Learning not to be a Mark

May 7th, 2017

Real Estate Education Continues

Today I’m waiting to see what happens with the offer we put in on the house in Marion County. The listing agent got the bad news on Friday, and I assume they’re going to make me sweat until Monday. I’m not sweating, though. The house is not ideal, and there are a couple of other possibilities that might be better.

I looked over the county website and learned some things. Maybe a discussion of my diligence will help other people.

When you buy a house, you don’t just walk in, look around, guess what it’s worth, and offer that amount. There are a ton of things to consider. I don’t know a whole lot about getting loans, but I can tell you about other things you need to think about.

1. Get it appraised before you make an offer. If you’re borrowing, the bank will want an appraisal anyway, so you might as well get it over with. Also, how are you supposed to decide what to offer if you don’t know what the house is worth? The people who own the house I want overpaid by maybe $250,000. They really got ripped off. Now they have it priced $110,000 over the appraised value. Zillow provides online estimates of home values, and Zillow thinks it’s underpriced by over $30,000. If I didn’t have an appraisal, I would have thought the property was worth more than it is, and I would not have had a sane valuation to beat the sellers with.

Maybe I’m wrong; apparently, most people don’t get appraisals before making offers. It sounds like a very stupid approach to me. You can get a $3,000,000 suburban house appraised for $400, and it might save you $400,000.

2. Get ahold of the covenants and restrictions. People who craft deeds have the crazy ability to restrict what buyers do with their land. You might buy land for a chicken farm and find out a lunatic vegan (redundant) who used to own it put in a restriction barring all types of meat farming. The restrictions on the place I’m trying to get say I can’t raise pigs or carry on a business. Annoying, but not deal-breakers. Besides, if things ever get so bad I need to raise pigs, I’ll raise them anyway, and my neighbors will be in the same boat, so they won’t complain.

3. Look at maps of your lot and the surrounding lots. There might be weird little strips of land set aside for driveways or something. I was excited because I thought I was next to a peanut field I could buy and add to my lot, but I found out there’s a skinny driveway strip between me and that lot, so if I wanted to increase my holdings by buying the peanut field, I would have to buy the other lot, too, or drive all the way around the driveway when I wanted to go from my house to the peanut field.

4. Find out if you’re in a flood plain or some other area with problems. If your house is in an area that floods even once a century, you may have to buy expensive insurance. If you have a wet area on your land, which, in a sane world, you could fill in and improve, the tree-huggers may have you by the throat. They may have had it declared a “wetland” (synonym for “dirty swamp”), and you may be stuck with mud and mosquitoes for life.

5. Get the best inspector you can find, and do not let the realtor pick him. The realtor just wants your money. He wants a quick sale. He may have inspector buddies who will do anything he tells them. Once you buy a place, after inspections and appraisals, you’re pretty well stuck with it, and the inspector is not going to come over and write you a check for a hundred grand because he missed the sinkhole under your foundation. That will be your problem.

6. Make sure you know what’s happening on surrounding properties. I thought the house I like was next to a pasture belonging to a nearby farm. In reality, the pasture is an undeveloped lot belonging to an absentee owner. Six months from now, a family from Hialeah could have a 6,000-square-foot orange McMansion sitting on it, and they could be having salsa parties every night until 4 a.m., with drunken guests vomiting mojitos over my fence. If my deal goes through, I want that lot.

Interesting fact: there are eight lots in my subdivision, and to change the covenants and restrictions, you need seven of the eight owners to vote yes. If I buy the pasture, I’ll have two of the eight lots, and no one else will be able to do anything unless I approve. That would be cool, because I would never agree to anything unless they agreed to cut restrictions I didn’t like.

Twenty-nine percent of one of the other places I like is in a “Zone A” flood plain. That means it’s expected to flood once a century. What a bummer. I don’t want to buy the insurance, and I don’t want to come downstairs after a rain and find the piano floating in the living room.

The lesson I’m learning is this: when you buy real estate, it’s impossible to have enough information. Everyone except you will be trying to cheat you, and they want you to know as little as the law allows. I’ve been looking at this same house since early March. It’s early May, and I am still learning things I wish I had known sooner.

I keep marveling at the things I hear about the way other people buy real estate. No appraisals. Offers based on whimsical asking prices. Offers above the asking price, to secure deals in hot markets. I think people are nuts. It’s hard for me to believe people buy properties so stupidly, but it appears to be true.

Should it surprise me if people routinely pay too much for houses? No. Most people get gypped very badly when they buy cars. They buy new instead of used. They bargain down from MSRP instead of bargaining up from cost. They look at monthly payments instead of total cost. They believe salesmen who say, “I’m trying to get you a good deal.” People are not shrewd.

I remember a Harley salesman telling me a regular customer came into his dealership, threw the keys to his old bike on the counter, pointed out the bike he wanted, and said, “Make the payments two-fifty a month.” He didn’t care how the dealer arrived at the figure. Imagine how much money that guy threw away. He probably got a twenty-year note at 20% interest. I guarantee he paid at least $36,000 for an $18,000 bike.

I went to law school with a guy who bought a Camaro with student loan money. We used to call it “the Ferrari,” because after paying the interest, it cost as much as a Ferrari.

No one expects consumers to know anything about money. I remember talking to a cell phone company about something or other they wanted me to buy, and they said it only cost twenty bucks per month. I would have to pay that over two years. I said, “So $480.” She was stunned. She didn’t know the figure herself until I said it; she was not used to thinking about the total cost. I said whatever it was was not worth $480 to me. That’s how you have to think about money. I’m bad with money, and even I knew that.

Regarding houses, I’ve heard people say, “If you’re planning to live there the rest of your life, it’s okay to pay too much.” No it’s not! That’s crazy. If money doesn’t matter, let the other guy sell for too little.

The sellers of the house I want are detached from reality. I don’t understand why they paid so much, and I don’t understand why they’re asking so much. Maybe they used the same realtor twice. Maybe he helped the original seller nail them to the wall, and now he has gotten their sale listing by claiming he can limit their losses with an astronomical asking price.

Realtors will do anything to get a listing, and they don’t care if it hurts the owner. If you’re a realtor with one listing, it opens doors to other properties. When people call you about it, you can show them your listing plus dozens of others belonging to other realtors. You can deliberately suppress the sale of your listing in order to keep calls coming in. If you have a seller who is dumb enough to give you an overpriced listing, it may work out well for you. You can sell other houses off of the leads it generates, and eventually you may get the sellers to face reality and lower the price to a level where you can unload the place and get a commission. In a case like that, you’ve basically used the owners to finance the promotion of your business.

I’m not a sharp buyer. I have some experience with selling and managing real estate, but I don’t know a lot about buying. I’m trying to wise up so I don’t get skinned.

Maybe I should stop being so picky about the house. There is always a house out there you can buy for less than it’s worth, and you don’t have to live in it forever. Maybe I should be looking at a good buy I can stand instead of an okay buy which is close to what I really want.

I wish we could buy a big lot and build on it, but right now, that’s a bad idea. It costs more than buying a newish place with the bugs worked out. If the green place doesn’t work out, there’s another place which is cheaper and has no outbuildings. We could take that and build a dynamite shop building in a month.

I’ll give myself this much credit for brains: we’re offering to buy the farm machinery and most of the furniture. The machines are nearly unused, and the place is decorated beautifully, with nearly new furnishings. We can sell the awful stuff we have here, or we can give it away and get a tax deduction. Save on moving expenses.

The experiences of the last year have really gotten me thinking about how to handle property, and I’m getting ideas. Eventually I want to dump all of my dad’s residential rental real estate. Residential tenants are whiny and needy. They’re also hard to evict. Commercial is the way to go. Commercial tenants improve the property, they leave the improvements behind, they don’t bother you until they leave, and you can throw them out in a heartbeat.

I’m not worried at all. The longer buying takes, the better I get at the whole enterprise. If the place we’re trying to buy can’t be had at a reasonable price, it will be an opportunity to find something better and more economical.

I do want to get out of here, though. I have heard enough Spanish and car horns for two lifetimes.

4 Responses to “Learning not to be a Mark”

  1. Anthony Says:

    A few years ago I purchased a home not knowing the things you have pointed out. The only thing I did know is that debt is bad. I’ve never been in debt. Not for a car loan, not for a mortgage, no credit card debt – nothing.

    Unfortunately, I only had 80% of the purchase price for the home – so needed a mortgage for 20%. My realtor didn’t suggest it, and I didn’t know what an appraisal was until it was required as part of the mortgage application. My offer price was based on nothing more than guess work. My realtor and I had a chat about how much houses are going for in the area, and offered 20% less than the asking price. They accepted 9% less than the asking price.

    Concerning the appraisal, the loan officer causally mentioned that if the appraisal came in less than the offered purchase price, it will affect the terms of the mortgage. Stupidity I blurted out “If the Appraisal is less than my asking price – the deal is off”. I should have kept that thought to myself. The appraiser was chosen by the Mortgage company.

    By a “miracle” the appraisal was exactly the accepted purchase price.

    Live and Learn.


  2. Cliff Says:

    I think the “no response” is probably a good response – especially if you gave them a “low ball” offer.

    At least I hope so, for your sake.


  3. Steve H. Says:

    Anthony, you are talking about one of my big concerns. The realtors, lawyers, and appraisers in any given area know each other, and they work together all the time. I chose my own appraiser, but he probably cares more about getting work from realtors and banks than he does about me. I hope he’s honest.

    The more I think about the property, the more I think the appraisal is too generous.

  4. Jonathan Says:

    It might also be a good idea to have the property checked over by an expert plumber and electrician. Inspectors, even ones you select, are not going to be as knowledgeable about sewer pipes and electrical systems as are people who specialize in them.