, it’s because they are. I took one step in and the floor was quite soft.  I wanted to walk in to assess the damage but this just felt too unsafe.  To the right are two more rooms, where you could see beyond any doubt that the floor has caved in.

Floor caving in.

The issue here is I have no idea if I just have to replace a few floor joists – replacing the sub-floor was a given – or something more foundational.  This can get very expensive real fast.

One the second floor, I found it interesting that a plant was growing through the window.  A clear indication that some time has passed since this house was last lived in.  An electrical panel can be quite expensive, especially if you’re replacing most of the wiring along with it.  To the top right is a termite nest, which means they had years to further reduce the stability of the 100-year-old home and do further unseen damage.

Electrical panel and termite nest

 A clear sign that this house was exposed to the elements is how warped these blades are.

Fan blades bending

Sometimes we find interesting things.

Can you imagine losing your keys years ago and still wondering where they went?  There are quite a few keys here.

Lots of keys laying about.

I found it quite interesting that all these DVDs where sitting out in plan sight in a large neighborhood but nobody every touched these.

DVDs

I wonder if these albums are still playable.  I really hate throwing out stuff that others may want.  No idea if the local charity would even want these.

Albums

Anyway, back to the role of real estate investors.

Would you see anyone wanting to move into this house in it’s current condition?  No windows, floor collapsed, unknown what would happen if you turn on the water, or electricity, or gas.  This is the unique domain for people who buys homes to do significant repairs on them.

In my back-of-the-napkin analysis, I have this house at a 30% chance of being worth purchasing.  To become more confident, I would need to pay a structural engineer, a plumber and an electrician to come out and provide an estimate on what it would take to make this place livable.  The engineering letter is around $500, the other contractors charge between $50-$150 for their estimates.  So I would be out around $800 before even determining if this house would be worth it.  I can easily see this taking 3-4  months of work, plus at least $50,000 before it’s livable again.

Okay, with this basic understanding, you can better understand my situation.  There’s little motivation to pay money on such a high risk investment, with the upside is maybe $30-40K.  Plus, there are real estate agents involved, who have a signed contract with the sellers.  It’s not uncommon for a real estate agent to ask for me than 6% on a $30K listing, which is only $1,800 split 4 ways (listing and buying agent, listing and buying broker, so 4 people who want to get paid), so $450 each.  It should be no surprise that the listing agent expressed little excitement about my desire to see the place.  Usually they show up promptly with business card in hand, and are quick to do a follow up.  In this case, I followed up with the agent a couple of days later and expressed I had to pass.

Also, have a real estate agent creates a middle man, I can’t talk to the sellers directly, everything has to be relayed through the agent.  It was also interesting that the agent told me they had only $3,000 to play with the price, but the next day they lowered the price by $5,000.

Further, this particular area the land has very low value.  If I had to tear it down, I would lose money without question, so the only viable alternative I had was to make the current house livable.

I believe the agents made a mistake taking this listing.  They are inserting their costs into an already highly questionable property.  If we removed their cost from the equation, plus the additional $5,000 cost in the original listing, I may have had more interest in the property.

There are a lot of ways to reach out to real estate investor, all they had to do is reach out to an experienced agent and I’m sure they could have named 3-4 investors almost immediately.

Real estate investing is very reputation driven, so if the house could be sold, this would have been the most viable path.

Seller Financing

On a related but slightly different topic, there are those that need to sell their house while having little to no equity.  If they sign with a real estate agent, there’s a good chance they’ll have to pay (i.e. lose money) to sell their house due to the agents’ fee, which is usually around 6%, if they have no equity then they’ll definitely lose money with a real estate agent.

A real estate investor would evaluate the house and potentially offer to take over payments.  This saves the seller’s money, saves them from foreclosure, and allows them to walk away from the home.  A real estate agent won’t mention or bring these types of offers because these won’t get them paid.

Real estate investors, particularly if they are seasoned, can come up with even more creative options. So in summary, real estate investors fill a much needed market niche, and we bring solutions to people who would otherwise languish.

Further Reading