Out-Of-State Buying Guide - Article | Think Realty
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Out-Of-State Buying Guide

buying

Seven years ago, I moved from Eugene, Oregon to Kansas City, Missouri and have seen both sides of investing out-of-state. I’ve seen people in high-priced markets make very solid returns they could never have hoped to find in their home market. And I’ve seen people completely lose their shirt.

On one occasion, a man stopped by our office to ask if we managed properties for others. He was from California and had bought two properties in Kansas City at wildly high prices that must have seemed good when one normally sees only seven figure homes as far as the eye can see. He had bought the two houses and then paid for the rehabs. When the seller stopped returning his calls, he flew out to Kansas City and found both houses hadn’t even been touched. I have rarely seen someone look so depressed, and telling him we didn’t do third-party management was no easy task.

Unfortunately, this is not the only story of this nature I am familiar with.

Even the first property we bought in Kansas City, while I still lived on the West Coast, turned out to be a dud. Needless to say, out-of-state investing is something I would be very, very careful with.

Taking the Leap

If you decide to risk it, the first thing you need to do is to find and vet your team, as you will need boots on the ground. I would recommend going onto a popular real estate forum or attending the local REIA group and asking around for a property manager. Once you have some recommendations, interview them, and do it thoroughly. There are good property managers and bad ones. And some of the bad ones can be very bad indeed.

You should repeat this process for other key members of your team, such as brokers, contractors and other vendors. Or if you decide to go with a turnkey company, make sure to vet them as carefully as you can. Search for reviews online, ask people about them in real estate forums, visit their office and interview them thoroughly.

Even after you buy, you should visit from time to time to keep the managers accountable and make sure everything looks right. If things are going badly, demand accountability. If the problems are not addressed, do not be afraid to switch management companies. In my experience, most real estate investments fail because of bad management.

Know Where You are Buying

The other thing that can kill an investor, particularly an out-of-state one, is buying in a really bad area. I would note that as awesome as Google Earth is, still images often make areas look better than they actually are. You don’t see the garbage being blown around by the wind (or smell it either) among other clues a snapshot doesn’t catch. A picture may be worth a thousand words, but being there in person is worth a thousand pictures.

There are websites such as City-Data.com, CLRSearch.com or rentfaxpro.com that can help you evaluate an area by crime, income, unemployment, vacancy, etc. And while these are helpful, they usually break it down by ZIP code and often times you’ll need to be more specific than that.

Visiting is critical, but I would also ask some locals. Ask real estate investors who buy in that market as well as some of the people just hanging out in the neighborhood. You’ll frequently be surprised at what they’ll tell you. Or just drive through the neighborhood at night. That will tell you a lot.

Location, Location, Location

When looking at the property itself, you need to pound it into your head that real estate is local. Many people from high-priced markets are so enamored by the price difference in the so-called “cash flow markets” that they assume they must be getting a good deal. As you might have guessed, this is false and ends up being the undoing of many out-of-state investors.

You can do a quick and dirty analysis yourself. Zillow.com and Redfin.com are good places to start but remember the Zestimate is not to be relied on. Look for the nearby sale comps on their map feature and compare that to your prospective property. Also, make sure the date of sale is relatively recent. You can also call up a realtor or two to get a CMA or their advice on these areas. You can do the same for rental comps by going to Craigslist or Trulia.

A Couple More Pieces of Advice

If the property has a tenant, make sure to get an updated rent roll, a certificate of deposit (to make sure the rent roll is accurate) and an operating statement if the seller has owned the property for a while. Some landlords might not have good documentation, but you want to get anything you can.

I would definitely recommend you don’t start by buying a property that needs a lot of work. The more variables you have going on, the more can go wrong. But if you do buy a fixer, don’t trust a seller’s repair estimates. You can all but guarantee it will be way too low. Again, I would recommend flying out to the city and looking at the property yourself. Get a bid from a local contractor (preferably not associated with the seller or turnkey company). And remember, a contractor’s bid will usually not include HVAC, appliances, flooring and other things like that. So you will need to account for those as well. I would also throw in a contingency (say 10 to 20 percent) for anything that’s missed or could go over budget.

Buying out-of-state can be very rewarding. Indeed, I have seen it done well multiple times, so I don’t want to discourage it. But I do want to discourage buying out-of-state in the same way you would buy a stock or bond. Real estate investment just can’t be that passive. Diligence is of the utmost importance when buying real estate out-of-state.


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