HOW TO MAKE A FORTUNE IN LAND! Huey C. Walsh

HOW TO MAKE A FORTUNE
IN LAND!
ACQUIRE LAND AND A NEW HOME…
WITH ONLY BINDER DEPOSITS!
Huey C. Walsh
COPYRIGHT NOTICE
©Copyright 2001 by Huey C. Walsh
Published by The Institute for Real Estate Wealth
All rights reserved. Printed in the United States of America. Except as permitted
under the United States Copyright Act of 1976, no part of this publication may be
reproduced or distributed in any form or by any means without the prior written
permission of the publisher.
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nor the publisher is rendering legal, accounting or other professional advice. And it
is understood that they do not assume responsibility for errors, omissions or
contradictory interpretation of the subject matter herein.
If legal advice is desired, seek the services of a professional specializing in that
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The information contained may be subject to varying state or local laws or
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The author and publisher have used their best efforts in preparing this book and
there are no warranties of any kind, expressed or implied, with regard to
explanations and suggestions contained in this book. There are no guarantees of
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ABOUT THE AUTHOR
Huey Walsh has been active in many areas of real estate for 30 years, all in his
spare time, while maintaining a full time job completely unrelated to real estate.
During the 30 years he has completed remodeling, built houses and cabins,
syndicated beach investments, built lakes, developed residential housing
developments, mobile home subdivisions, and recreational properties. He has also
worked with foreclosures and rentals. To say the least, he has been busy.
The area that Huey has had the most success with and enjoys the most is working
with land; from taking a parcel of land and simply dividing it into parcels with no
improvements, to a fully improved subdivision.
Over a seven-year period, he developed and sold almost 300 parcels of land. He
sold and closed on 46 individual lots in one day! And sold over $1.3 million in $1015,000 lots in one year, all in his spare time!
One area that Mr. Walsh became very experienced in is the use of mortgages and
“owner financing”, to accomplish alternative financing of land. These techniques
can be used to produce an exceptional income as well as an impressive residual
income.
His techniques for alternative financing of land are truly remarkable and could be
of use for anyone desiring to produce an income or for simply desiring to have a
parcel of land “free and clear” of any mortgage.
“HOW TO MAKE A FORTUNE IN LAND!”
ACQUIRE LAND AND A NEW HOME...
WITH ONLY BINDER DEPOSITS!
Table of Contents
CHAPTER 1- - FIRST, THE LAND!
With no Real Estate Experience and with Little Cash
Our Estate
CHAPTER 2 - - PART-TIME BUSINESS
What to do?
CHAPTER 3 - - FINANCING LAND??
Ads that state “Owner Financing”
CHAPTER 4 - - OWNER FINANCING & DELAYED CLOSINGS
Something Magic- - “Delayed Closings”
Avoiding Interest Accrual
Delayed Closing Example
Acquiring Your Land Without Having the Down Payment
A Happy Day!
Lots “Free & Clear”
Getting Your Land Paid For Without Using Your Money
What if the Owner Wants “Cash Only”?
CHAPTER 5 - - ONE “SECRET” TO SUCCESS- - -DISCOUNTING
MORTGAGES!
Discounting
Generating Your Down Payment
Generating Operating Capital
CHAPTER 6 - - WOULD YOU LIKE TO GENERATE- - -“RESIDUAL INCOME”?
Selling the First Payments
CHAPTER 7 - - TOOLS OF THE TRADE
Title and Deed
Warranty Deed
Bargain and Sale Deed
Quit Claim Deed
Closings
Liens, Mortgages and Deeds of Trust
Secondary Mortgages
Foreclosures
Contract for Deed
Buying on a Contract
Selling on a Contract
Purchase Money Mortgage
Release Clauses
Would You Like to Receive Monthly Payments?
Wrap Around Mortgages
Balloon Mortgage
Title Insurance
CHAPTER 8 - - CONTINGENCIES AND ESCAPE CLAUSES
CHAPTER 9 - - DO I OPTION TO USE OPTIONS?
CHAPTER 10 - - HOW ABOUT AN AUCTION?
Same Day Closings
CHAPTER 11 - - IS FARM LAND GOOD FOR ANYTHING
EXCEPT CORN?
CHAPTER 12 - - SUBDIVIDING THE PARCELS
Lots Behind Lots
Kingsfield North
Legal Descriptions and Surveys
Survey System
Survey Problems
Sheep and Hogs!
Technology Advances
CHAPTER 13 - - MOBILE HOME LOTS
Brookhills Estates
Easy Financing
Restrictions
Decks
Manufactured Housing
CHAPTER 14 - - RECREATIONAL PROPERTY SOUNDS LIKE FUN
Deerlake Retreat
CHAPTER 15- -SHOULD YOU TRY A “FORMAL” DEVELOPMENT?
Setting Up Your Business
Public Streets
Private Roads
Planned Improvements
Recorded and Unrecorded Subdivisions
Obtaining Funds For A Formal Development Even Though You Have
Little Experience
Environmental Regulations
Surveying the Lots and Streets
Retention Areas
Tree and Stump Removal
Paving
CHAPTER 16 - - GENERAL DEVELOPMENT INFORMATION
Keep it Simple
Sacrifice the Interior Acreage
Don’t Fall in Love With Any Particular Piece of Land
Deed Restrictions
CHAPTER 17 - - GENERAL PREPARATION
Real Estate Attorney and CPA
Engineering Firm
City and County Agencies
Zoning
Up the Creek!
Flow Uphill?
Easements
State Agencies
Training
Seminars
Library
CHAPTER 18 - - AREA SELECTION
Locating Owners
Advertising
Location
Utilities
Municipal Water Companies
Sewer Lines
Septic Systems
Installing a Septic Tank
Wells
CHAPTER 19 - - SHOULD WE NEGOTIATE?
Silence!!
What to Offer?
Submitting a Written Offer
Split the Difference
Recap of Negotiating
Lot behind Lot Diagram
CHAPTER 20 - - NOW, THE HOME!
Equity in Your Land
Types of Homes
Build Your Own House
Using Your Equity
Partially Completed Houses
Manufactured Homes
Closing Comments
CHAPTER 1
FIRST; THE LAND!
So, we want land and a new home and we want to do it without having a
down payment! And we want to do it so that we have a large equity in our
property and consequently lower payments on our home.
First we need to acquire our land and then get most, or all of it paid for...
then use that equity for the down payment for a home! It’s called using “land-inlieu of a down payment”. (We’ll discuss this later.) So, we will discuss obtaining
the land in great detail, as there is more to that than there is to acquiring a home.
We need to be able to acquire land... no money down, right? And then we
need to get the part we want paid for without using our funds! But how in the
world can we acquire land, nothing down? There are plenty of books in the
bookstores on buying houses nothing down, but there are none on buying land
nothing down!
Well, now one is available and you have it in your hands! I know
it may sound impossible, but as you read on, you will realize that it’s not
that hard to accomplish.
You will learn how to get the land you want, nothing down, plus you will
learn other things such as producing a fast profit in land and even creating a
monthly income? A retirement income!
OK, let’s start with land. How about twenty acres, free and clear of any
mortgage, on which to build your “family estate”! Wouldn't that be nice? Or
maybe 30-50 acres! Whatever makes you happy!
There are a couple of things that most of us would like to have more of...
property and income! Well, what if I could show you some techniques that I
developed, that could help you obtain more of each?
WITH NO REAL ESTATE EXPERIENCE---AND WITH VERY LITTLE UPFRONT FUNDS!
Sounds too good to be true, right? But it's not and I am here to tell you that
the techniques work ! With almost 30 years experience in dealing with land and
other types of real estate, it is my opinion that by far the easiest and most
lucrative area is working with land, if you keep it simple!
Some of the techniques I developed could be of benefit to anyone, I feel,
whether an inexperienced individual, or and experienced real estate agent. As a
matter of fact, especially, a real estate agent!
I'd like to say up front that you don't have to be full-time nor do you have
to be a real estate agent, to use my techniques to obtain property and to produce
income. I am not a real estate agent and I've always had a job totally unrelated to
real estate.
Yet working in my spare time over a seven-year period, I subdivided and
sold, almost 300 parcels of land! All one to ten acres in size!
I've sold 46 lots, individually, to different owners in one day and had
their closings the same day!!
And I had to learn as I went! But you can take advantage of my
experiences and move much faster than I did. I can show you exactly what to do
and what not to do. Also I can show you how it's possible, without going to the
bank and borrowing funds, to get started with very little funds! And then to
recapture those funds!
I figured out ways to obtain virtually any size parcel I wanted; even if the
seller wanted "cash only”, and I didn’t have the cash. Most people think that land
is hard to finance because the banks normally will only finance 50-60%. But there
are methods of obtaining the land you want and not even working with banks.
Plus, as you will see, it's possible to produce a lot of income, very quickly!
I’ve subdivided and sold over $1.3 million in $10-20,000 lots in one year,
in my spare time!!
And how about an explanation on how you can produce a very nice
residual income... a retirement income?? All starting with almost no money!!
And, above all else, you will learn how you can acquire land, free and clear
of any mortgage, on which to build your dream home!
Have you ever dreamed about how nice it would be to have a parcel of land
with rolling hills and possibly a lake? And to have it free & clear of any mortgage?
Maybe 10, 20 or even 50 acres!
OUR ESTATE
We all have visions of our own private world; our estate! For some it’s
manicured gardens. For others, it’s rustic, natural, undisturbed areas. A large
percentage of us would like to have ample land to build our home and still have
enough room for play areas for the kids or grand kids. Plus have room to build our
swimming pool, detached garage, workshop, etc. And it would be nice to have
natural areas to enjoy, which also serve as buffers for privacy and noise
suppression.
Also some of us would like to have a quantity of land to establish our own
little “farm”, and have animals running around. A couple of Labs chasing around
or maybe a horse or two would add personality to our “estate”.
But most of us are frustrated because we don't have enough money or
resources to create our “estate”. We need more money immediately, and also
more money monthly! The majority of us come from average backgrounds and
have average incomes. Which in today's world, doesn’t allow for creating a "really
impressive” estate.
So, what do we do? Most of us just resign ourselves to the fact that we can
only dream of our “palatial estate”. There are others who have long term plans
for obtaining their estates, but of course, there always seem to be occurrences,
which delay or knock the plans off track.
Now, what we need is an alternative means of “getting ahead” and having
the land and resources to build our dream home and estate. We need a program
that will allow us to accumulate resources IE, land and money, in order to
accomplish what we desire.
For most of us it will have to be a program that we can work in our spare
time and accomplish in a manner that’s enjoyable and not considered work.
What’s more enjoyable than riding around looking at land and letting your
imagination run wild?
CHAPTER 2
PART-TIME BUSINESS
We need a part-time business that doesn't take a lot of our time but gives
us a sense of accomplishment, in addition to income. And, of course, it has to be
a business that we have the resources to accomplish. And for whatever reason
some of us may not have a boatload of cash lying around.
Well, not to worry because we can still obtain our dream home and estate.
I know you're thinking, “I don't have tons of money so how can I get 20 acres free
and clear?”
Those were my thoughts at one time. I had dreams, but no extra cash, but I
decided I was going to fulfill my dreams. Now I live in a very nice house on 10
acres and have a 3 acre, spring-fed lake behind my house!
My house has a large Florida room and deck on the back, so throughout
the day I am constantly walking out on the deck, or the Florida room, looking at
my lake. We have a beach and pier that I built and the water flows year round and
is crystal clear. There normally are some of our mallards flying around or one of
our Labs swimming around. Let me tell you, it really feels good walking out on my
deck and seeing what life has to offer!
But, it wasn't always like this. I was frustrated. as I wanted a nice place but
all I could afford was a small house in subdivision, with a very small yard. And I
had two small children and very little room for them to play. Normally, when I had
time off, we would go to a park and get away from the small back yard.
WHAT TO DO?
When I looked for land, I realized that I could not afford what I really
wanted, which was acreage with plenty of elbowroom and a new home. And, of
course, this also made me realize even more so that I wanted more income! So,
I was in a quandary. I wanted land, a new home, and more income! Ever been
there?
But what to do about it? I started looking at all the real estate magazines
and scanning the real estate section of the newspaper to try to find a “steal”. Well,
it never worked. Everyone wanted top dollar. I noticed that the parcels of land that
I felt I could possibly afford were too small. Everything that I wanted was too
expensive!
So I started thinking that I might be able to obtain a larger piece, cut it up
and sell some and keep some. Maybe I could do it that way. Maybe I could sell
enough to pay for the mortgage off the entire piece and have what was left over,
free and clear! Generating an equity!
I had noticed that people with small parcels for sale, (1-2 acres, in our
area), were selling their land very well, as I visited several projects and saw that
they were indeed selling. It seems that some people only want one-half acre or
maybe one acre, or maybe they don't feel that they can afford anymore. For
whatever reason, the smaller parcels were selling. So my thoughts were that a
large parcel might be the way to do it. But, how do you “do it”?
I felt that I had come up with a concept that would work, I just had to figure
out how to accomplish it, as I knew I had limited resources and I knew it was hard
to get land financed.
So, my concept was; “Get control of a large piece of land and sell
enough of it to have the portion I wanted to keep, remaining with no
mortgage on it!” Now I just had to do it!
CHAPTER 3
FINANCING LAND??
As I became more interested in obtaining acreage I decided to investigate
the financing available for land. I went to a bank and asked if they provided such
loans and they said, “yes, we do but you will have to qualify and we will only loan
50% of the value of the land!” “50%”, I said. “What is wrong? You can borrow
100% on a house, that could burn down, but only 50% on land, that can't get up
and walk away!”
But that was all they would do. I visited another lending institution, and
another, and another. I finally found some that would go 70% on land and even a
credit union that would go 80%. But you had to qualify first, and then come up
with a large down payment and start making payments! That didn’t sound too
good!
I felt that my idea of getting a large parcel and selling some and keeping
some was a good one I just had to overcome a simple problem; how to finance
it! I knew that if I borrowed the down payment and financed the balance, I would
have two monthly payments in addition to the ones I already had, so that was out
of the question.
ADS THAT STATE “OWNER FINANCING”
One thing that I had noticed that had really sparked my interest had been
any ad that stated “owner financing”. That always got my attention. But I
assumed that you had to have owned the land 100 years, or had it given to you, in
order to have it free and clear of any mortgage so that you could advertise it with
owner financing. I didn’t realize at the time that my thinking was all wrong as there
are several ways to be able to provide “owner financing” without owning the
property clear of a mortgage. And as I was to learn later on, owner financing is
a major key to selling a great deal of land!
My interest in obtaining acreage increased and I checked out a couple of
books at a local library on real estate principles. These books helped me a great
deal as I started learning more about basic principles such as deeds, surveys,
mortgages, etc.
One thing that particularly got my attention was information on mortgages
and deeds and how land is bought and sold. My discovery was that there is an
entire world out there of transactions conducted on contract for deeds, purchase
money mortgages, etc. Then I started to realize how a person could advertise land
for sale with owner financing even though they don't own the land free and clear.
Boy, did that bring on some ideas! Now I was starting to realize how I might
be able to make my concept work! What if I found a large piece of land, arranged
owner financing and sold some parcels on a contract for deed or a purchase
money mortgage... and kept what was left? Which would eventually be free and
clear! And what if I generated some income in the process?
It was starting to sound good! So I continued to learn as much as possible
of the principles of real estate as I started looking for acreage that I liked. It didn’t
take long to find a parcel of land that met my criterion and I was on my way!
CHAPTER 4
OWNER FINANCING & DELAYED CLOSINGS
I became somewhat educated on Contract for Deeds and Purchase Money
Mortgages, which will be discussed in detail in a later chapter, and decided I had
to figure out how to use them. But how was I going to come up with the money to
get my first piece of land to get started?
I started looking for large tracts of land, 20-100 acres. Every time I ran
across a piece, I would first ask the seller about the financing, before I ever got
interested in the land. Sometimes I would talk to the owner and sometimes I would
talk to a real estate agent. I would ask them if they would provide owner financing
for the entire tract. Some would say “yes” and some would say “no”.
So, I kept looking and talking until I found some acreage with road frontage
in an area that I liked, that the owners would agree to a payment plan rather than
cash. And to a delayed closing! And I was able to get started selling lots!
SOMETHING MAGIC- - -DELAYED CLOSINGS
My concern had been about a large down payment. But I finally resolved
that problem AND THIS ONE TECHNIQUE IS WORTH THE PRICE OF THIS
BOOK. A FOUR TO SIX MONTH, DELAYED CLOSING!!
Pause and think about that one!
I asked the owner of the land if he had to have his entire down payment
immediately and he said, “No, not right now.” So, I said, “How about a six month
closing?” He said, “What, I've never heard of a closing that long off.” So I told
him that I would pay his asking price, so long as I could delay the closing
somewhat. And he agreed.
So, for a $500 deposit, I got a piece of land with road frontage, with a six
month closing! And I got him to agree that I had the right to enter the property and
make improvements such as cleaning up, surveying and erecting signs. Almost
immediately, I was advertising lots for sale with “Owner Financing"!
Every time a lot was shown, the prospects were told that the closing would
not occur for a while, not until my six month closing date. Most of them liked this
as it gave them more time to arrange their down payment. But it caused some to
lose interest.
The sales were set up on contract for deeds and by the time my six-month
closing date rolled around every piece of it was sold, that I wanted sold! It sold fast
because I kept the prices reasonable and provided owner financing.
The closings were all the same day and everyone’s down payment provided
my down payment, and then some!!
Everyone's monthly payments covered the monthly payments to the original
owner, with excess remaining, plus the land that was not sold was getting paid for!
FREE & CLEAR!
Folks, I'm here to tell you that if you will keep the prices reasonable and
provide “owner financing”, you can sell a bunch of land!
Now, of course, my techniques may not work in downtown New York or
Chicago, but if you live in just about any city that you can drive to the outskirts of
your town, you should be able to make them work! But as a matter of fact, a six
month, delayed closing might come in handy with just about any type real estate
transaction! Even if you’re dealing in houses or apartments.
AVOIDING INTEREST ACCRUAL
There are other considerations of delayed closings, which might help you.
One advantage of the delayed closing, even 2-4 months, is that any research or
preparation that you feel you need to accomplish can be done before you actually
buy the land, that is, before you actually complete the closing, which starts the
interest clock!! This is a very important reason to arrange a delayed closing,
as no interest accrues until the closing!
So your research and organizational efforts can be accomplished prior to
the closing. Your research might disclose something that would cause you to back
out on the transaction. You will be able to back out because you will have some
“escape clauses” in your contract. Escape clauses are just contingencies that you
put in your contract and your purchase is contingent on those conditions being
met. More discussion on those later.
Delayed closings of 4-6 months can help you tremendously to become
successful in this activity as you can operate with only small deposits, (which can
be recaptured)!!
With a delayed closing arrangement, all you have to come up with at the
signing of the contract is the binder deposit, and you feel comfortable signing the
contract because you have escape clauses in it. If you had bought the land and
closed on it immediately, it would be yours and the interest would start to accrue.
Also, after you have closed, it’s yours and it's too late to change your mind and
back out. A delayed closing can provide breathing room.
Let me mention at this time, that you should be very familiar with the
county requirements for the county in which you are interested. Some
counties require a lengthy process to get approval to divide land and this would
greatly affect your using a delayed closing in that county.
As you will see later, I advocate finding land which has frontage on a
county road and then subdividing it without building new streets. Subdividing
land which has county road frontage is usually a simple process without a
lengthy approval process.
Before you start your activities, go to the county engineer’s office
and ask about the requirements for subdividing land on a county road as
well as with new interior streets, or visit a real estate attorney. Some
counties are quite restrictive, while the county right next door may have hardly
any requirements! Each county is different!!
You don’t want to buy a tract of land with the thought in mind of subdividing
it to later find out that you can’t chop it up. I would suggest only working with land
which has county road frontage to keep your life uncomplicated.
And make sure your title company will conduct simultaneous closing for
you! If one won’t, talk to another!
Also be aware that some counties require a minimum size building lot in
order to utilize a septic system. You need to know this before you start making
plans on how you would divide a tract!
DELAYED CLOSING EXAMPLE
The following is an example of how a delayed closing could be used. Let's
say that you have found 10 acres that you really like and it has quite a bit of road
frontage. You can subdivide the parcel into 14 lots simply by slicing it up, without
any other development costs. Your only expense would be the binder, some
preliminary surveying and signs and you would have 14 lots for sale.
Advertisement can be done very reasonably and will be explained in more
detail in a later chapter. Also, information on how to select your property will be
presented later.
The owner wants $50,000 for the 10 acres, or $5,000 per acre, and it has
been on the market a good while. You try to get him to reduce his price and he
won't budge. But he will provide owner financing with a $500 binder, 20% down
payment, ($10,000), and a six-month closing. His financing terms are ten-year
amortization at 12% interest, with a lot release computed at $7,500 per acre.
The lot release means that he will give a free and clear deed to each acre,
or part of an acre at the rate of $7,500 per acre. The lot release is normally
computed at the rate of 150% of the price per acre cost. However, lower releases
can sometimes be arranged and you should always attempt to get the best
possible terms in the negotiations prior to signing the contract for purchase.
A closing “to occur on or about six months, at buyers preference”, is
perfect because no interest expense is incurred until the closing, but the property
is tied up for the six months. Let's say that it is now January 1st and the closing is
set for June 30th. Your contract states that you have the right to enter the
property and make improvements such as surveying, doing clean up work and
erecting signs. You have the survey company complete some preliminary
surveying, have someone accomplish any clean up, and erect your signs. Now
you have property for sale!
The lots could be advertised for $9,900 each for approximately threequarters of an acre, which sounds reasonable and is a sum most families looking
for land can come up with, as this time you won't be providing owner financing.
When you have a sale, the new lot buyer is told that the closing on their lot
is contingent on your closing on the ten acres. You also put this in their contract,
and state that the closing will occur on or before June 30th. This makes most of
them happy because it gives time to come up with their purchase money, but as
mentioned earlier, some buyers will back out.
ACQUIRING YOUR LAND WITHOUT HAVING THE DOWN PAYMENT!!
When your engineer divided the 10 acres into 14 lots, the lots became
about 3/4 acre each, (.71 acre), and you have them priced at only $9,900 each.
With a $7,500 per acre release from the original owner, upon each sale of .71
acres, $5,325 is required to get the parcel released. ($7,500 x .71=$5,325). With
the lots selling for $9,900 each, minus $5,325 release, leaves $4,575 for operating
capital on each sale, which could go towards your down payment or operating
capital!
So you can see that before your six months closing, and you need $10,000
for your down payment, you only need to pre-sell three lots to generate your
down payment and reduce your mortgage by $15,975! Plus have $3,725 of
operating capital left over!
Or you could sell just one lot if you apply all the proceeds and got the
seller to agree that the lot release of $5,325 could be considered as part of the
$10,000 down payment.
A HAPPY DAY!
You could pre-sell enough lots to completely pay the ten acres off, at the six
months closing! You set everyone's closing for the same day, June 30th, and
have simultaneous closings, and come out of the title company with quite a bit of
money in your pocket!
Let's assume that you have sold all 14 of the lots, so at the closing the
money would look like this; 14 x $9,900 = $138,600 minus $50,000 leaves you
with $88,600 minus your expenses! At only $9,900 per lot!
LOTS “FREE & CLEAR”
If you wanted one or two of the lots for yourself, you could get them “free
and clear”, by simply not selling the ones you like and let the other sales pay the
entire mortgage off. In this case you would complete the subdivision with less
profit but would have your lots "free and clear".
GETTING YOUR LAND PAID FOR WITHOUT USING YOUR MONEY!
You can get land paid for without using your funds by acquiring a large
tract and then selling enough of it in small parcels to have what is left completely
paid for! Without using your funds!
WHAT IF THE OWNER WANTS “CASH ONLY”?
The delayed closing arrangement can also be done to cover a purchase
when the seller won't provide financing and only wants "cash". If in the above
example, the seller would not go along with owner financing and would not agree
to a lot release, just arrange a delayed closing, and pre-sale enough lots to cover
the purchase price, $50,000, or five lots!
And if you weren't successful in pre-selling five lots, you would have
escape clauses in the contract with the original seller to get out of your contract.
And you could back out of your contract with the person you bought the tract from
as you will have put “escape clauses” in your original purchase contract.
And you have escape clauses in the contracts you signed with your
buyers, to get out of those. (Escape clauses will be discussed later.) This
presents some thoughts to consider in regards to delayed closings and
generating your down payment. I feel that delayed closings can be terribly
important in any area of real estate and you may come up with many more uses
for them than I have.
As you grow and gain more experience in this area, plus accumulate
financial resources, you may use shorter and shorter closing dates and provide
the down payments. If you have the resources and complete confidence in an
area, you could continue to the closing without a delay and would not need as
many escape clauses in your purchase agreement. However I personally would
not buy any property with less than a 60-90 day closing.
Now if you’re thinking, “What do you do if the seller will not go along with a
delayed closing or escape clauses?” Just forget that piece of property and go
look for another! Or use an option, which we will discuss later.
CHAPTER 5
ONE “SECRET” TO SUCCESS- - DISCOUNTING MORTGAGES!
One way to arrange to sell your parcels with “owner financing” even though
you don’t own the property free and clear, is to sell your parcels, take back
purchase money mortgages and then discount and sell them. A later chapter will
cover the tools of the trade such as deeds, mortgages, releases, etc.
Let's say that you have bought a large tract of land and have an
arrangement with the owner that he will finance it and will release each lot when
you pay him a certain amount of money. Simply sell your mortgage at a discount
each time you have a sale and pay the original owner the amount previously
agreed upon for the lot release. Arrangements can be made beforehand to
discount the mortgages to an investor or an institution, so that it is done
simultaneously with your closing.
When you begin your activities in this area, you need to shop around and
find investors or companies that will buy mortgages, and there are plenty that will.
If you have taken back a mortgage, they will buy the entire mortgage for a
discounted value, or will just buy a certain number of payments.
Companies that will purchase your mortgages can be found in the yellow
pages or from advertisements in newspapers. Or talk to title companies or CPA's
and locate investors in your area. I suggest that you locate several investors, as
you may need them as you develop your business.
As you confer with an investor or company about buying your mortgages,
or “paper”, an agreement can be reached as to what the discount rate will be. If
the discount rate is only, say, 60%of the value of the mortgage, then go to another
source. When you find a company or individual that will give you a rate of 70% or
better, then you can make your plans.
DISCOUNTING MORTGAGES
Let's say that you put a binder deposit on a 60 acre tract with an impressive
amount of road frontage, at a good purchase price of $300,000. The owner wants
10% down and the balance computed at 9% for 20 years with a 7 year balloon,
(balance will be due at the end of seven years), and has agreed to a six month
closing.
The payments would be $2,429 per month if you closed on the purchase
and had no prior sales arranged. The owner has agreed to a $5,000 per acre lot
release and he also agreed to consider the $5,000 reduction as two monthly
payments.
You have the lots laid off by just slicing them up on the road frontage or
perhaps using a lot behind a lot concept, which will be explained later. Now you
have lots that you can start advertising for sale. The price of your lots is $12,900,
with “owner financing”, 10% down or $1,290, and 7 year financing at 11%. The
buyer’s payments on the $11,610 will be $198.79 per month.
A lot sells for $12,900 and you receive $1,290 down payment and take
back a mortgage for $11,610. The company you have an arrangement with will
give you 70% or $8,127 for your $11,610 mortgage. Arrangements are made so
that at the closing the finance company buys your mortgage for $8,127 and the
title company will pay $5,000 to the original owner for your lot release. The
remainder, $3,127 plus the down payment of $1,290, or $4,417, is your profit or
operating capital.
GENERATING YOUR DOWN PAYMENT
In the above example, your agreement with the original owner is a 10%
down payment of $30,000, due at the closing in six months. And of course, you
have put escape clauses in your contract. But, you will have to pre-sell enough
lots in six months to cover the $30,000 down payment. With each sale that you
make, which will close on the same day that you will close on the 60 acres, $5,000
will go to the seller, as per the lot release, and $4,417 to yourself, as explained
earlier.
With this arrangement you will need to sell six lots during the six months
and at the closing $30,000 will go to the seller and $26,502 to yourself! Or, if you
want to use your $4,417 operating capital towards your $30,000 down payment,
then $5,000 and $4,417 or $9,417 would go towards your down payment, on each
sale you make. This way you would only have to sell four lots to cover your
$30,000 down payment, and would have an excess of $7,668 at the closing!
GENERATING OPERATING CAPITAL
After the closing, if you just sold one lot per month for $12,900 and
discounted the mortgage for $8,127, you would reduce your mortgage by $5,000
and generate $4,417 operating capital! Two sales would reduce your mortgage by
$10,000 and generate $8,834 each month! And believe me, if you have one acre
lots at 10% down with owner financing, you should be able to sell two or more
each month!
Since there is money lost in the discounting process, the price of the
lots will have to be adjusted upward. You could have one price for the lots you
sold with “owner financing” and another, “discount for cash” price.
I found that if you are generating your own operating capital, discounting
mortgages is extremely useful. Discounting mortgages can play a big roll in your
road to success and you should become as knowledgeable as possible about this
activity. There are books and seminars on buying and selling mortgages and I
recommend that you put forth the effort to become fully educated on the subject.
CHAPTER 6
GENERATE - - -“RESIDUAL” INCOME
Now let's talk about residual income! A retirement income!
There are ways to produce a residual income with the Contract for Deed
and the Purchase Money Mortgage. The following unique method is possible as
you work with the mortgages you take back.
SELLING THE FIRST PAYMENTS
Let's take the example in the previous chapter and only sell the finance
company a portion of your payments! This can be an important technique!!
Let's assume you generated your down payment and closed on the
purchase mentioned in the previous chapter. You sell a lot with $1,290 down and
the balance of $11,610 financed at 11% for 7 years or 84 months, at $198.70
monthly. You ask the finance company or investor, how many payments they
would buy in order for you to receive $5,000 for the lot release and they say, 40,
or so. They will adjust their computations in order to produce a yield that they are
happy with, and tell you how many payments it would be.
Now let's say that they will buy the first 40 of your payments for $5,000
providing for the lot release. Then the first 40 payments the new buyer makes go
to the finance company or investor and you don't receive anything. But after 40
payments to the company, you start receiving payments and receive 44 payments
of $198.79 or a total of $8,746.76!
Quite a residual income! Especially if you have 20, or 50, or 100 lots
sold like this! Let’s assume you only have 20 lots sold in this manner, that would
result in a monthly income, (after the first 40 payments), of 20 x 198.79 or
$3,975.80 for 44 months! Or a total of $174,935.20! Try 50 lots!
You could sell some lots with a total discount of the mortgages to help
generate your down payment, then sell some with just selling part of the payments.
Using the discounting of mortgages in this manner is an excellent way to buy
property with little or no money down by generating your own down payment,
covering your lot releases and getting the land paid free and clear. And
generating a fast income, or a residual income!
As mentioned earlier, to find someone to discount your mortgages to, look
in the yellow pages or newspapers or talk to CPA’s. Ask them if they know any
investors that you might talk with. They will know several but won't give you their
names or phone numbers but might possibly give your information to them. And
another good place to find investors is to talk to the title company you are using.
They know who closes loans and discounts mortgages at their business and could
get your information to them.
As you grow and accumulate operating capital, you will arrive at the point
that you can provide owner financing with your lots having been paid for, thus
avoiding the discount expense. In this case you would keep your mortgages and
receive interest income as well as the profit on the sale of the lots.
Let’s look at the above example of 60 acres for $300,00 and let’s assume
that the land has been paid for and that we have 50 lots. With the monthly
payments of $198.79 principal and interest for a single lot that would total
$16,698.36 over a seven year period, for each lot. And with 50 lots that would be
$834,918 plus the down payments of $1,290 per lot, for a total payout of
$899,418! That minus the $300,000 purchase price leaves $599,418, minus
expenses, which were minor as the subdivision was on a public road!
With only two sales per month, the sell out period would be 25 months with
almost a $600,000 profit!
Can you find a piece of land that large that can be subdivided easily? I
have! As I describe elsewhere, I stumbled onto a large tract that had county road
frontage on three sides, with a six-inch water line surrounding it!
But, you have to get off the couch!
CHAPTER 7
TOOLS OF THE TRADE
At this point we will discuss ownership of real estate. Throughout the book I
have refrained from making it a book of real estate “principles” but rather one that
contains as many “techniques” as possible, however some explanations are
necessary at this time.
TITLE AND DEED
Title represents ownership while a deed is the instrument used to transfer
the title of real property from one person to another. A person holding the deed to
a parcel of land holds the title as specified by the writing in the deed.
Don’t confuse a deed with a deed of trust which we will discuss later. A
deed transfers the title of real property while a deed of trust is a means of
financing a land purchase.
Different types of deeds are used in the United States such as the
Warranty Deed, Bargain and Sale Deed and the Quitclaim Deed. The
Warranty Deed is sometimes called the Full Covenant and Warranty Deed or
General Warranty Deed.
WARRANTY DEED
The advantage of the Warranty Deed is that when the title is transferred,
specific warranties are included. The seller warrants that he or she is the fee
simple owner and has the right to sell the property. And that there are no
mortgages, liens, easements or encumbrances on the property other than those in
the public records. The seller guarantees the statements and is liable in court if
the buyer finds otherwise.
The seller also warrants quiet enjoyment to the buyer. Should a problem
arise such as a previous owner with a claim, the seller will work with the title
company to take care of the problem. The seller will do whatever is necessary to
provide the buyer with the title promised in the deed.
A Warranty Deed basically means that any information provided by the
seller to get you to buy the property has to be true or else you have legal
recourse.
BARGAIN AND SALE DEED
A Bargain and Sale Deed transfers title and establishes that some form of
consideration has been transferred. The consideration can be money or
something else with value. The seller warrants that they do in fact own the property
and that they have done nothing to encumber it. For the best protection when
buying a property with this type deed, ask for a Bargain and Sale Deed with
Covenant Against Grantor’s Act.
Even with this, the seller is liable only if he or she has caused a problem
with the title, such as an encumbrance, but not the activities of previous owners.
With a Warranty Deed the seller is liable for any encumbrances on the title. So,
the Bargain and Sale Deed is called a Special or Limited Warranty Deed.
QUITCLAIM DEED
A Quitclaim Deed is an instrument normally used to transfer an interest in
a property from one person to another and includes no warranties or covenants. It
simply transfers any interest a person may have in a property and ensures that
the person granting the Quitclaim Deed has no further interest in the property. An
example would one spouse releasing or transferring any interest to the other
spouse during a divorce. Or in the case of a dispute over a parcel of land, which
happened to me once, one owner quit claims the land to the other.
Since a Quitclaim Deed comes with no warranties or guarantees, never
accept such a deed when buying property.
A deed needs to be recorded at the county courthouse to prevent the
possibility of the title being given to someone else. This is normally accomplished
at the deed room or recorder’s office. The date on which an item is recorded can
be very important, as the first one to record a deed to a property, is the owner.
CLOSINGS
The closing or settlement occurs to transfer ownership or title of a
property to the new buyer and is usually conducted at title insurance and abstract
companies, escrow companies or an attorney’s office. The process is started
when two or more parties agree on the price and terms and conditions of the sale
of a property, sign a contract of sale and exchange an earnest money deposit,
which is normally held in escrow by the closing agent. The contract includes the
legal description of the property to be transferred and any conditions. Once the
title has been researched and perhaps title insurance written, and the conditions
addressed, the closing can occur.
When the closing is scheduled, the buyers provide the balance of the funds
due in the form of a cashier’s check, or from funds obtained through a loan from
a lending institution. The closing agent will have assembled the necessary
paperwork to complete the transfer of ownership and also to put into effect a new
mortgage, if required.
There are numerous documents requiring signatures at a typical closing,
especially if a new mortgage and its associated paperwork are involved. The
seller’s share is small compared to the buyer’s portion, should a mortgage be
included. Both parties are present at many closings although separate closings
may be scheduled. Whether buying or selling make certain the conditions of the
sale which were spelled out in the contract are correct.
Closing costs are a big part of any real estate closing and are normally
considered during the negotiation stage of the transaction. The settlement
statement will be prepared a day or so in advance of the closing and spells out the
costs and who is to pay them.
Examples of closing costs are fees for a title search, premium for title
insurance, recording fees, survey, attorney fees, and real estate agent
commissions. The buyer will have assorted costs associated with putting a new
mortgage in place if that is the case, such as a credit report, an appraisal, points
to the lender, and state mortgage tax. Plus first payment of the proration of any
insurance premium required on a house or the proration of property taxes.
As these costs can involved several thousand dollars, there should be a
clear understanding who will pay what. During negotiations on the sale price of the
property, remember to include a discussion on the closing costs.
After the closing is completed, the documents are recorded at the county
recorder’s office and made a part of the public record. Recording the documents
protects everyone, as there is no question concerning proper ownership of any
property.
LIENS, MORTGAGES AND DEEDS OF TRUST
A lien is a claim against a property which is used as collateral for a debt
and the most common ones are; Mortgages, Deeds of Trust, Property Taxes and
Judgments.
Frequently when a person buys real estate, they go to a lending institution
and obtain a loan. In some states, they are required to sign a Mortgage and a
Promissory Note. In others, they are required to sign a Deed of Trust and a Deed
of Trust Promissory Note.
A Mortgage is an instrument used by which the buyer pledges the property
to the lending institution as collateral for loan and describes the terms and
conditions of ownership. It also contains the rights of the lender in the event of a
default.
A Promissory Note holds the borrower personally responsible for the loan
and spells out the loan amount and terms of repayment.
A Deed of Trust is sometimes called a Trust Deed or a Trust and is similar
to a Mortgage except for the rights it offers the lender during a foreclosure. A
Deed of Trust pledges property as collateral and there are three parties involved.
The Trustor is the buyer who grants the trust and the Beneficiary is the lender.
The Trustee is an independent party who holds title to the property on behalf of the
lender. The Trustee either releases the title as the loan is paid off or institutes a
foreclosure if there is a default.
A Deed of Trust Note accompanies the Deed of Trust and spells out the
terms of the loan repayment.
The Mortgage or Deed of Trust describe and specify the security for the
loan, while the Promissory Note and the Deed of Trust Note specify the loan
amount and the repayment schedule.
Since Mortgages are used in my area, I will refer to Mortgages during my
discussions and if you are in a Deed of Trust state, just consider I am referring to
the same thing.
SECONDARY MORTGAGES
On occasion there may be more than one mortgage on a certain property,
IE, a 2nd, 3rd or even 4th mortgage. The priority of the liens is determined by the
order in which the liens or mortgages were recorded at the county recorder’s
office, IE, the dates of the filings. The first one recorded becomes the senior
mortgage and the others become junior. Should a foreclosure occur, the primary
mortgage is paid and if there are funds remaining, they go to the junior
mortgages.
There is an exception to the above order of priority and that is a Property
Tax Lien, which goes to top priority regardless of filing date.
FORECLOSURES
Judicial Foreclosures are used in the states which use Mortgages, and
require court action which can be quite lengthy. The process involves the default
which results in the foreclosure action.
A default occurs when a person does not make their monthly payment
before or during the grace period. The lender sends notification of the late
payment and when the second or third payment is missed, turns the account over
to their collections department. If the collection department can not get the
account current a foreclosure is initiated.
An attorney for the lender files a LIS PENDENS or, action pending, to give
notice to the public that foreclosure action has begun. Once court approval to
begin foreclosure is received, the notification process begins. A Notice of Default
is filed and the notice is sent by certified mail to the mortgagor and any junior
mortgage holders who have requested notification. It indicates the amount that has
to be paid to bring the account current and stipulates a date.
Following the Reinstatement Period, if the default is not cured, a Notice of
Sale is advertised. Most states allow the owner to cure the default and stop the
sale up until the day of the sale. If it is not cured, however, a public auction is
conducted on the court house steps and the property sold. The previous owners
must vacate the property and most do so voluntarily, but if they don’t, the new
owner must resort to eviction.
Non-Judicial Foreclosures are used with Deeds of Trust foreclosure action.
The Deed of Trust contains the power of sale clause which enables the Trustee to
begin foreclosure without having to go to court. The Trustee issues a notice of
default and notifies the borrower, then proceeds with notice of sale, begins
advertising, and conducts the sale.
CONTRACT FOR DEED
Let’s now discuss some of the instruments that can be used to provide
financing either for buying or selling land. A Contract for Deed is exactly what it
sounds like. It is a contract to get a deed at some point in time. In some areas it is
referred to as a Land Contract or Installment Sale Contract.
A person buying a parcel of land on a contract for deed has the
understanding with the seller that as the buyer pays for the land, they will
eventually receive a free and clear deed. The person buying the land can occupy
and use the land but there is no title transfer until the agreed amount of money
has been paid.
Real estate could be sold on a Contract for Deed regardless of whether it is
held free and clear of a mortgage or not. If the parcel has a master mortgage, the
buyer makes a down payment (unless a no down payment arrangement has been
negotiated) and then makes monthly payments of principal and interest. The seller
must take the monthly payments and apply them to his/her master mortgage.
When a certain amount is paid, the seller’s mortgage holder, either an institution
or an individual, will release the parcel free and clear. At that time, he/she can
convey title and give the buyer a Warranty Deed.
BUYING ON A CONTRACT
Buying on a Contract for Deed is a means of buying land with poor credit
or even with no credit check as the owner still owns the land and you only have a
contract. You make a down payment, if one is required, and then make payments
to the owner.
A disadvantage of buying on a contract is that the seller may not apply the
monthly payments to his mortgage holder and it could result in a foreclosure. If
the land is foreclosed on, the buyers would probably loose their investment. The
same situation would result if the seller were to file for bankruptcy.
If you were to buy property on a Contract for Deed, have the contract
written so that the monthly payments go to a third party, a “Trustee”. A trustee
would ensure that the payments were forwarded to the master mortgage holder,
and pay the necessary taxes each year. Any excess funds could be forwarded to
the seller. You could also require the seller place the title to the property in trust
with the trustee until you pay the required funds.
Also, have the Contract for Deed recorded at the county recorder’s office.
You may hear, “we don’t normally record Contracts for Deeds”, but insist that it be
recorded because it tells the public that you have bought the land and the seller
will not be able to resell it or put another mortgage on it. The contract should
specify that the seller is forbidden from placing another mortgage on the property.
A disadvantage of buying on a Contract for Deed is that you will not be able
to obtain a mortgage to build a home until you have a deed.
Should you desire to build a house before your land is paid for, it will be
necessary to arrange for a deed to the land. Perhaps you would have paid
enough by this time that if you requested it, the original owner would issue a deed.
Or you would have to pay the land off by arranging the funds in another manner
such as a signature loan.
One avenue could be to obtain a loan which covers the cost of the new
house plus the remaining debt on the land, combining the two. In any case the
original owner of the land would be paid and would issue a deed, which could be
assigned to a lender in order to obtain a mortgage to build a home.
Buying land on a contract may be a means of making a purchase if you
have credit problems, as a credit check is not normally done and there is no
transfer of title. Since there is no transfer of title, it could make it easier to
negotiate a no down payment arrangement.
SELLING ON A CONTRACT
Buying on a contract may not be the best way to buy land but it’s not a bad
way to sell it! You could provide “owner financing” even though you don’t have
the property paid for! You could produce a residual income! When your buyers
pay you each month, you could pay your obligation and any amount remaining
would be your income. Of course that would increase considerable as you get
your obligation satisfied. As mentioned earlier, providing “owner financing” is one
“secret” to selling a great deal of land!
On a Contract for Deed sale, you can sell the land with little or no down
payment and no credit check, because it is normally easier to regain possession
of the land in the event of a default.
Under the strict foreclosure action, if the buyers are not making the
payments as agreed and are in default, simply tell them to leave. There has been
no transfer of title and you may not have to go through the normal foreclosure
procedures. You get the land back, plus the money you have been paid.
If the buyers won’t vacate the property, you will probably have to go
through foreclosure proceedings.
It is best to require a reasonable down payment even with a Contract for
Deed as you can feel comfortable that the buyers are serious about their
purchase and won’t default.
A default could cause you to need to resell the land quickly to keep your
cash flow moving. A reasonable down payment could also provide operating
capital.
Selling land on contracts for deed can be a means of generating operating
capital. If you have several people paying each month and the amount of their
payments is such that you can meet your obligations and have money left over,
then it can be used as operating capital!
Contracts for Deed are normally used when the seller has a mortgage on
the property, but can be used even if the seller has the land free and clear. If an
owner sold a property which has no mortgage on it, and provides owner financing,
he or she could give the buyer a Warranty Deed anytime they felt comfortable
with the amount of money invested by the buyer.
PURCHASE MONEY MORTGAGE
The Purchase Money Mortgage is another means of providing "owner
financing". The Purchase Money Mortgage differs from the Contract for Deed or
Land Contract in that title is transferred. A seller receives a mortgage or deed of
trust and the buyer receives a title. The seller is providing financing and though he
does not loan the money, he allows the land to be paid for on a monthly basis. The
arrangement is set up so that after a down payment, the seller provides “owner
financing” with the property providing the security for the loan.
Security for the Purchase Money Mortgage is the land which protects the
seller in case of a default. The new owner will make monthly payments of principal
and interest to the seller. If there is an underlying or master mortgage on the land,
the seller will have to make payments to the institution or individual that holds the
mortgage to keep it current. Should a buyer default on a purchase, the
foreclosure proceedings are required.
So, if you have “bought” a tract of land and have a mortgage in place and
desire to sell portions of it, you can advertise that you will provide owner financing
and use the Purchase Money Mortgage. As you are being paid monthly for the
lots you’ve sold, you will in turn pay the required funds to your mortgage holder.
At some point, you would be able to obtain a release of the parcels from your
mortgage holder, due to the lot release clause in your contract. Then your buyers
would receive a deed free and clear of any mortgage.
RELEASE CLAUSES
Arranging for lot releases when negotiating the terms of any purchase is
terribly important. A lot release allows for a certain area of land to be released
from the mortgage upon the payment of a predetermined sum of money. This
amount is negotiated and is usually 100-150% of the cost of the land, on an
acreage basis. Let’s assume that you paid $4,000 per acre for a tract and the
release is computed at a $6,000 per acre basis.
Let’s say that you sold an acre lot for $10,900 with a down payment of
$2,000, all or part of which could be paid to your mortgage holder. Then as you
made payments totaling $6,000, your mortgage holder would give you a release of
that acre of land. At that point, you would be in a position to give the buyer a free
and clear deed. Also then, the payments that were still owed to you by the buyer
could be used to cover your obligations each month or used as operating capital.
With the lot release set up on a 150% basis of the land cost, you are
getting the land paid off fast. When three-fourths of your lots are sold, your
master mortgage will be paid off. Then you can either keep the remainder of the
land, which is now free and clear, or continue to sell parcels to generate cash.
As mentioned, the release schedule at most lending institutions is at a rate
of 150% of the per acre cost, but it can be to your advantage to obtain a
lower rate if possible. I would recommend that during negotiations you request
what the lot release would be and let them answer, then request a lower
percentage.
WOULD YOU LIKE TO RECEIVE MONTHLY PAYMENTS?
Should you sub-divide a tract of land and sell it on a Contract for Deed, or
a Purchase Money Mortgage, one of the inconveniences is collecting the monthly
payments! What a problem! It’s usually not a problem and receiving payments
each month is fun!
However if you don’t want to bother with collecting funds, some banks will
collect them for you each month for a small fee. The bank will also dun the buyers
if they are late. So when you get to the point that you are selling many parcels,
you will probably have a bank handle the collection of the monthly payments for
you.
Who knows, you might do like I did. I started slowly and continued to learn
and grow and over a period of time, subdivided and sold almost 300 parcels of
land, in my spare time!
So when I indicated that you might grow to the point that you need a bank
to collect your monthly payments, you certainly may!
Wouldn't it be nice to have 100 people sending you $200 each month, or
$20,000, and for your monthly payments to be less than half that! It can be done!
And starting with very little up-front capital.
This example, and the statement of my experience, is for those who want to
make a business out of it, like I did, and produce a very nice income. However, a
person can use the techniques presented in this book and obtain a very nice
piece of land for themselves, free and clear of any mortgage, and then stop!
Whatever your thoughts, the ideas and techniques enclosed should help you
accomplish your goal.
WRAP-AROUND MORTGAGE
There is another instrument that should be discussed before we leave this
section and that is the Wrap-Around Mortgage. A Wrap-Around Mortgage wraps
around, or includes the present mortgage or mortgages, without paying them off
or assuming them. You are buying the land subject to the loans already in place
rather than assuming them.
Let’s say that a seller has a 1st mortgage on a property with a $40,000
balance remaining and a 2nd for $5,000. You agree to purchase the land for
$80,000 with $10,000 down and a wrap around mortgage for $70,000. So his
mortgage of $70,000 becomes a 3rd mortgage. When you make your payments to
the seller, he must make the payment to his first and second mortgage holders
and then can keep the remainder.
One reason a seller might want to take a Wrap Around Mortgage is that he
or she expects to charge a higher interest rate on the wrap around than the rate
that is on the present mortgage, and increase their yield on their equity. Another
reason might be that the seller is hopeful you may go into foreclosure after making
many payments, at which they could intervene and get the property back.
Other reasons might be that the property is overpriced but the owner is
willing to provide attractive terms, or that the property would be hard to get
financed at a conventional lending institution.
There are advantages for some buyers to obtain a property with a Wrap
Around Mortgage, one of which is that the buyer may be able to acquire a lower
interest rate than that presently offered on mortgages. Also a buyer may obtain
property that he would otherwise not be able to qualify for, plus save extra costs of
new financing such as closing costs. And if negotiated, it can be accomplished
with little or no down payment.
Another significant advantage is that title is transferred with a wrap
around whereas it is not with a Contract for Deed or Contract for Sale.
It’s best to assume the underlying mortgages rather than buy subject to, if
possible. But if not, there are some things you can do to protect yourself in case
the seller doesn’t make the required payments on the 1st and 2nd. Make sure you
and the seller open a special collection account at a local bank. The monthly
payments will go to the bank and they will pay the 1st and 2nd and then send the
remainder to the seller. Their charges are usually very low for the service. Never
rely on sellers to keep their payments current!
CAUTION: If you buy property subject to loans in place, using a contract
for deed, purchase money mortgage or wrap around mortgage, make sure that
the owner’s loan agreements do not have due on sale clauses. If these clauses
are in the mortgages, the seller will have to get the lender’s permission to sell the
land, or face the possibility of the lender accelerating the mortgage and
demanding payment in full if the property is sold. If that happened and the seller
could not provide the payment, a foreclosure could occur and the loss of property
result.
BALLOON MORTGAGE
A Balloon Mortgage is a mortgage, which is amortized over any number of
years, such as 15 or 30 years, but the principal balance becomes due at a
shorter time, say 5 or 7 years. Balloons are sometimes used by lending
institutions to protect themselves if they have made the loan at a low interest rate
so that the person can afford it presently, but with the anticipation that the interest
rate will be increased at the end of the balloon.
I used balloon mortgages occasionally since I could get a better discount
rate when I sold my mortgages. When a mortgage is sold, the sales price is
determined by the yield to the investor. A shorter time period for the funds to be
due results in a better yield, and thus a better sales price. Also a balloon mortgage
can gave the buyer several years to obtain a better mortgage due to expected
raises, etc.
TITLE INSURANCE
As title to a property is transferred from one owner to another, a title search
is conducted to ensure a marketable title, which basically means that the seller
has the legal right to sell the land. An owner may have a deed to the land but it
may not have a clear title. A defect may exist if someone, such as a mortgage
company has a claim or lien on the property. Other clouds or defects could be
mineral reservations, easements, subdivision restrictions and taxes, however the
property can be legally sold subject to these conditions.
A search of the public records is conducted to trace the ownership and
history of liens and encumbrances on a particular property and any defects that
would make the title unmarketable are corrected. Then an abstract company would
issue a “certificate of title” or a title insurance company would provide a “title
insurance policy”. In some parts of the US the guarantee of a marketable title is
ensured by the abstract being brought up to date and analyzed by an attorney
while in others a title insurance policy is used.
Even though an abstract is brought up to date, the protection for a buyer is
not as complete as buying a title insurance policy and most states use title
insurance. The policy protects not only against defects that are in the public
records but also for those that aren’t. Title insurance protects against items such
as forgery, clerical errors or undisclosed heirs and is a wise investment.
An important note: make sure you ask your closing agent if they will
conduct simultaneous closings for you if you require them. Some companies will
and some won’t. It depends on their bank account.
Initially I used a real estate attorney for my closings but then started just
having a title company complete them for me. I used the same one quite often and
would just fax them the sales agreements and they would put the closings together
for me. Plus they would accomplish simultaneous closings, if needed.
CHAPTER 8
CONTINGENCIES AND ESCAPE CLAUSES
As stated earlier, contingencies and “escape clauses” are important in all
contracts, either buying or selling. They take the pressure off the sale or
purchase, as they can allow for you to back out of a transaction. In the case of a
purchase, they can even ensure that you get your deposit returned should you
change your mind.
When you agree to buy a parcel of land, put something in the contract
such as, "sale and purchase is subject to my attorney's approval". Or subject to
your partner’s approval. Then if for some reason you feel you need to back out,
you can have your attorney or partner state that they don’t approve of the
purchase and the contract is void and your deposit is returned.
Another possible contingency would be “purchase subject to buyer
arranging acceptable financing." Or, “tract of land has to be less than 20%
unusable due to the green belt area."
Also if there is no current survey on the tract, it is a good idea to
mention that the price of the tract is a particular price per acre as occasionally
surveys reveal less than expected acreage. And make sure the purchase is
subject to your approval of a legal survey.
Of course, the amount and extent of the contingencies you can get in your
contract when you agree to purchase a piece of real estate, depends on how
agreeable the seller is. If the seller won't agree to contingencies, walk away and
look for another piece. Or possibly use an option, but DON’T FALL IN LOVE
WITH ANY PARTICULAR PIECE OF REAL ESTATE!
A very important contingency to put in your purchase agreement is; Buyer
to be able to obtain all necessary permits and zoning for- - -(whatever... either
residential, commercial, apartments, etc.) This one is a must!
Also you might want to include a contingency such as, “Purchase
contingent on there being no liens on the property associated with an
environmental cleanup”. I know of a gent who ran across a tract of land that was
such a “good deal” that he thought; “this is too good to be true”. And it was!
He went to the county deed room and asked for assistance to determine it
there were any liens on the land and was shown liens placed on the property by
an environmental agency. It indicated that there had been a gas station on the
property years prior and an enormously expensive clean up project would have to
be accomplished to satisfy the lien! Needless to say, he forgot about that good
deal!
You will also need contingencies in the contracts you sign with your buyers
if you are using a delayed closing on your purchase. The contracts you sign with
people you sell a parcel to, can have a simple escape clause such as, “sale and
purchase is contingent on the consummation of the purchase agreement on the
ten acres between you and Mr. Such & Such.” This closing of course, will be at
the end of your delayed closing.
Make sure everyone understands this to begin with as this gives you an
escape if in case you can't sell enough lots to be able to complete your closing
with Mr. Such & Such. Using this contingence in the contract with your new
buyers, will cause some to refuse to commit to buying the lot but for most it won’t.
This type contingency is used frequently in the sale and purchase of
homes. A person may buy a home with the contingency, “The purchase of this
home is contingent of the sale and closing of my present home.”
Having escape clauses in your purchase agreement with an owner can
keep your life from becoming complicated. Let's say that you have arranged a
six-months closing on a tract of land and it's been four months and you haven’t
been able to sell the smaller parcels like you expected to. Four months and you
have only had three sales when you were expecting ten by now! So, it doesn't look
like you will have enough sales accomplished by the deadline to meet your agreed
upon funds at the closing, so you need to back out of the arrangement.
First of all, you have put a statement in the purchase agreement with the
seller, a statement such as, “sale and purchase is contingent on my attorney's
approval”. Well, if you can't pre-sell enough lots to come up with your down
payment, then he certainly wouldn't approve of the purchase. Or, “sale and
purchase is contingent on the buyer arranging the down payment by such and
such date.” So you will have clauses that will allow you to back out of the purchase
of the tract.
And if you have had presales of some of the smaller parcels you created,
clauses that you would have put in those contracts allow you to void those
contracts and stop the project. A clause could be that the “sale and purchase of
this one acre parcel is subject to my closing on the entire 86 acre tract with Mr.
Smith”, thus allowing you to “escape” from the contract. You can void the presales
you have had and return their deposits.
So, if it doesn't appear that this particular undertaking will work as you had
planned, you can back out and get your deposit back. You're only out any clean
up costs, signs, preliminary surveying, etc, but you're out of it instead of being
tied to a “white elephant”.
This arrangement takes any stress off you as to whether or not you will be
able to get the sales and be successful with the tract purchase. For those of you
that are not quite as bold as others, if you think about the delayed closing method,
with escape clauses, you will realize that your risks are limited. If things don't work
like you expected, you could get out of the contract with your risk being minor.
Can you always get all the contingencies and escape clauses you desire?
No you can’t! But you will if you persist and don’t rush things.
CHAPTER 9
DO I OPTION TO USE OPTIONS?
An option is just what it sounds like. You have the option to buy the
property or not. The option will state the time period in which you can buy the
land and at what price. If you have found some property that you like but have
not been able to obtain the contingencies or escape clauses that you feel you
need, then perhaps an option would be in order.
Let’s assume you have found a tract of land that you really like but the
owner in not accommodating and will not finance the purchase, and you can not
borrow the purchase money. But you want the tract for its resale value and feel
that you can successfully market the entire tract, or the smaller parcels, over the
next few months.
You could tell the seller that you desire the option to buy his land within
say, a 6 or 12 month period, at a certain price. This would be after having
negotiated the price of the property, of course. If the seller agrees to the terms
of the option, he will tell you how much the option will cost you. He may state that
for $1,000 you can buy the property anytime within six months at the price you
have agreed upon. Or he may raise the price somewhat. One way or the other,
the option is going to cost you something because the seller takes the property
off the market and expects compensation.
The price of the option is the price you pay to have the ability to
accomplish the investigation, planning and advertising that you normally would do
with a delayed closing. If you determine from the advertising response that your
planned subdividing of the tract will probably be successful as you have had a
number of presales, you could exercise the option and close on the purchase. Or
if you don’t feel that the development would be successful, let the option expire.
Another choice you might have is to sell your option. Depending on how
the purchase agreement is worded, you could possible sell your option to a third
party for a profit. Always ensure the contract you sign states “your name or
assigns”, IE, John Doe or Assigns.
If you had been able to tie up the property at a very good price using an
option, you might be able to resell the tract by selling your option and realize a
nice profit and never have to come up with a down payment or close on the
property!
You would have to advertise and find someone who feels like you, that the
price of the property is very reasonable and has a good potential. And is
interested enough to pay you a premium for your option. So, it’s possible that
you could make a nice, quick profit by simply assigning your option to someone
else for a few thousand more than you paid for it.
Or you could wait longer for possibly higher profits. Let’s assume that
you’ve found a tract of land at a great price of $100,000, which is quite a bit
lower than you think it’s worth. But you don’t have the funds for the 20% down
payment, or the improvements that you feel are necessary.
But you still want to get involved with that particular piece of land. You
might be able to tie the property up with and option of $1,000 to $2,000 for a
year, with the ability to extend the option. If you can’t resell your option during the
year for a price you are happy with, your contract has stipulations that for $200
to $300 per month, you can extend the option another year. At some point you
should be able to sell the option for a sizable profit and never proceed to a close.
On occasion, a rolling option is nice to have. If you’ve found a really large
tract of land that you want to work with, you might buy a certain portion of it, with
an option on the remainder at a specified price. For each additional block of
acreage that you exercise your option on, the price might be slightly higher than
the original price per acre, depending on how you negotiate.
Working with options can be profitable in several ways as they give you
time to accomplish your development plans before the interest clock is started,
they allow for a possible lucrative sale of the option, and they allow time to
organize a partnership or syndicate to help with your development. But of course,
you have the cost of the option itself, which is definitely lost if you don’t exercise
the option, but may be applied toward the purchase price if stated in your option
agreement.
As you start out you need to have any contract you use, IE, a
Contract for Deed, Purchase Money Mortgage or Option either prepared by
or reviewed by a real estate attorney. As you become more experienced you
could perhaps complete them yourself.
I recommend that you have a Contract for Deed or an Option recorded at
the county recorder’s office. You may be told that these documents aren’t
normally recorded, but any document can be recorded and I feel it’s best to
record the option to protect yourself. This might prevent an unscrupulous seller
from selling the property to someone else.
As mentioned earlier, an option might be the answer if you can’t arrange a
purchase agreement with your desired contingencies or escape clauses.
CHAPTER 10
HOW ABOUT AN AUCTION?
Another technique that I have used to market a great deal of land is a
public auction! A public auction can be an excellent tool for selling a lot of land
very quickly and very successfully, if it is structured correctly!
I've sold 46 lots to different individuals in one day, using an auction!!
Most people think that auctions are used in distressed situations and
sometimes that's true. However, they can be used for any sale. Auctions can be
conducted so that the sales prices are “absolute”, which means that any bid is
accepted. Or the seller can determine the minimum bid that he would accept and
inform the auctioneer, and the auction will be stopped if bids go below that figure.
With an "absolute" auction, the seller is really rolling the dice but with an
established minimum bid auction, there is protection. Absolute auctions are
normally advertised as such but the established minimum bid auctions are not.
Since an absolute auction is an auction where there is no minimum bid
established, the property is sold at any price! This is really risky and in my
opinion, is not necessary.
The alternative to the absolute auction is an auction where, although it may
not be advertised, a minimum bid has been established. If, in the course of the
bidding, the bids get too low the auctioneer stops the bidding. This way you have
a minimum price set that you will accept for each lot and no lower.
I've conducted two large auctions and they definitely are marketing
techniques. They can be excellent means of selling a lot of property in a short
period of time. As I have said, I sold 46 lots in one day with an auction AND we
had the closings the same day!! Which I will explain later.
Should you decide to use an auction there are a couple of things you
need to consider. First of all, don't let the auction company talk you into putting all
your lots up for "absolute" auction. They may try to get you to do this because
they say "it will bring more people out to the auction!" Don't trust them and don't
put all your lots up for absolute auction!
Let's suppose that you have 33 lots ready to market. You could advertised
10 lots at "absolute auction", and then have a minimum bid established for the
remaining 23 lots. Or you could simply advertise 33 lots for sale at auction.
People have a real curiosity about auctions and will come out; you just have to
have it set up properly. As I mentioned, the auction company may try to get you
to list all your lots at absolute auction. This way they know that everything will sell
and they will make more commission.
That happened to me once as the salesman for the auction company
didn't care about my welfare, he just wanted all the lots at absolute. I listed more
lots at absolute than I should have but at least I didn't list all of them that way. The
auction turned out OK but if I had had less lots at absolute sale, I could have
stopped the auction when the bids got too low . I would have made more money
on the project, as I would have had more lots remaining to sell at a normal sales
prices.
An auction works well in getting attention to your project and with
auctioning off only a few lots, you will get publicity and people coming
to your project.
A few lots listed at absolute auction may work as an advertising tool,
however I feel that just as many people will come out even if you don't use the
word “absolute”. Most people don't know what that means anyway, and would
probably have come out one way or the other. I feel that most people think that an
auction means absolute so you really don't have to mention that word.
The auction companies normally charge 10% for their services and it can
be taken out of the price that the people bid, or it can be added to it.
I conducted one auction with the auction company taking their 10% out of
the sales price. This was smooth for the buyers but cut into my net.
At another auction the 10% auctioneer fee was added to the bid price and
this information was posted in several locations under and around the big tent.
However some people were upset because they said they didn't realize the 10%
would be added, although we had signs everywhere. This method may result in
your receiving a little more money for your lots but I think that the best method is
to have the auction company take 10% of the bid price, rather than adding 10%
after the bidding is complete.
I feel that land auctions are worthwhile marketing tools but you have to set
them up so you are protected. The land that you auction off can be land that you
have bought and perhaps have free and clear, or it can be land that is not yet
paid for. It could even be land that you have under contract with a delayed
closing as will be explain later.
If you own the property free and clear, you could simply auction it off and
require 10-20% deposit on the day of the sale with the closing set a few days
later, at which the buyers would have to bring the remaining funds. Or you could
provide owner financing with 10-20% down.
If you have closed on the land but don't own it free and clear but have a lot
release, you could auction it off, with an established minimum bid and require
10-20% deposit on the day of the sale, with the closing a few days later as
explained above. At the closing the buyers would bring the balance remaining in
the form of a cashier check and you could provide them with a free and clear
deed after paying your lot release. Or you could provide Purchase Money
Mortgages, discount and sell them, pay your lot release and provide free and
clear deeds.
SAME DAY CLOSINGS
At one of my auctions I sold the lots with “owner financing”, and had the
closings the same day, even though I only had a deposit on the land!!
I simply provided "owner financing" with 10% down and had a minimum
bid established with the auctioneer. The buyers bid on the lots under the auction
company's big tent and made their purchase. Then they went to a “closing” trailer
that we had rented, and completed their closings.
I had arranged for a title company to complete the title search and have
the paperwork for each lot set up for a closing, depending on the sale price and
name. The title company personnel were in our sales trailer and when the buyers
came into the trailer, after making their purchase, they had a fast closing!
And since I had a minimum bid set up on some of the lots I knew about
what the total sales would be.
Since I had provided "owner financing", I took back a mortgage for 90%
on each lot. I had made arrangements with a local finance company for them to
buy the mortgages at a discount, and they did that very day! So the auction was
completed in about an hour then everyone had their closings and the mortgages
were discounted and sold. The discounted mortgages paid for the land as it had
not been previously paid for!
Auctioning off property that you haven’t closed on can be risky as you
may not sell enough lots to cover the down payment you have arranged with the
seller. Or to cover the total price if it is a cash arrangement. It depends on how
much you like to roll the dice.
As stated before, I feel that auctions can be effective marketing tools, you
just have to put some effort into locating a good company to conduct it and have
it set up properly. I heard of one auction that was really set up properly. They
started with a barbecue with free drinks, alcoholic of course, and during the
auction, more free drinks! Got everyone plastered and really loosened up and
had a very successful auction!!
An auction needs to be advertised properly in order to get the people to
come out. The cost of the advertisement has to be negotiated with the auction
company, as they will try to get you to pay for all of it. There are many auction
companies around and some specialize in real estate auctions. You need to
locate one with a good reputation and obtain and check out several
references! You need to obtain the name and phone numbers of several
previous customers and go to the trouble to talk with them before you decide on
an auction company!
CHAPTER 11
IS FARMLAND GOOD FOR ANYTHING EXCEPT
CORN?
As you have probably figured out by now, I believe in"subdividing" in the
most simple manner. The ideal situation, in my opinion, is to find a parcel of land
about 300' deep along a paved county road with a six inch water line out front
and easy owner financing! Then simply slice it into parcels about one acre each.
This type situation doesn't come along every day but it does happen. You
just have to be patient and don't rush things! And operate in counties that are
easy to get along with.
Don't think that you have to become a full-time developer, building streets,
recreation areas, etc. (But I will discuss later how you can). Think about simply
obtaining a parcel of land and chopping it up into smaller pieces. And even if the
parcel doesn't have full road frontage, the subdividing can be done in a simple
manner, avoiding the expense and trouble of making improvements such as
streets. A later chapter will give you some ideas on how to subdivide a parcel in a
manner to avoid building streets.
My recommendation is to find land with as much road frontage as
possible, paved or unpaved. I was concerned at one time that if I tried to sell land
on an unpaved road that I would have trouble selling it. But I found out that that
was not true and I sold a great deal of land on dirt roads.
As you are looking for your land, consider all parcels, even farms. Once I
drove past a farm that the farmer was growing corn right up to the asphalt road.
The property was relatively close to town and I felt that it was in a good area. I
went and talked with the farmer and told him I didn't want to buy his entire farm,
just the first 300' along the road.
I have found that one acre parcels in rural areas relatively close to town,
sell very fast. There are 43,560 square feet in an acre, so a lot 300' deep and
145' wide, is about an acre. In our area, if you keep the lots at least one acre, it
is easy to get septic tank approval. Plus in a rural area, you should keep your lots
at least an acre, as they will sell easier. So my normal lot size has been at least
an acre.
Back to the farmer. At first he didn't think he could sell part of his land
since he had a mortgage on it. I explained about releases granted by mortgage
holders, upon the payment of stipulated amounts of money. He called his
mortgage holder and they told him that they would grant partial releases and told
him how much would have to be paid to release each acre. Now he realized that
he could sell part of his land and was very happy with this as it could help pay off
his mortgage. And he didn't miss not being able to grow corn completely to the
asphalt.
Any farmer that is growing crops along a public road is a good candidate
to talk to. Don’t think that property that has been farmed recently and has no
trees will not sell. Believe me, it will sell if as I have said before, you keep the
prices reasonable and offer owner financing.
So, you could find a farmer such as I mentioned and get him to sell you
the first part of his land. If at first he appears uninterested, it may be that in the
back of his mind he’s thinking about the mortgage he has on the property and
doesn't think he can sell part of it. You just need to explain to him that more than
likely, his mortgage company will release pieces of his land upon his paying them
a certain amount of money.
Have him call his mortgage company and ask if they will grant him partial
releases. They will probably say "yes", and will tell him how much is required to
get each acre released. He may not want to sell the entire road frontage, but will
probably sell most of it once he realizes that selling the road frontage would
reduce or eliminate the mortgage on his farm. Strips of land 60' wide could be
reserved every so often to ensure that he has access to the remainder of his
farm. You might negotiate for a strip of land 300' deep along the road and divide
it into lots of about an acre each.
The farmer might own his farm free and clear of any mortgage but
perhaps would still be interested in selling some of the frontage to generate cash.
Once you have gotten the farmer to agree to sell the land and have agreed upon
a price, talk to him about providing owner financing.
He might also be interested in financing the lot sales and receiving 10-12%
interest. In that case he would serve as a lending institution and when you had a
sale he would provide the financing. The down payment your buyer made could
be your profit. The farmer would provide the new buyer with a warranty deed
when the agreed upon sum had been paid.
Regardless how you have the financial arrangement structured, should a
new customer desire to pay cash for their lot, pay the amount per acre agreed
upon, to the farmer and he will pay it to his mortgage holder, if a mortgage exists.
Any excess would your operating capital.
If your buyer wants you to finance the purchase, just sell it on a Contract
for Deed or a Purchase Money Mortgage. You will have to make sure you apply
the payments made to you, on your master mortgage and it’s best to have a bank
take care of that for you. Either method, a Contract for Deed or Purchase Money
Mortgage sale, is closed by a title company or an attorney.
The closing agent will ensure that the paperwork is structured so that lot
releases from the seller's master mortgage can be obtained as needed. And, in
case of a cash transaction, will provide the buyers with a free and clear deed.
Or, will provide the paper work necessary for the Purchase Money Mortgage or
Contract-for-Deed, if it's financed.
If the farmer won't go along with a Purchase Money Mortgage or wants a
large portion of the sales price at the closing, arrange a delayed closing such as
six months, or nine months if you can get it, along with escape clauses. Then
erect signs and start selling lots.
As mentioned earlier, always have “escape clauses” in any contract.
When you buy the land, put a contingency in the contract that will allow you to
back out of your purchase, if you feel you should. And then put one in the
contract of any lot you sell that will allow you to void it if you have to.
And make sure you can assign your interest in the contract to someone
else, as you might run across such a good deal that you could sell your interest
in the contract and make a profit without going to a close, using an option as
explained in Chapter 9.
I am familiar with a gent that puts forth the effort to locate desirable
property with proper zoning and ties it up with an option or delayed closing. Then
he has the preliminary engineering planning accomplished, obtains the permits
and appraisals and has the project ready to begin, with the exception of the
funding!
He then sells the entire package at a profit to another party, usually a
professional such as a doctor or lawyer. After he assigns his interest and the
new buyer obtains financing and closes on the purchase, he will remain and
accomplish the development for a percentage, if they desire.
This activity requires the gent to perhaps risk a few thousand dollars until
he can sell his interest but he has been quite successful with this method of
operation. He derives income on his efforts but does not have the financial
liability!
As you are talking with various people about acquiring their property,
you might keep in mind that if you can not get an arrangement you are happy
with, you might ask the owner if he or she would be interested in a joint
venture. They could provide the land and you could provide the efforts in
subdividing it and split the profits.
CHAPTER 12
SUBDIVIDING THE PARCELS
As I have said before, I feel that the perfect parcel of land is one with
county road frontage and a depth such that it can just be sliced into lots and
resold. But suppose the parcel you have found is not shaped perfectly or doesn't
have much road frontage; then “chop it up” differently!
I found that it is much better to divide some of the land into larger parcels
such as 5or 10 acres, if required in order to avoid development costs such as
roads and streets. If it is a fairly large tract of land with some road frontage, the
interior could be subdivided into large parcels and sold at reasonable prices.
Then the remaining road frontage acreage could be made into smaller parcels
and the profit made on the road frontage. Later I will relate a story to serve as an
excellent example.
Normally it is a simple matter to subdivide land if it has county road
frontage. In my county you can divide land into parcels without an approval
process as long as each lot has at least 20' of county road frontage. But if you
want to build interior streets, either private or county maintained, it requires
an approval process.
You would certainly want to ask the county engineer’s office about the
approval process for dividing land which has county road frontage as well as
building private or county maintained interior streets.
In my opinion, if you can avoid building roads and streets, you are
much better off. You can get in and make some money quickly and then move
on to the next tract without a lot of headaches and sleepless nights. So, with that
thought in mind, I came up with ways to sub-divide the parcels with minimum
development costs and effort.
LOTS BEHIND LOTS
One of the methods is to divide a parcel into “lots behind lots”. Let's
assume you bought a parcel of land with road frontage and it’s 800' deep. Well,
that is too deep to just slice off into 150' wide lots. It could be done, of course, but
I found that the lot behind a lot handles the problem nicely and the response of
the buyers has been positive.
With the lot behind a lot concept, you would start by laying out the front lot,
say 150' wide and 400' deep. That would be about 1.38 acres. Then next to the
150' lot, create a 40' or 60' right of way leading into the parcel behind the one on
the road. The 60' would not be an easement on another person’s property but
would be part of the lot behind the lot. The owners would drive into their lot on
land they own. The lot behind the lot would be about 210' by 400' or about 1.93
acres.
Once you look at the diagrams on the last page, you will be able to figure
this method out very easily. The houses on these lots would be so far apart that
the neighbors would not bother each other and it would allow them to buy their
land at a lower cost because you didn't have expensive development costs. This
method of course, makes it cheaper, easier and faster for you to accomplish
your sub-dividing. Once you’ve reviewed the diagrams you could decide which
method would suit your needs for your tract of land.
Earlier I mentioned 40-60' right-of-ways. This is because it gives the
person behind the front lot adequate width for a road and land for the utilities
such as water lines and power lines. But, smaller lanes may be feasible, such as
20-40' right-of-ways. Check with your county engineer as your county may
require a certain minimum road frontage.
KINGSFIELD NORTH
Once I located an 80 acre parcel that had road frontage on three sides
and a six-inch water line surrounding it! I used the lot behind a lot concept and
created “KINGSFIELD NORTH”, in a very inexpensive manner. The lots were at
least an acre with the second layer lots being about two acres and it has built out
into a very appealing development.
The only development costs on KINGSFIELD NORTH were clean up, lot
layout and surveying, and signs. The clean up did entail costs of cutting a great
deal of the underbrush. It was very attractive property with mostly pines and
some oaks but the vegetation was so thick that you couldn’t walk around on it. So
I located a gent with heavy duty tractors and bush hogs and had him cut the
brush. The lots looked great and the features of each could be determined
quickly such as oaks trees, streams, or rolling hills, etc. Plus the prospects could
now walk around easily, so the clean up helped my sells tremendously.
Cutting underbrush and having limited clearing done allowing the people to
be able to walk over the property and see the features and is well worth the effort
and cost. This way they can visualize how they would position their house and
other buildings, and it greatly increases sales. The people also need to be able to
see the boundary lines and locate the corners of the lots.
When you first start thinking about subdividing or chopping up land, I
recommend that you think, “How can I do this in the most simple manner?” The
lot behind a lot concept may be desirable but ask your engineering company for
other ideas on ways of subdividing your tract in an inexpensive manner.
LEGAL DESCRIPTIONS AND SURVEYS
Now is a good time to cover legal descriptions and surveys. The legal
description of a certain piece of land describes as accurately as possible it’s
position and boundaries. There are three methods of describing a lot or tract of
land; Section, Township and Range, which is part of the government rectangular
survey system, Lot and Block descriptions of recorded plats or subdivisions and
Metes and Bounds descriptions.
Section, Township and Range descriptions are normally used for large
tracts of land, such as the NE Quarter of Section 19, Township 2 North, Range
31 West.
Lot and block descriptions are utilized when the subdivision has been
platted and recorded at the court house deed room. Once the plat has been
recorded, the lots can be described by lot and block designation in that particular
subdivision. This is a much shorter legal description than the metes and bounds
description. The description could be “Lot 4 of the recorded subdivision of Lake
Smith as recorded in OR book 4, page 16".
Metes and Bounds means “measurements and bounds”. Metes are the
measures of length and Bounds were originally boundaries such as rivers or
roads, etc. Now they originate at a known marker or point in the ground such as
a section corner and are used to describe irregular shaped lots or tracts of land.
Normally the surveyor determines the distances and angles of a particular
tract of land he is subdividing and produces the legal description. The description
can sometimes contain many sets of angles and distances to completely describe
just one piece of land and its beginning is normally referenced to a section
corner. Occasionally a benchmark will be used to determine the elevation of the
land, if needed.
SURVEY SYSTEM
In order to be able to produce legal descriptions and conduct surveys, the
government established a method of using the latitudes and longitudes of the
earth’s surface to develop square grids. The US is divided by 36 Principal
Meridians which are vertical lines running north and south and are named, such
as the Second Principal Meridian. There are also horizontal lines running east
and west across the country, called Base Lines.
On both sides of the Principal Meridians, the land is laid off in six-mile
wide strips which are termed Ranges. On either side of the Base Lines the land is
also laid off in six-mile wide strips termed Townships, which results in 6 mile by 6
mile squares, or 36 square miles each.
Each Township containing 36 square miles, is divided into 36 one square
mile Sections. Each Section contains 640 acres. Each Section is divided into
four Quarter Sections of 160 acres each and each Quarter Section is divided
into 40 acres or Square Forties. An acre is approximately 209' x 209' or 43,560
square feet.
SURVEY PROBLEMS
Since the early survey work was primitive, as can be imagined, it still
causes problems today. If a corner marker such as a section corner was not
placed exactly in its proper place, everything referenced to that “point of
beginning” would be in error.
I am painfully aware of some of the problems that can cause. My Father
bought a house in a rural area once and there was a current survey at the
closing and everything appeared in order. A couple of years later, the neighbor
to the north came by with a survey that she had obtained from a different
surveyor, that showed that ten feet of my Dad’s house was on her land! When
the surveyor the neighbor used started running the section line, he started at a
different point of beginning than the one our surveyor used. And that caused the
neighbor’s property line to appear about 40' to the south!
We had to go to the expense of having our survey redone by a third
surveyor and it showed that everything was OK, since he started at the same
point of beginning that our original surveyor had. So what to do? We had a
survey starting at a point of beginning to the south and the neighbor had a survey
starting at a different point of beginning to the north and they didn’t agree! If we
went to court and the court ruled in favor of the neighbor we would have to move
the house or pay for the 40'. So I arranged a settlement with the neighbor and
paid her. It amounted to a parcel of land that basically didn’t exist!
HOGS AND SHEEP!
One day a person that had bought a lot from me about two years prior but
had not built a house, gave me a call. He was all excited, as the neighbor to the
north had erected a farm fence about three feet into his lot! I went up and looked
at the fence and talked to the neighbor, who was very uncooperative. He showed
me the stakes in the ground that his surveyor had placed there recently and how
he had erected his fence, and said that he wasn’t about to move it!
I had my surveyor come out and recheck the corners and he confirmed
that our survey was correct and that the one the neighbors had was wrong. Two
different points of beginning had been used, and the property was in the same
area as my Dad’s house, so I could see what the problem was and knew that
there was no easy solution.
However the neighbor decided on a solution! He was from a middle
eastern country and told us that if we persisted and moved his fence that he
would fill his lot with sheep and hogs right up to the fence which would be near
the other person’s new house! After considering that possibility my friend
decided not to pursue it!
TECHNOLOGY ADVANCES
With modern technology such as global positioning, (GPS), the surveys
are extremely accurate and can also allow for shortcuts in field work as the
surveyor can go directly to a corner without numerous measurements as in days
gone past. A few years ago, each time I ordered a boundary survey of a parcel
of land, the surveyors would cut through the vegetation along the boundary line
and flag it with survey ribbon. The lines were very visible and it was easy to walk
the lines and investigate the land.
Presently, unless you specify that you want the boundary lines cut
through, you will probably only receive the corners marked with a stake and
survey ribbon, since the workers can proceed directly to the corners without
cutting the boundary lines.
This was a rude awakening for myself once, since I thought the price of
the survey that we had agreed upon included the cutting of the boundary lines.
But the company said that it didn’t. Make sure you have a good understanding
with the engineering firm, as to what they are going to do for the agreed sum of
money.
Normally on a sale and purchase, a boundary survey is provided and paid
for by the seller. Make certain this is discussed and agreed upon prior to signing
any contract. And if possible, have the property lines cut in so that you can walk
the lines and see the entire acreage.
CHAPTER 13
MOBILE HOME LOTS
Some developers have done quite well financially developing mobile home
lots so we will discuss those. Normally mobile home lots are only 1/4 to 1/3 acre
in size so many lots and therefore many sales can be made on relatively small
parcels of land. However, the one mobile home development that I accomplished,
resulted in a lot of trouble and effort with minimum profit.
I became interested in mobile home lots after a friend told me he was
selling ¼ acre lots for $10,900 each! Over $40,000 per acre!! I thought, man, I’ve
got to get into this! Bad Call! Before I got finished with my mobile home
development, I wished many times I had not gotten involved. Prior to this, my
mode of operation had been to buy land with road frontage and “chop it up”.
(That’s my slang for a very simple subdividing of land.) Now my life was going to
get complicated.
BROOKHILLS ESTATES
After my friend told me how well he was doing I decided to locate some
property and put together a mobile home development. I had been chopping up
land for a while and had some operating capital available. I found 20 acres that
was in an area in which there were already a few mobile homes. The parcel was
rectangular and just about the right width to put a street down the middle and have
lots on either side. Due to the terrain features and the space allocated for the
road, I was able to produce 28 lots of about 1/4 acre each. I decided on the
name of Brookhills Estates.
The land cost $5,000 per acre or $100,000 and I had 28 lots at $10,900
each or $305,200, minus expenses. That sounded pretty good!
After the closing, I had the engineering firm lay out the road and lots.
Then I hired a bulldozer operator to clear the road right-of-way for the road. At
one location the road was to cross an area which had a small stream and was a
“wet area”. We had to slow things down until the engineering firm had time to
obtain a permit from the state in order to put the road through this area.
A strong word of caution! You don’t want to get crossways with any
environmental agencies! Make sure you get the necessary permits and abide by
their guidance!
The small stream looked harmless but we were told that there was a large
drainage area that flowed through that area and that we would have to install
many large culverts or build a good size bridge. I went to the Soil Conservation
Office and once they analyzed their maps, they confirmed the large drainage
area.
I feel now that I should have gone with the culverts but I decided to have a
bridge built. I had the engineers design the bridge and I located a concrete
company who poured the side support walls and then had a structural concrete
firm place concrete beams across the top. When the side rails were installed, we
had a bridge! It really looked good but I found out later that on occasion the
volume of water coming through completely filled it and maybe the culverts would
have been better.
Prior to the road being paved, I had to arrange for a waterline to be
installed to service the homes. I went to the small municipal water company
nearby and was shown on the maps where the nearest waterline was. I was told
that if I wanted their water that I would have to have the water line installed, and
give it to them!
The existing waterline was to the north of my project and if we were to
follow a street route to our location, the line would be very long. The other
alternative was to cross a gent’s property to the north which would save me great
deal of money. I visited the gent and he said OK that I could have the waterline
installed on his property but he would charge $2,000 for the easement across
his land. So I paid him and had a utility company install the line.
The line was mostly straight, about 2,000 feet long and came down a
street, across the neighbor’s property and through the middle of my development,
stopping at the entrance. The cost was over $8,000.
After the line was installed but before it was officially turned over to the
water company, one of the neighborhood kids turned off the shut off valve that
was installed at the start of the new line and the water was cut off. I realized it a
couple of days later and complained to the water company. They sent a worker to
turn it back on and when he did, he promptly blew the end of the 2,000 foot line
off! It blew the fire hydrant at the end of the line completely out of the ground!
And the water was flowing like crazy!
I was to learn that day that if a waterline has drained, you have to open a
valve downstream and fill the line slowly allowing the air to escape, or it will blow
the end off!
I almost blew a gasket when the water company people told me
it was my problem! The repair cost me $700!
So, I finally got the bridge finished and the waterline up and running and
had the paving contractor pave the street. I decided to use a private road since
our county requires full curbs and gutters for the county to accept any road for
maintenance and those type roads are really expensive. The only problem with a
private road is that there has to be a homeowner’s association to take care of it. I
will discuss private and public roads in a later chapter.
Once I started selling the trailer lots, I realized that I had to help the
buyers more than I expected and that resulted in much effort on my part. One
thing I found was that most people who live in mobile homes are living in them for
a couple of reasons, and those are that they have little financial resources or
have credit problems. There are of course, many people living in trailers that do
not have bad credit and there are many very nice mobile home developments.
However, in my area it seems that a good deal of the people who are shopping
for, or living in mobile homes, have bad credit or no money for a down payment.
EASY FINANCING
When I started advertising the mobile home lots, I found that I had to
provide very easy owner financing in order to make the sales. Invariably the
people would tell me they didn’t have the money for a down payment or that they
had bad credit. Consequently I had to offer owner financing with only $100 down,
in order to get the lots sold!
I provided purchase money mortgages and then discounted and sold
them. I raised the price of the lots to $11,900 with $100 down and had to discount
the mortgages a great deal due to the small down payment and the credit ratings.
I received about $7,900 each.
With the fact that there was such a small down payment involved, the
company that bought my mortgages reserved some of the funds in case of
defaults. They kept $2,000 in reserve for 3 years in case someone moved off and
left the lot and they had to foreclose and resell it. If there was a shortage when
they got it resold, it would be made up by the funds in the reserve, and there
were several lots that fell into this category.
The buyers had to have funds for their electrical service pole and septic
tank, so they had several hundred dollars of expense before they could move into
their home and this caused problems. The septic tanks were costing about
$1,500 and the power poles about $500 and some of the people asked me to add
$2,000 to the price of the lot and provide a septic tank and power pole.
So we added $2,000 to the total cost for the improvements and this
worked OK but it caused extra effort for me getting the tanks and poles installed.
Finally I told the buyers that they would have to put forth the effort required to get
this accomplished themselves and I would simply provide the funds.
There is one very important area that I can help you with if you are
considering a mobile home development. The area is in obtaining financing, both
for the development and for the buyers to acquire their homes. Go to the Internet
and type in www.yahoo.com and then search for “manufactured home
financing”. There are numerous companies which provide financing for
manufactured homes and a great many of them have zero down. I located one
which even provides land financing for a developer; www.aaamortgagebuyers.com/index.html.
RESTRICTIONS
If you become involved with a mobile home development make sure you
put deed restrictions on the development in order to keep it looking decent. And
make sure each buyer gets a copy of the restrictions. The restrictions should
address inoperative or junked automobiles, number and size of sheds that can be
built, and that they must be built of new materials, skirting around the lower edge
of the mobile home, maximum age for the home, what type and location of
fences, etc.
You can visit other mobile home developments as though you were a
prospect and ask for a copy of their restrictions and covenants and duplicate
them. Or visit the deed room of the courthouse and get copies of any recorded
restrictions on a particular development.
DECKS
Once during a visit to another mobile home development, I saw that they
were using decks on the front of the mobile homes to improve the looks of the
trailers and thus the development, so I started doing the same. I added the cost of
the deck to the complete package and had a carpenter build them after the home
was set up. It greatly improved the overall appearance of the development.
I finally got the development completed and found that with everything
considered, i.e., putting the project together, working with the people, suffering
the discounting of mortgages, having to reserve funds, etc., it definitely was not
worth the effort.
Let’s put it this way, I accomplished one mobile home development with
28 lots and I would never do another one! But, there are developers who
concentrate on mobile home developments.
I would say that if you are interested in producing a mobile home
development, locate developers who continue to work in this area and visit their
projects and talk with them and learn as much as you can from their experiences.
MANUFACTURED HOUSING
In recent years the “manufactured housing” industry has greatly increased
and the homes are large, attractive, and somewhat expensive. The people who
are buying these homes appear to have more funds and better credit than the
ones I encountered with my mobile home project.
I am familiar with a successful manufactured housing development which
is a first class operation. The person who created the development is the
developer, the authorized dealer for the particular homes that they are installing,
and the realtor for the sales. The project is highly restrictive with each owner
required to have installed a double, awning type carport, concrete double drive,
large deck and skirting around the bottom of the home. Plus there are several
other restrictions which will ensure that the subdivision has a pleasing
appearance.
There is an impressive entrance and a great deal of landscaping providing
a pleasant experience as you drive in. There is a homeowner’s association in
place to collect monthly fees and provide the development upkeep.
The lots are only one-third acre and the cost with the double drive, carport
and deck is $35,000. The homes average $65,000 or about $100,000 total.
The subdivision and the concept is so appealing that it causes one to
consider duplicating it, especially if you can become the developer, wholesale
distributor of the homes, and the sales person. If you were considering a mobile
home development, I would highly recommend a first class manufactured home
subdivision, if your property and community would support a higher cost item.
CHAPTER 14
RECREATIONAL PROPERTY SOUNDS LIKE FUN!
Another time I complicated my life was once more a deviation from my
standard mode of operation. I indirectly became involved in a lake retreat
development. How does a lake retreat in a beautifully wooded area sound?
Pretty good, right? Well, be careful.
DEERLAKE RETREAT
The retreat that I built, “Deerlake Retreat”, was a development of 20 lots
surrounding an 11 acre lake situated on an 80 acre parcel. The retreat had many
acres of wooded common property which was used for walking, hunting, etc. It
was a beautiful area, not too far from a major city and would seem to sell very
fast. But that was not the case.
I originally bought the 80 acre parcel for my sons and I to hunt on as it
bordered a very large tract of land owned by a paper company. We were going
to build a cabin, enjoy the woods and of course hunt during the hunting season.
And it was a good area for hunting as I got two eight points the first season and
one of my sons got a ten point and the other, a six point. But it was a large
expense that we were seldom using and my wife was on my case, so I decided to
sell it, but it was so far out that I had little response to my ads.
About that time, the adjoining property owner asked me to sell him 4 acres
next to his property so that he could put the toe of a dam on it and build a lake. I
sold him the land and watched him build the lake. And I thought, “that doesn’t look
too hard, I think I’ll build one, survey in a few lots, sell them fast and that will be
that. The 80 acres will be sold!”
So, I had the preliminary engineer work done and the lots laid out with a
plat drawn. I had an appraisal completed, (which I found out later was way out of
line), and went to the bank I used. The appraisal was for $450,000 and I told
them I wanted $200,000 and they said “sign here”. They used the appraisal and
didn’t require that a feasibility study be completed. I feel that had I had a
feasibility study done, to back up the appraisal, it would have been negative.
The reason a feasibility study would have been negative is because the
retreat was situated near the Gulf of Mexico with its numerous beaches and bays,
which offer many recreational opportunities. Personally I didn’t think too much
about that as the property was 50 miles from the water and I prefer the woods
and lakes to the beach. But it certainly was to play a role in concluding the sale
of my lots.
Anyway, I got the loan and hired a consultant civil engineer and we
started building the dam. The ideal spot for a dam is a valley that a great deal of
land can be flooded with a short dam, one that is vee shaped. But my property
had a valley that was shaped like a u instead of a v, so it cost more to build. My
valley floor was flat instead of sloping and the bottom of the dam was about 500
long which required a lot of dirt. And the engineer made sure it was built very
soundly.
The core is the most important part of a dam as it prevents the dam from
leaking. Normally the best type soil is the sticky clay that resembles molding
clay. There happened to be a huge deposit of this type material near one end of
the dam and a great deal of it was moved into the valley floor. The valley floor is
muck that can be 10-20' deep and it has to be removed and replaced with the
core material and that can be a monumental job.
Usually a large crane or a large back hoe, a track hoe, will remove the
muck as bulldozers push the core material into place. Replacing the muck with
the core material was the most demanding part of the undertaking but it was
eventually in place. Each day I watched as the trackhoe operator teetered on his
mats on the soft muck, and one day he and his machine basically disappeared!
He finally managed to get the trackhoe back on the edge of the mats and
eventually pulled himself out.I thought the machine was a goner.
As a dam is being completed, the core material continues up through the
center of the dam to the top, with the sides being filled in with fill dirt. The front of
a dam is not as important as the back and if the back starts leaking, as is evident
by wet soil, it has to be repaired. The repair consists of placing a layer of coarse
sand type material over the wet area a foot or two deep covered with grass. The
sandy material allows any water that leaks through to follow the sand down to the
bottom of the dam and not rise to the surface.
The majority of the trees in the lake area were cut down and burned and
the area from the projected water edge extending out several feet was cleared to
provide fishing without constant tangling of the lines.
The dam was large and expensive but was finally completed and created
a picturesque 11 acre lake. The stream that fed the lake flowed constantly with
crystal clear spring water. Some trees had been left in the lake to provide for
better fishing and they added to the attraction. In the years since the lake was
stocked, several huge bass have been caught.
There was one very tall pine tree that was left standing and a short time
after the lake was filled, I decided to go out in a boat and cut it down with my
chain saw. As I started to saw it down the side pressure caused my boat to move
away, so I tied it to some bushes next to the tree and continued to saw. I thought
I had it cut so that I knew which way it would fall but to my dismay, the darn thing
started to fall backward toward my boat!
I tried to get the boat loose quickly but didn’t have time and the monster
tree fell across the bow of my boat, catapulting me and the chain saw, which was
still running, about 10' into the air and into the water! I finally located my saw on
the bottom of the lake but couldn’t move the boat because the %$*# tree was on
the bow! After much difficulty I made my way to the shore and once I took the
spark plug out and dried it off, was able to start the saw! So, I swam back and
sawed the tree off the very damaged boat and paddled in. So much for being a
lumberjack!
An older gentleman that had a bulldozer lived nearby and he and I cleared
land and built walking trails all over the 80 acres. We also built a corral for
anyone with horses.
The old gent had long hair and a Santa-like beard and one day as I was
walking toward the area in which he was working, I saw him running down the
road yelling at the top of his voice, with the dozer following him! He had abandon
ship while the dozer was still running, as he had stuck the nose of it into a bee
nest! He had put it in reverse and jumped off as he had bees in his hair and in
his beard! He had so many stings that we took him to a hospital!
We built over two miles of roads leading into the retreat. To build the
roads, we took the trees down and burned them, then graded the land as best as
we could with the dozer. Then we had a gent shape them up better with a small
road grader. After that I had gravel hauled in from a nearby pit to stabilize the
earth and the cost was exorbitant.
One thing I learned from that experience was how to build dirt roads! Now
I’m a dirt road sport!
Actually if you should have to build a dirt road, the one aspect of the
construction that makes for a road that won’t wash out, is a good crown in the
road. With a large crown, (raised center section of the road), the water will exit
rapidly and cause little damage. Without a crown, the water stays on the road
and as it runs down, causes erosion damage and will be a constant problem.
Initially I had the dozer operator build the roads which were on a hillside
with designated water turn-offs. Every 20-30 feet we would build a large hump in
the road which would cause the water to exit to the side. But there was a constant
problem with erosion. Finally one day an older gentleman that had worked in the
timber industry for many years told me to forget the water turn-offs and just build
a nice crown in the road and it would solve my problem. We did, and it did!
Needless to say, by this time the $200,000 was long gone and I had to
hatch more and more funds! The total cost of the development was such that the
lot prices had to be high in order to break even, so that helped cause the sales to
be slow.
Much to my astonishment, I discovered that should you structure your
development so that it has limited use, you have limited prospects! And especially
if it is in an area that has many other recreational features. What a surprise!
After having done one, I wouldn’t recommend building a recreation area
unless it is quiet large, and very competent feasibility studies have been
completed. The property has to fill a need for the area and be so appealing that
the interested parties can’t live without it, in order to get them to commit
financially to a second home or weekend property.
One mistake that I made was putting a 600 square foot minimum area for
any cabin. This required a somewhat expensive cabin and later I saw some
terrific, very small cabins, which had much more personality than the ones I built
and were very inexpensive. In retrospect, I should not have mentioned a minimum
cabin size.
Most people thought that if they paid $25,000 for one of my lots, they
would have to spend another $50-75,000 for a cabin. So I hired a carpenter
crew to “shell-in” several A-frames and small cabins. I got the A-frames shelledin for $10,000, and was finally able to sell the lots with partially completed cabins
on them, for $35-40,000 each.
Eventually the retreat was finished and sold out and I took a break for a
couple of years. The project was difficult but it wasn’t too hard, with one reason
being that due to the fact that it was so far out, there was no consideration for
water or sewage lines. At least I didn’t have to worry with those. I just told the
buyers they had to use a well and a septic tank.
A recreation area could be fun to build if you have the appropriate
funding so that it can be properly planned and constructed, but I would be very
cautious of getting involved in one. Everyone has to have a place to live but they
don’t have to have recreational property!
CHAPTER 15
SHOULD YOU TRY A “FORMAL” DEVELOPMENT?
I have explained ways to subdivide in a manner to avoid expensive
improvements such as paved streets. As I have discussed, when you find land on
a public road, normally a county road, it is normally simple to just slice it up and
resell it if your county doesn’t object. And in this case there is no need to
establish a homeowner's association as the road is being maintained by a
government agency.
Also on a public road it’s not normally necessary to have the subdivided
tract designed and drawn by an engineering firm as a formal platted and
recorded subdivision, unless you particularly desire to do so or unless your
county engineer requires it. It could be an unrecorded subdivision and each lot
would simply have its own legal description described in metes and bounds,
which was explained earlier. As I mention elsewhere, every county is different so
you should check with you county engineer’s office before you start any
subdividing.
As you grow and become more involved, you may want to accomplish a
formal platted and recorded subdivision with paved interior streets, curbs,
drainage systems, drainage retention areas, recreation areas, etc.
SETTING UP YOUR BUSINESS
You are probably familiar with some of the real estate attorneys in your
area. Visit one and ask for help in setting up your business. You will have to
decide how you will be doing business, as a Sole Proprietor, a Partnership, an
LLC (Limited Liability Company), or a Corporation. He or she can help you with
the paperwork to properly start into business in the manner you decide. And they
can advise you on any license you should have or any regulations you should
be aware of.
Should you decide to construct a large development, you may want to
form a partnership so that you would have the contributions of the partners to
enable you to accomplish the project. Or perhaps form a corporation and sell
shares, but this can be touchy so make sure you have proper legal advice before
selling any shares.
Your attorney will also help set up your development. You will either be
developing a county “platted and recorded subdivision”, with county maintained
streets, or an “unrecorded subdivision” with private streets.
PUBLIC STREETS
If your development is within the city limits and you desire the city to
assume maintenance of the streets, you will have to build the streets to according
to their specifications. And the same goes for the county should your
development be outside the city limits. Normally the city and county specifications
are about the same and include paved streets with full curbs.
If you produce a subdivision with streets built according to the city or
county specifications and will be turning the streets over to one of the
governmental agencies for maintenance, no homeowner's association is
required. Also if the streets are built according to their specifications, they will
allow the subdivision plat to be recorded.
PRIVATE ROADS
In our county, if your roads do not have full curb and gutters, the county
will not let you record the plat and will not accept the streets for maintenance.
The alternative is to use private roads which will have to be maintained by the
homeowners. There has to be some method to ensure proper road maintenance
in order for the lot buyers to obtain mortgages for their houses and this is
accomplished by a homeowner’s association. Lenders won't lend funds for
homes unless they feel comfortable that the streets will be maintained by either a
governmental agency or a homeowner's association.
As you’re planning your development, you will have to decide whether to
use public roads or private roads, and normally the decision is based on cost.
Streets built to county specifications usually have full curbs, gutters, retention
ponds, etc., and are expensive. But if the number of lots and the expected profits
justify it, then county roads may be the proper choice.
Make sure you check with the County Engineer or your engineering firm
as to the requirements for the county to accept your roads for maintenance. You
might luck out and be in a county that still accepts dirt or gravel roads, which are
much cheaper. Most counties won't accept these and you have to have them
paved to their specifications before they will accept them and assume the
maintenance responsibility.
If your county won't accept roads unless they are paved to their
specifications with curbs and drainage systems, and your funds are limited, plus
your land is rural, then private roads may be the answer.
Private roads can be either paved, dirt, or gravel. Paved roads require the
storm water to be collected and treated in retention ponds or with ditches and this
applies to both public and private roads. Using dirt or gravel roads, the rainwater
does not have to be collected and treated.
Since paved streets with the full, laid-back curbs are expensive to build,
and my property was rural, I used paved roads without curbs on a couple of my
subdivisions. Therefore I had an attorney create homeowner’s associations.
A decision needs to be made whether to use public or private roads early
in the planning stage as this affects your entire developmental efforts.
There are many decisions that have to be made as you grow in this
business and that is one reason that I feel that my book can be of great value to
many people. What decision do you make? Can you sell lots on a private road?
Yes, you can!
I thought that private roads and homeowner's associations might hurt my
sales but that never seemed to be the case. Some people prefer private roads as
you can restrict access, and homeowner’s associations don’t bother them.
The disadvantages of a homeowner's association are the annual dues and
the efforts necessary to maintain an active organization to keep the common
property maintained. You don't have to manage the homeowner’s association
personally, as you turn it over to the homeowners when the development is
finished, or nearly so, but some associations tend to be disorganized and
ineffective.
PLANNED IMPROVEMENTS
Information concerning planned improvements is in order. In some states
there are state agencies which monitor planned improvements. Normally you
can't sell lots until the advertised improvements are in place. Discuss this with
your attorney to determine if that is the case in your state. If it is you will need to
complete the advertised improvements before making sales or you may be fined.
If you don't have the funds to accomplish all your planned improvements
presently, and you intend to complete them as you have sales, then you will have
to do it without advertising or telling the prospects about the planned
improvements, until they are completed.
As you take on a platted subdivision with various improvements, you really
need the services of a competent real estate attorney and engineering firm to
help you satisfy all the governmental agencies. And there are a bunch; city,
county, state and federal.
If you slice up land that is on a public road with road frontage,
whether the road is paved or unpaved, and you don't plan any
improvements, you usually don't have to deal with all these agencies. It
keeps life simple!
RECORDED AND UNRECORDED SUBDIVISIONS
As mentioned earlier, subdivisions are either recorded or unrecorded. If
the streets are built to county specifications they will let you record the plat of the
lots and streets and this is a recorded subdivision. If the streets are not paved to
their specifications and are private, they will not let you record your plat and it is
known as an unrecorded subdivision.
With a county road and a recorded plat, the lots are described as “Lot
such and such, of such and such subdivision”. This would be the legal
description of the lot and would be a short description. With private roads and an
unrecorded subdivision, the legal descriptions have to be in the form of “metes
and bounds”. This type description can be quite lengthy as it includes angles and
distances to describe the particular piece of land. Either description serves well
although the title companies and closing agents prefer the short version.
As mentioned, when you buy property on a county road and simply
subdivide it into a certain number of lots, each with some public road frontage,
(in many cases as little as 20'), you don't have to pave streets and you don't have
to put together homeowner's associations!!
When deciding whether to use county roads and a recorded plat, or
private roads with an unrecorded plat, the decision will probably be made
considering the expenses and your resources. Your engineering firm can
provide preliminary engineering information of your streets and you can take this
information to several paving contractors for estimates and make a decision early
in the planning stage.
A decision can even be made before preliminary engineering work is
done by simply asking the paving contractors for a general cost per lineal foot for
a street with full curbs and for one without curbs. Then analyze these estimates,
considering the estimated length of the roads and the funds you have available.
OBTAINING FUNDS FOR A FORMAL DEVELOPMENT EVEN THOUGH YOU
HAVE LITTLE EXPERIENCE
OK, so you've decided to pave some streets. What next? This is where a
very professional engineering company is a must! They can help you in several
areas, not only in the actual planning of ways to subdivide the parcel, but also
by providing assistance in locating and obtaining the funds you may need
to accomplish the improvements you have planned!
Let's assume you have decided to develop a parcel of land with paved
streets, water lines, sewer lines and other improvements, but you don't have the
funds to accomplish it!
You have located a tract of land that you feel is in a good area but the
price is high and would necessitate developing it into a high number of lots, and
thus paved streets and other improvements. You need to go to a reputable
engineering firm and ask for their help in subdividing the tract and in raising
funds.
They will provide a preliminary drawing of the lot lay-out and estimate the
cost of the improvements needed. And if requested, they can also structure a
formal presentation for a lender with architect's renderings, schedule of events
and estimated costs!
And, working with a prominent real estate company, you can obtain
graphs of expected sales and thus the expected profits, factoring in the cost of
financing. Also a CPA’s analysis would be helpful. Then if you desire, make the
presentation to the banker yourself or have the engineering firm conduct it. With
this type professional help and a formal presentation, the banker feels
comfortable that the project has been planned properly and will probably provide
the funds requested.
If you get the funds approved by yourself, this is great. But you may be
told that your organization needs more financial strength and in that case
partners could be brought in. With the fact that you have located and tied up
attractive property and have a development properly analyzed and planned,
finding partners is not that difficult.
One point to remember, a professional engineering firm can be very
instrumental in your obtaining funds to accomplish a development!
So, you’ve arranged your funding and you're now on your way to
becoming a full-time developer! You will continue to rely on the engineering firm
for their guidance in accomplishing the steps of the development. As you become
more experienced you will rely on them more and more so always associate
yourself with a top-notch engineering firm.
ENVIRONMENTAL REGULATIONS
One area in which an engineering firm can help is the environmental
regulations. You don't want to break any of the county, state or federal agency
regulations and the best way to avoid this is to rely on your engineering firm. Ask
them to drive out and take a look at any area of your land that may be in a “green
belt”. This is normally a wet area and is defined by certain vegetation and is
environmentally sensitive. You may not be allowed to disturb it with heavy
equipment.
Always ask someone from your engineering firm to visit the property
and walk over any land before you buy it! They may be able to point out
characteristics of the land that you have not analyzed. (Another escape clause
should be; “Purchase subject to my engineering firm’s satisfactory inspection”.)
Also, always obtain aerial photos of the land from the County Tax
Appraiser's office as they can help you and the engineering firm. I always
obtained aerial maps on any parcel of land that I was looking at, as a great many
features can be determined without having to walk over it.
And then I certainly used them as I was making decisions about how best
to subdivide the parcel. Of course the engineering firm will give you suggestions
on how to subdivide the land but I always had input myself. And it came mostly
from the aerials. The aerials are not expensive and normally can obtained at the
County Appraiser's office or a Regional Planning Board.
SURVEYING THE LOTS AND STREETS
If you have decided on an improved development and have your funds
arranged, the next step is to have the engineering firm survey the lots and streets.
Make sure you have an understanding with the firm as to what they will do for
you. As they survey the lots, will they just put in the corner markers or will they
cut through the vegetation along each property line?
I have found that if you have large wooded lots it is very important to have
the property lines chopped completely through and marked occasionally with
survey ribbon. This is so that as the property is being shown, the potential buyer
can see exactly where the property lines are. If the lots are small and most of the
trees and bushes removed, you can get by with just flagging the corners in a very
conspicuous manner.
Most potential buyers want to know exactly what they are buying and it
makes it easier for yourself or a real estate agent to show the property if you
have the property lines cut through with good markings.
After the engineering company surveys the lots, streets and retention
ponds, it is time to have trees removed. You will have to locate someone with the
heavy equipment to clear the street right-of-ways and any retention ponds.
RETENTION AREAS
Normally one of the regulatory agencies that you will have to deal with has
regulations that require retention ponds. If an area is covered with asphalt paving,
the first amount of rainwater has to be collected and "retained" so that the run off
will have time to settle into the ground.
The location and design of any retention areas will be completed by your
engineer and is very important in the early stages of the design of your
development. As mentioned earlier, dirt or gravel roads do not require retention
ponds.
TREE AND STUMP REMOVAL
As you are planning to remove the trees for the streets and retention
areas, locate people who will pay for your pine trees. Normally there are small
companies which will pay for those trees, remove them and carry them to a
paper mill. If you’re working with an area in which the stumps will have to be
removed, such as a roadway, it is best to allow the dozer operator to push the
trees down first as the operator will use the weight of the tree to help get the
stump up. If the tree has been cut down, the dozer operator will basically have to
dig the stump up and will take more time and cost more money.
Working with a dozer owner can be somewhat difficult. He will want to
work by the hour as it is very difficult to estimate the time and cost of large jobs
but I found it best to require a specific price for the job. If he is working by the
hour, unless you get the readings of the meter on the dozer, you really don’t
know how many hours were actually worked while you were away. Or whether
the hours requested pay for, were legitimate.
I feel it is best to get 2 or 3 estimates for the entire job and use the one
you feel most comfortable with. Also, always require a copy of his insurance
certificate for workman's compensation in case he gets hurt while working on
your job.
PAVING
When it’s time to have the paving installed you certainly need to obtain
several estimates. By this time your engineering firm will have complete the
drawings of the proposed road, which will include elevations and such. Take the
drawings to two or three paving contractors and obtain firm estimates. If you don't
want to work with a dozier operator to remove the trees and do the rough grading,
ask the paving company if they will also include that and give you a complete
clearing and paving package.
Make sure when you are working with a paving contractor that you have a
good understanding about what their services will include and get it in writing.
Have a clear understanding on things such as whether they will install grass or
ground cover to control erosion on the sides of the paving. Require that they be
specific as to what they will do for the stated price, especially what type curbs
they will be installing! There should certainly be no misunderstanding in this area.
A problem with private roads without curbs is that the asphalt will
eventually shift in some areas such as around curves, and the edges will
crumble. A ribbon curb can be used which is a concrete strip about 8" wide and
8" deep which prevents the asphalt from moving and is about half the cost of full
curbs. It is put in place before the paving and although it prevents the asphalt
from crumbling, it will not control the rainwater and our particular county will not
accept this type road for maintenance.
As stated earlier, the type curbs and paving you use will normally be
controlled by the costs and the funds you have available for your development.
So, as you grow and accumulate experience and resources, you may
want to complete an improved, recorded subdivision with complete amenities,
such as county roads and recreational areas.
If you have selected an area that is in demand and the timing is right, you
could earn an impressive income. Just make sure you surround yourself with
competent advice and professional service companies! I found that you can
waste money trying to save money with the services companies, as I explained
elsewhere!
CHAPTER 16
GENERAL DEVELOPMENT INFORMATION
The most valuable features of my book, in my opinion, are the methods of
obtaining property with only a binder deposit and generating your down payment,
of obtaining owner financing when making your purchase, of using delayed
closings, of using techniques for inexpensive sub-dividing, and of using “owner
financing” to market your lots quickly. Of course, very importantly is the use of
discounting mortgages either totally or partially. However now I will provide some
general real estate information that you may need for either part-time or full-time
development efforts.
KEEP IT SIMPLE!!
One of the most important techniques of working with land, I feel, is to
keep it simple, as I have preached throughout the book. It can reduce the efforts,
worries and costs. Try to stick with parcels that have some road frontage and
sub-divide in a manner that you don't have to build roads and streets. I feel it is
best to make your money quickly and easily on the road frontage and perhaps
using the lot-behind-a-lot technique, then sell the interior acreage cheaply, if
there is any, and move on.
SACRIFICE THE INTERIOR ACREAGE
Once I bought a beautiful tract of land that was 120 acres and had 4,800
feet of county road frontage. I did well with the road frontage, but instead of
selling the interior in large parcels, I decided to build some roads and create
more interior parcels. What a mistake!
Instead of sticking to a simple mode of operation, I went to a complicated
one. If I had just made my money on the front two levels of lots, (lot-behind-a-lot),
and sacrificed the interior acreage at what I paid for it, I would have had a
fantastic, quick profit with little effort! But, I had gotten greedy and thought I could
make all kinds of money if I developed the entire tract into lots.
A terrible mistake for a part-time developer! No way was it worth the effort
and worry, working in my spare time. If I had been a full-time developer perhaps
it would have been worth it. But, I advocate working with land in your spare time
and in a simplified manner. Perhaps my book can help you earn an income and
also help keep your life simple. Make your money in an easy manner and move
on!
An influence on my decision to create many interior lots was the
engineering firm that I was using at the time. They drew a plat which had 130 lots
and really lobbied for the large development, and I’m sure they were thinking
about all the engineering work that would be involved. I felt uncomfortable with the
size of the lots they recommended and the fact that the development was quite
rural. I finally decided on a comprise and had the engineering firm design the
development with three streets, which I had decided would be private.
Later on I realized how much I had screwed up by not sticking to my
simplified mode of operation and it still bothers me when I think of it. Consider the
following analysis.
The contract price of the 120 acres was $2,400 per acre, or $288,000. If
I had surveyed the front lots into parcels of about an acre each with the second
layer of lots as described in the lot behind a lot design, about 60 acres would
have had public road frontage.
I had been selling one acre parcels for $9,900 per acre, so 60 acres
would have sold for $594,000, with hardly any development costs!
Then the 60 acres of interior property could have been sacrificed in
large parcels at $2,400 per acre for $144,000 for a total sellout of $738,000!
A sellout of $738,000, minus the purchase price of $288,000 would have
resulted in a profit of $450,000, with very little effort!!
I finally got the improvements completed and the lots sold but did not make
anywhere near $450,000 profit, plus I had caused myself many headaches and
problems, simply because I did not stay with my simplified method of subdividing!
Like I said, I’ve thought about that one a time or two!
DON’T FALL IN LOVE WITH ANY PARTICULAR PIECE OF LAND
When you decide to work with acreage, be patient and find a good piece
to start with. Don't rush things and don't fall in love with any piece of real
estate! Make sure it has the attributes you desire such as road frontage,
favorable financing and perhaps utilities, such as water and power lines. Then
"chop" it up and resell it for a reasonable profit. I feel that this is one of the
easiest and fastest ways to produce an income, to obtain land for your own use
that is"free and clear", and to produce a residual income.
And I speak from experience as I have built houses, cabins, lakes,
worked with foreclosures, speculated with beach property, built mobile home
developments and accomplished minor and major housing developments!
"Chopping up" land which has road frontage, is the easiest!
DEED RESTRICTIONS
Restrictive covenants are sometime placed in a deed to a parcel of land.
The restrictions limit what the buyers can and can’t do with the property.
Normally when I was developing my rural “Mini-Farms”, I stipulated such things
as only private dwellings, no mobile homes, minimum square footage for the
house, double garage required, certain number of horses per acre, and building
set back lines.
As you create subdivision, you will need to consider what restrictions you
will place on your development. Unless the development is for mobile homes, be
sure and state “no mobile homes”. Also I used “homes of new construction only,
with a minimum of 1,600 square feet and a double garage”.
I found that using 1,600 square feet worked well because more people
could afford housing in that range and the double garage made it look larger and
made for a nice looking community. And I found that even with these minimum
restrictions a great many people built homes over 2,000 square foot range.
One of my friends subdivided a tract of land in a rural area near one of
my developments and used a restriction of 2,400 square feet plus a double
garage, and almost never sold his lots. He said that even though it was rural
property, he was going to create the market! He almost created himself out of
business! I recommend a square footage requirement that is medium and not
excessively large for the area so that you will have more possible customers.
Other items that can be included in the deed restrictions are stipulations
on animals and fences. Since I normally sold rural property, I allowed for animals
such as horses. And I didn’t mention fences as the lots were one to ten acres in
size and I assumed the owners would want to fence their “mini-farm” entirely. By
not stipulating, they could do what they pleased. If you were to develop smaller
lots in a subdivision, the fences might be restricted to the back yard only, which
is common.
Making the decisions on the restrictions for your subdivision is difficult
and my advice is to visit many other projects and obtain as much information as
possible. Visit their sales office and capture brochures and handouts. And talk to
the realtor on site. Plus you need to look up various developments in the county
deed room at the recorder’s office, as you can obtain copies of their restrictions
and covenants. This is usually the only way you’ll be able to obtain all the
restrictions the others are using. Very important stuff!!
Your real estate attorney will be familiar with the normal restrictions in
your area as he or she will have worked with other developers, so ask them.
Depending on your mode of operation, you could use minor restrictions
just so that the neighborhood maintains a pleasant appearance or you could use
highly restrictive covenants. But you will have to make a decision in this regards
in the early stages of your planning.
CHAPTER 17
GENERAL PREPARATION
Now I will cover several items which you will need for your general
preparation. Everything you do in real estate should have professional guidance.
I will give you some thoughts and ideas, but every state and county has different
rules, regulations and ordinances and you should seek proper professional
advice. And by the way, nowhere in this book am I attempting to give you
professional advice. I am only trying to give you things to think about by relating
some of my experiences.
REAL ESTATE ATTORNEY and CPA
OK, so you need to obtain professional advice and a sharp real estate
lawyer is a must. I would use one that specializes in real estate as he or she may
be able to help you more than just a general attorney. Visit the attorney and tell
them what you have on your mind.
The attorney can advise you whether to incorporate, operate as a
partnership, LLC, sole proprietor, etc. Most importantly, he or she can advise
you of the county and state rules and regulations that you need to know. Obtain
this information up front and conduct your development efforts properly. Also ask
them if they have experience with homeowner's associations, as you may be
needing one or more. And ask about their rate per hour and shop around.
Make sure you discuss protecting your assets with perhaps a
corporation. Who knows, you might make a mistake sometime and you want
yourself protected.
Also it would be a good idea to visit a CPA and get his or her input and
advice on any development you may be planning.
ENGINEERING FIRM
Next, visit an engineering concern. Locate an engineering firm that is of a
good size and is reputable. Select a somewhat larger, dynamic concern, if you
can afford them, rather than a small inexpensive one because the larger firm will
have more resources and may save you money in the long run. The larger firm
may be somewhat more expensive but this is one extremely important key to your
endeavors. The larger firm will have the resources and personnel to help ensure
that they guide and advise you properly.
When I started out I used a small inexpensive engineering concern and I
was not satisfied with their services. When I started using a larger firm they
made my life more easy, as they recommended a different way to handle the rain
water run-off and saved me thousands of dollars. Plus they helped me in many
other ways. A large engineering company will have the wherewithal to produce
and make a formal bank presentation for you as described earlier, should you
decide to take on a formal development. They’re your working partners and
should be first class.
When you visit the engineering firm, explain what you are planning and
tell them that you will probably have them inspect any tract of land before you
make a purchase. The engineering firm's inspection of the property, before you
buy it, is a definite recommendation. This should also be done for your personal
lot purchases, whether you decide to go into the land business or not.
CITY AND COUNTY AGENCIES
By now you have spent a couple of hours with a real estate attorney and
an engineering firm. Now go spend a few hours at the city and county offices.
Normally your development won't be inside the city limits and you won't have to
deal with the city. If you do however, go to their various offices and become
familiar with them and their functions.
You will certainly have to deal with the county and a trip to the County
Engineer's office is highly recommended. Go to his office and introduce yourself
and explain that you may be coming in with questions later and obtain copies of
any regulations or ordinances pertinent. And ask them about any zoning
restrictions! They can show you maps which will have the differently zoned
areas depicted.
You could also visit the health department and building inspection
department to help you become knowledgeable of the county procedures and
requirements. Information on septic systems and what the county requires would
be very helpful and is something that you will need to be aware of as you are
making your decisions on your development. The county probably has
established the minimum size lots on which they will allow septic systems to be
installed, so you may have to size your lots accordingly.
The county health department can give you information on available sewer
lines also. You need to know about sewer lines, whether they are available or
whether you would have to install one. In our county if your development is within
a certain distance of a sewage treatment facility, you have to use it. And you
have to suffer the expense of installing the line to it!!
It wouldn't be fun to get caught with a parcel of land and limited funds and
find out that you have to install an expensive sewage line! Spending some time at
the county engineer’s office could be time well spent.
Also visit the county building inspection department. Ask them if you could
obtain a building permit on the land you are interested in. They will know if
there are flood plains involved or zoning problems and this information can
answer a lot of questions for you. Normally if you can obtain a building permit on
a particular lot, then everything is OK. I would highly recommend that you visit
these people before buying even one lot for your own use. This one thought
could be worth the price of this book, as a following example will show.
ZONING
Proper zoning for the type subdividing you have in mind is critical!
Eighty percent of the counties in the US having zoning of some kind.
Some people look at this as an advantage as it controls the amount and quality of
the growth in an area, while others look at it as an infringement of their rights as
owners.
The counties have zones which are created by the planning or zoning
commission and some of the basic zones are; residential, commercial, industrial,
and agricultural, with each one having several categories of restrictions.
There can be restrictions on the minimum number of acres per parcel that
you can subdivide your property into, limits on the number, size, or purpose of
buildings, number of homes and population density per acre, etc.
New zoning is not normally that much different from the type activities or
zoning already in the place for a neighborhood. But there are stories of people
who have owned their property for many years and suddenly are restricted as to
what they can do with it! And without compensation!
Zoning laws for particular areas cause some problems but their absence
can also. You may have a beautiful tract of land and unexpectedly have a paper
mill built near you, or have mobile homes or very small houses appear nearby, or
a stock car track! Who knows? Personally I prefer zoning restrictions as long as
they aren’t greatly restrictive.
If you are involved in real estate, it is beneficial to stay informed of the
present zoning laws and proposed changes, as well as other county activities,
such as planning for new roads or industrial parks, etc.
Once zoning laws are in effect, the county building and health
departments ensure they are abided by as they won’t issue building or sewage
permits until they have analyzed your proposed building or subdivision plans.
Should you locate a parcel of land that you like but it has the wrong
zoning for your plans, there is a possibility that you might get a particular zoning
changed. Once I was successful in getting the zoning changed from residential
to commercial on a large building lot my wife and I had acquired, which allowed
us to sell it to a doctor for a new office. But it was a great deal of trouble and was
certainly time consuming.
After I submitted the request to the planning commission, we had to get
signatures from property owners in the neighborhood stating that they didn’t
object to the zoning change, and present them to the commission. Once they
received the signatures it still took forever as it had to be advertised and
presented at a council meeting. But if finally worked.
If a Realtor tells you that the zoning can be changed or a variance
received on a particular property, I would be cautious as it is difficult, and
sometimes impossible,
UP THE CREEK!
In the mid 70's I was asked to build a home for a friend who lived in the
Atlanta area. He and his wife had found a lot that they liked and took me to look at
it. It was in a nice development and was one of the last two lots remaining, which
should have told me something. The lot sloped away from the street, which was
nice, as they wanted a basement. About 300 feet to the rear was a small stream
which was very picturesque. The lot looked OK to me.
My friends bought the lot, paying cash for it. Everything looked good at
this point but when I went to get the building permit, the county said “NO”,
because the lot was in a flood plain! It seems the stream basin was very active
during heavy rains, and later I saw it when it looked like a river! The new owners
went to the gent they bought the land from and demanded their money back and
were told to get lost! Needless to say, our relationship at this point was strained!
The only way we could build on the lot was to forget the basement and
build the house with an elevated floor level. We built the house on cement blocks
about five feet high. The county wouldn't let us haul dirt in to fill the yard to make
the house look normal, but we had to remove soil from the stream basin and
transport it to the area around the house. The county's concern was that if we
brought soil in and reduced the effective area of the basin it would cause the
water during heavy rains to back up on other property owners.
We finally got the house finished and the yard looked OK, but I was
certainly glad to get away from that house! A trip to the county building
inspections department prior to buying the lot would have prevented a lot
of problems.
FLOW UPHILL?
On another occasion, I bought a lot in a subdivision for the purpose of
building a speculation house. The lot looked OK and once again sloped to the
rear, and had a small stream on the back of the property. The subdivision had
sewer lines and I had noticed the manhole cover directly in front of my lot, but I
did not have anyone open the cover and take an elevation of the sewer line at the
bottom.
We proceeded to build the house and when the plumber was installing the
rough plumbing, he determined that the sewer line out front was higher than the
house! Of course, the sewage would not flow up hill! What to do?
A pumping station was out of the question due to the cost! Luckily I had
an accommodating neighbor who solved my dilemma. After explaining my
predicament to a gent that lived on the lot to the rear of my lot, (on the adjacent
cul-de-sac), he allowed me to have the drain line installed across his property to
a man hole and sewer line that was down hill! If he had not granted me an
easement I would have had to suffer a great expense.
After that experience, as I was arranging to start another house, I ask a
plumber to open the manhole cover and strike an elevation on the pipe at the
bottom. He told me that wouldn’t be necessary as he had the engineering
drawings of the sewer system and it indicated the elevation. I insisted that he
obtain an elevation and when he did, it was quite different than where it should
have been!
A word of caution! Before buying any lot that slopes away from the
street on which you have to utilize the existing sewer line, always have the
elevation of the line determined by a plumber before signing a contract!
(Perhaps another escape clause!)
EASEMENTS
It is much better to actually own the land over which you have to traverse
from the public road to your house, and also the land on which the utilities to your
home are located. But this is not always possible and an easement on another
person’s property is used.
Normally an easement is for ingress, egress and utilities and is deeded
and recorded. It is included in your legal description and gives you the legal right
to build a road or install utilities across the other person’s property. As your
property is sold and resold, the easement stays in place with the land, unless
otherwise stated. Don’t ever buy land that has no public road access on a verbal
agreement that you have the right to cross another person’s property. If you have
to utilize an easement given to you by the seller, make sure it is recorded.
Since easements are recorded, you could ask your title company about
them. Or make a visit to the county recorder’s room and obtain a copy, or visit
the tax assessor’s office and look at their maps of the tract you are interested in
as the easements normally are indicated. The easements would show up at the
closing, but to learn of recorded easements early in your investigation might
affect your decision on the purchase or might be used in your negotiations.
Once I was really excited about a plot of land that I had discovered but
much to my dismay, upon my investigation, an easement reserved by a timber
company showed up almost in the center of it. The property had previously been
owned by the company and when they sold it, they reserved the easement and
the right to build a road in order to get to their other property. This really but a
damper on things as there was no way the property was acceptable with that
easement in place.
The timber company had a massive amount of property in the area so I
located maps of their property and learned that there were two other routes the
company could use to get to their property. I took all the maps to the attorney for
the timber company and requested that they cancel the reservation. After a
couple of weeks the company agreed to the cancellation, and did not demand
compensation. I lucked out on that one.
If your situation requires that you obtain an easement from a property
owner for your road or utilities, be prepared to pay for it, as the other party will
be surrendering the right to their land and expect to be compensated.
STATE AGENCIES
Locate any state agencies, such as environmental, that you think may
have an interest in what you’re doing. Call them and go visit with them. They are
just people and will help educate you and keep you straight. Believe me, you
want to keep the environmental agencies happy.
In Florida presently, you have to deal with the "Florida Land Use
Restrictions", among other things. You can't divide 100 acres into two pieces
without approval! Of course, your engineering firm and real estate attorney will
be familiar with such restrictions and will be able to assist you.
Ask your engineering firm about the state and county agencies, but make
a personal visit with them and establish a relationship. This may sound like a lot of
effort but it can all be done in a day or two. This is a very important part of your
preparation!
TRAINING
Something that takes longer but may be important also, is a real estate
training school. You don't have to be an agent to sell your own property but the
educational aspects of such training could be helpful through the years. You may
already be a real estate agent or you could decide to attend an agent training
school later, as you become more involved. Reading books on the principles of
real estate could be very helpful also.
To find a local real estate training class, call a couple of the real estate
companies listed in the yellow pages and ask them. They should know some and
advise you.
SEMINARS
There are some very good seminars going around the country. Seminars,
in my opinion, are worth the money just to hear of the different techniques other
people employ. One seminar that I attended on foreclosures was two days in
length and cost $450 and could have been condensed into 2 hours! I did feel,
however, that the information I received was good information and helpful.
Basically, I feel that real estate courses and seminars are helpful but are
not mandatory. A seminar that I thought was better than expected was one on
working with mortgages. Knowledge of mortgages is very helpful in any area of
real estate, but as you can now realize, it is very helpful in working with land.
LIBRARY
The local public or college library is a very good place to spend some
time. There are many books that can be of value to you, in every area of real
estate. Why blaze your own path when there are many publications available to
help make your way much easier? A couple of hours in the local library is time
well spent. The library has a reference book for almost any question you might
have.
There are books on the principles of real estate, to help your basic
education, books on building houses, buying houses, organizing real estate
syndications, and even land. The ones on land that I found were more formal and
in general terms and didn't present practical applications as I have!
So, basically for your preparation; obtain some books on the principles of
real estate or attend a real estate school, locate a top-notch real estate attorney
and engineering firm. And visit the county and state agencies and begin to
become familiar with the rules and regulations.
CHAPTER 18
AREA SELECTION
Knowledge of the growth patterns in your area is extremely important
when deciding on a purchase. If you are not familiar with the growth patterns,
ask an experienced real estate agent, talk to an active real estate appraiser, or
visit the Chamber of Commerce.
Make sure you concentrate on an area that is growing. You do not want
to buy land and have to hang on to it. Of course, if you use the techniques in this
book, you can tie up a piece of property and see if it will resell before you
actually close on it.
In order to find property that can be bought for a reasonable price and
provide a good profit margin, you will normally look on the outskirts of the city.
When looking for a tract, first make sure you are in a county that will not prevent
your subdividing activities. Then as you are looking for land in a particular area,
notice if there are fire hydrants or manhole covers in place.
And look for land with a for sale sign on it, preferably by the owner.
Personally I prefer to find land that is not listed with a real estate company.
Should you come upon property that really gets your attention and there is no
sign on it, you will need to locate the owner.
Even though I feel that working directly with the owners of a particular
piece of land is preferred, working through a Realtor is still feasible. I found that
Realtors will go along with a delayed closing if they feel that is the only way they
can assure themselves of a commission in the near future. And on occasion they
will cut their commission in order to make an arrangement work.
LOCATING OWNERS
To locate owners, first visit some of the neighbors in the area and ask if
they know who owns the property. If you can’t determine the owner and their
address, go to the County Tax Assessor's office. At the Tax Assessor's office
you can locate the property on their tax maps and they can provide you with the
name and address of the owner.
By looking at the tax map you can determine how many acres the people
own and how it lies. This could give you very important information on the
approximate road frontage and whether the road is public or private. And whether
the tract is so deep that a road would have to be built or shallow enough so that it
would be perfect for slicing up.
Analyzing the tax map could cause you to loose interest in that particular
piece of land or could get you very excited. These maps will also indicate any
easements that have been recorded on the property.
Also while you are there, if it looks as though you want to pursue this
piece of land, ask if they have aerial maps of the area. You can then look at the
tax map and determine roughly where the property lines are on the aerial photo.
These photos can be very helpful in your investigation of the tract as they would
show possible problem areas such as a large swamp or a large ravine, etc.
It would be best for you to learn as much as possible about the land
before you approach the owners. Through the years, I have found the tax maps
and aerials obtained at the tax assessor’s office to be very helpful.
Sometimes contacting an owner, especially an out of town owner, will
result in your obtaining the land you are interested in.
When you do contact the owners, I would suggest that you not appear to
be a big time developer but just a person that is looking for some land at a
reasonable price, perhaps for your family. Make sure you let them do the talking
and don’t appear anxious. And let them tell you how much they would take for the
property. You need to negotiate as good a price as possible and a later chapter
will help you with negotiating.
Don’t be discouraged if the owners tell you they are not interested in
selling at this time. Just give them your contact information and look for another
one. You may have to do it several times in order to find a party that is ready to
sell their property.
Back to the land selection. I like to find property out of the city a short
distance so that the buyers can have horses if they care to. With that thought in
mind, I normally made the lots at least an acre and sometimes 5-10 acres. When
you are looking for land to develop, the topographic features are very important
such as trees, ravines, swamps, etc. Normally the more large trees the land has,
the easier it is to sell and to sell at a higher price. However, you can also market
land with no trees, at the right price.
When you are making further analysis of a tract of land that is for sale, it
is a good idea to walk over it, if possible. If not, be sure to obtain an aerial photo
or rent an airplane and fly over it. I normally did all three. (This is of course,
when you are really getting serious about making an offer.) You want to be able
to see any unusable areas so that you can figure this into your analysis as you
are estimating how many lots you will subdivide the land into and how much the
gross sales might be.
Also you can use this information to perhaps negotiate a lower price for
the tract. You can point out that the tract has wet areas, ravines, etc. and that
you will only pay a certain amount for the land.
But when you are showing the lots, use this same information to help with
your re-sales. I found that wet areas and any stream, even a small brook or
spring, caused that particular lot to sell faster than the others. Many people really
like the thought of having water on their lot. I always made a big deal out of even
a small spring when I was advertising.
ADVERTISING
This is a good place to mention advertising. I tried many different types of
advertisement from newspaper ads, to throw outs, to radio, to billboards and by
far the one that worked best for me was the local newspaper.
And the smaller the ad, the better. I could place a large ad and talk about
this and that and get hardly any calls. Then I could put a small ad such as; “Five
acres with small stream, owner financing, call xxxx”, and it would get a great deal
of calls! And it was cheaper. I think most people feel that if it’s the owner they
may get a better deal so I deliberately tried to keep my ads from looking like a
real estate company was involved.
I contracted for a large billboard once to advertise my development... my
“Mini-Farms”, but I certainly would not recommend that to anyone. The sign was
very expensive and almost invariably when I ask the people how they heard about
the lot for sale, they would say the newspaper.
One thing I learned when I was showing property was that I had to paint a
picture for most people to get them to buy the lot. I could say, “You could place
your house here near this large oak and your workshop or barn could be placed
over there”, and it worked really well.
Also I found that I had to sell most of my lots myself as the real estate
agents weren’t interested in selling relatively inexpensive lots because of the small
commissions.
And I found that I had to help the people find their financing if I wasn’t
going to provide owner financing. Normally I would try to get the people to come
up with the cash instead of me having to provide the financing because I had to
suffer quite a large discount when I sold their mortgage.
So, I would have a price of say, $12,900 with owner financing or a
discounted price of $10,900 for cash. And cash to me meant that either they had
the cash or they borrowed it.
To help them I would call around and find a source for financing land and
normally it would be a credit union. You may have to call several to find one that
will finance 70% or 80% of the sale price of the lots. If you can find that kind of
source and provide that information to your prospects, it will really help you sell
your lots.
As you are starting out, you really don’t know what to charge for your lots
in order to get them to sell easily. Of course, you should know what you have to
get out of each lot in order to break even. But it’s tough to decide what price to
use to make sure you achieve a good profit, but at a price that the lots will sell
quickly. It would be wise to take a real estate appraiser who works in the area to
the property and get their opinion of your resells before you even buy the tract.
And then get an official appraisal of the value of your lots after you “chop
up” the tract. This will protect you and you can show the appraisals to the
prospects and they feel comfortable that they are getting a proper price. As you
get more into larger developments, a feasibility study would be in order.
LOCATION
The location of land is more important than the topography, I feel. It needs
to be in an area that is in demand, and in an area that is very much in the
direction of growth. It is also extremely important to consider negative aspects of
a neighborhood such as paper mills or landfills.
There is an area in which I am familiar that was once very much in
demand and the value of the property in the neighborhood stayed quite high.
Then the county decided to establish a new sanitation landfill in the area and the
property values decreased drastically. Especially as the odor of the facility began
to be more apparent.
Another important consideration is the access of adequate highways and
streets. If the area is very congested and the highways stay packed, you may
think of another area. Most people want to move out and away from such
conditions.
UTILITIES
Of considerable importance on the selection of a tract of land is the
availability of utilities. As you drive around the neighborhood of a piece of land
that you are interested in, be sure and look for fire hydrants and manhole covers.
The existence of fire hydrants tell you that a waterline is available and manhole
covers normally indicate a sewer line. The water lines and sewer lines are the
most important of the utilities because if you don't have them, you normally have
to go to the expense of installing them. Or use wells and septic tanks.
Electrical, phone and cable lines are not as important since you don't
usually have to pay for those. Normally if you are developing in a rural area, the
only utility you have to be concerned with is the water line as the homes will
probably be on septic tanks. If your area doesn't have a water line, you can sell
the lots without water and tell the buyers that they will have to use a well.
Once I developed an area in which the buyers had to use wells and I was
concerned that it would affect my sales adversely. But I found that it didn't seem
to matter as some people actually preferred wells, so overall it wasn't a factor. If
you develop an area along a county road, whether paved or unpaved, and there
is no water line or sewer line, I wouldn't worry about it and just tell the new buyers
use a well and septic system.
The color of a fire hydrant can tell you the size of the waterline that it is
connected to. Normally there has to be at least a 6" line in order to provide the full
water capacity for the fire hydrant. And those hydrants are normally completely
red. When you see a hydrant that has say, white caps on it, this indicates to the
fire department personnel that the waterline feeding that hydrant may not be full
size.
So, if you see fire hydrant that is not completely red, that could tell you
that the water line along that street is not a 6" line. The importance of that is that I
have found that if you have a 6" line, you can accomplish a great deal of
development without having to install a larger line, but if you only have a 4"
line...beware!
MUNICIPAL WATER COMPANIES
When you are in the rural areas you probably will be working with a small
municipal water company, which is nonprofit and mostly managed by volunteers.
They won't have the funds to install the water lines and they will tell you that if you
want their water, then install the water lines! And then give them to them! And
that you can’t receive any part of the tap-on fees from future customers! You
have to be careful with the water companies and get everything in writing!!
Once I bought a large tract of land which had road frontage on both sides
of a county road. I visited the local water company before I bought the land and
showed them on their maps which land I was going to develop and even showed
them my aerial photos. I told them that I was going to develop the east side first
and then the west side. The president of the company, a volunteer, said OK they
would provide the water service. But I didn't get anything in writing. The
development on the east side moved along nicely and I started developing the
west side.
When the new buyers on the westside went to get their permits for water
service, the company told them that no water service was available! I drove to the
office and the same president told me that no water service was available on the
west side of the road!
He said that the 4" line that was on the east side of the road was large
enough to handle the east side development but not the west, and that they did
not know that I was going to develop the west side! I went ballistic! But it did no
good, as I had nothing in writing. I had gone to the trouble to visit those people
before I bought the land, which is what I should have done, but I didn't get
anything in writing, which I should have. Always get any agreement or
understanding in writing!
If I had know about this problem earlier, I would have just sold the lots on
the west side using wells. But since I had already made several sales and had
told the people that water was available, I had to have a water line installed.
My engineering firm later told me that the water company was responsible
for the service and thus the size of the line on the existing public road. But
because I was adding interior roads, even though they were private, I was
responsible for the line in the development as well as the one leading to it, if the
existing line was less than 6".
So, I had the engineering firm locate an 8" line that the water company
had in place about two miles away and design a 6" line to connect to it. Of course
this took time and cost money. And the water company told me that we would
have to install fire hydrants along the way to my project, and those things are
about $1,000 each, installed!
They demanded that the new 6" line be installed on the west side of the
road opposite the 4" and extend slightly past my development. The lines were
then tied together in two locations which gave the people in my area 10 inches of
water line! Believe me, no one in that area has complained of weak water
pressure!
During all this hassle, I was thinking, “Why didn’t I just make a nice
profit on the road frontage and sacrifice the interior? If I had not planned
interior roads, or at least not mentioned water service, I would not have had to
gotten involved in this as the water company is responsible for lines on existing
public roads.
A nice profit simply selling the road frontage and basically sacrificing the
interior acreage in large parcels at what I paid for it, would have been a much
better plan!
SEWER LINES
As mentioned previously, manhole covers normally indicate the existence
of sewer lines so as you investigate an area always look for them, as this
information could be critical to you. I mentioned that the manhole normally
indicates a sewer line, but it can simply indicate telephone company utilities. If
one is observed, check the top and see if it indicates a phone company. And to
be on the safe side, call or visit the county engineer and ask if there are sewer
lines in that particular area.
If there is a sewer line close by, be sure and ask the county engineer if
its use would be mandatory. Most counties dictate that the sewage treatment
plant be utilized if the home or subdivision is within a stated distance from a
sewer line, which in my area is one-fourth mile. And installing sewer lines is very
expensive!
If there is a sewer line nearby and you intend to provide sewer service,
there is a tap-on fee for a new line, which a developer has to suffer then pass it
along to his buyers. I feel it is better to use a sewer line for your development if
one is close by than to have to worry with septic systems. But it’s not fun to have
a sewer line installed as they are very expensive and frequently uphill pumping
stations are necessary, which certainly adds to the cost!
Should you see a manhole cover near a tract of land that you are excited
about, (which tells you that you will probably have to connect to the system),
consider the expense of installing a line when deciding to pursue that particular
parcel.
Keep in mind that you will have to suffer the expense of having a line
designed and installed and then give it to the municipality which owns the facility.
Look in the yellow pages for a company that advertises utility services installation
and get some rough estimates per linear foot before you make a decision to
purchase the tract.
SEPTIC SYSTEMS
If your area doesn't have sewer lines, your lot buyers will have to use
septic tanks. This is not normally a deterrent to your sales, but it should certainly
be a consideration when you are looking at a parcel to purchase and develop.
It can be a deterrent if you are in an area of a great deal of rock or clay
which necessities an expensive system. And can even restrict the size of the
houses being built. I’ve heard of an area in Tennessee where the Ground Water
division of the county government occasionally restricts the houses to one
bedroom!
Once again, rely on the county officials. Go visit them and get to know
them and the local policies. I recommend that you always have someone from the
county health department come out and give their opinion on the acceptability of
the land for septic tanks before you sign a contract. They will normally require
that you conduct either a percolation test or a soil analysis.
A percolation test determines how fast water will percolate or settle into
the ground. It is a relatively simple test as a hole is dug and water poured in and
timed as it is absorbed. A list of county approved engineers who conduct these
tests can be obtained from the county health department. A percolation test is a
very basic exam of the property characteristics, while a soil analysis provides
much greater detail.
A soil analysis is the best way to determine exactly what you have to work
with, but they can be somewhat expensive. However, your county may require
them. The soil analysis is accomplished by a company utilizing a truck mounted
auger which drills a hole perhaps 25' deep. As the soil exits the hole, it is
analyzed by a technician and recorded. The health department inspector then
refers to the data as he decides what type system will be required. Companies
which conduct these tests, can be found listed under "Labs--soil analysis".
It’s possible to get an inspector from the county health department to give
you his best guess of what type system would be required on a particular parcel
of land by just looking at the land and vegetation and by conducting his own basic
analysis.
He can use a post hole digger and dig several holes 4-5' deep and give
you his impression before you buy the lot or commit to a soil analysis. As he is
digging the hole he is determining how easy, or how difficult, it is to cut through
the soil. If it’s difficult, this would probably indicate a “hard pan” which can be a
compacted layer of soil or clay or perhaps sand stone. Occasionally sandstone is
not too bad as it can usually be broken through relatively easy. However, clay
can represent big problems, as it may be several feet thick.
As you are becoming interested in a lot or tract of land, you can do some
basic analysis yourself. Take along your post hole digger, (I’m sure everyone
has one!) and dig several holes around the property. Check to see that you find
soft sandy type material and not rock or hard clay. Also check to see that the
hole does not fill with water after several minutes because if it does, the land may
have real problems. This fast analysis can alert you to possible problems and
expense with difficult septic systems early in your investigation.
The inspector will probably tell you to have a soil analysis performed
before they will give you their official opinion. In my opinion, you should have a
soil analysis done anyway as this is the only way to really determine what kind of
soils you are dealing with. If you make a purchase and find later that the land is
not acceptable for septic tanks because it won't percolate properly, the buyers
will have to install expensive systems and won’t be too happy. And your sales will
be slow.
If the land won't percolate due to a hardpan or clay, a couple of things
can be done. If the problem is heavy clay and essentially impenetrable by water,
an “above ground” system can possibly be installed by trucking in fill dirt and
installing the drain field in the upper levels of the fill dirt. These areas are
generally about 40'x100' with the fill dirt about three feet deep. This creates a
drainage area for the tank and is more expensive than the normal system but is
usually not cost prohibitive and takes care of the problem.
If the problem is a hardpan such as sand stone, the installers will have to
break through the stone with a backhoe which ensures that the water will drain
through. If they can’t, an above ground system will have to be utilized.
As you walk over land, you can get an idea on how the soil percolates
water. Notice the soil and vegetation such as trees and bushes. Is the soil sandy
or mostly red clay? Do you notice a lot of rocks lying around? Do you see water
standing in puddles and you know that it has not rained recently. Are there areas
with no bushes or trees growing, only small ferns? Do you see very tall pine
trees with few branches? All these items can tell you that there may be
percolation problems.
Once you have a percolation test or soil analysis completed, don't rely on
the opinion of the person that conducted the test. Take the results to the health
department inspector and get his determination on what type systems will be
required. If he states that normal systems can be installed, that is great. If he
says that an elaborate system will be necessary, you may not want to follow
through with the purchase.
If you do want to go ahead and sign a contract even though you have not
completed the complete analysis that you should, you might want to put an
escape clause in the contract such as, “Purchase contingent on the soil analysis
allowing for permits for septic systems which cost less than $3,000", or whatever.
If you have determined that there is a problem with installing normal septic
systems and you are still interested in the land, use this adverse information to
negotiate a lower purchase price. The tract would be worth less if you have to tell
your lot buyers that they will have to spend $8-10,000 for their septic system vice
the normal $2,500.
Another very good way to investigate your selected area for possible
septic system problems is to call a couple of septic tank installers listed in the
yellow pages. Ask them if they know of any problems in your area. They might be
familiar with your specific location and could give you an alert. Of course, soil
composition changes and good areas exist right next to bad areas. The only sure
way to determine any potential problems is to have soil analysis conducted.
As you can see, it is very important to determine if the area that you are
interested in has sewer lines and if not, does it have possible septic tank
problems. You need to know this information before you commit to buying a
single lot for your personal use or a tract for development.
INSTALLING A SEPTIC TANK
A septic tank contains the solid matter while the drain, or leach field,
allows the liquids to be absorbed into the ground. As a new tank fills with water, it
reaches a point that the water starts to flow out into the drain field pipe. The drain
field pipe rests on a layer of gravel and has many small holes in it, which allow
the water to run into the ground. The drain field has to be basically level because
if it isn’t the water will run rapidly to the end of the pipe. If a system is installed on
a lot which has a slope, the drain field will be placed perpendicular to the slope so
it can be level.
The required length of the drain field is determined by the percolation
capability of the lot on which the system is placed. In sandy areas it can be a
short as 100-150' while in clay areas, 300-400'. After the soil analysis has been
completed, the Health Department inspector will make a decision on the type
system to be used and the amount of drain field. And he will indicate where the
system should be placed.
With that information, calls can be made and estimates received on the
installation. Then when ready, usually near the completion of the building, the
system can be installed in a few hours.
WELLS
If no water line is available, or the owner simply prefers, a well can be
drilled and a pump installed. Normally a 4" hole is drilled into the ground to a level
at which water is present, with the sides of the hole being stabilized by a casing.
Water is trapped underground in aquifers which are loose water bearing
materials such as sand or gravel, and in consolidated water bearing rocks, such
as sandstone and limestone. Once the shaft and casing is in the level of the
water, a pump will pump it to the surface.
Underground water is normally preferred for drinking as it has been
filtered by the sand as it sinks into the earth and is more pure than surface water.
A great many people prefer to have a well and their own water supply.
When I decided to structure a development that required the owners to
use a well, I didn’t know if I was doing the right thing or not. I just knew that I
didn’t want to pay to have a lengthy water line installed, so I made the decision to
market the parcels without water. Much to my surprise, it didn’t seem to matter at
all! Hardly anyone objected! I found that my sales did not suffer because there
was no water line available and wells were to be used. I was thinking that I should
have known that earlier.
Most wells are drilled today but in days gone past, they were dug. The
wells were about 4'x4' and dug until the worker had to quit due to the flow of water
into his hole. I remember my Dad digging one on his farm many years ago when
I was a kid and it was not very deep at all, maybe 20' or so, but he told me that
some of the dug ones were as deep as 50'.
Drilled wells in our area are often 100' or so, and I’ve heard of some 200300' deep. The well drillers will not guarantee you that they will find water but will
charge you by the foot which is about $20 per foot for the hole and the casing.
Observing the type trees on a parcel of land can give an experienced well
driller an indication of the presence of water and also the quality and approximate
depth. In arid areas, willows and cottonwoods can indicate water within 20 feet.
Maple, birch and oak trees can indicate water at shallow depths while mesquite
can indicate water at 30'-50'.
If a well driller can find a good supply of water, which is normally the
case, a free source of quality water will be available for many years. The only
adverse comment I’ve heard about a well is that the pump seems to be struck by
lightening more frequent than you would imagine. I assume it has something to
do with the fact that it is certainly grounded.
If a well is to be used as a water supply for the home, it has to be placed
at least 100' from the drainage field of the septic tank.
CHAPTER 19
SHOULD WE NEGOTIATE?
Once you have found some property that you like and desire to subdivide;
now comes a very important task... negotiating!
Negotiating is one of the most important aspects of working with real
estate and is one area that a great deal of people glaze over. Some people are
reluctant to try to negotiate a lower price as they may feel they are getting a good
deal. Or they don’t realize that negotiation is normally expected, or they are timid
and lack the confidence to try.
There are books and seminars available on the art of negotiating and
would certainly be useful throughout life, not just with your real estate ventures.
As a matter of fact, I’ve seen a two day seminar advertised on the art of
negotiating for only $795! I think I would have to negotiate that one.
Prior to negotiating a price on a parcel of land, you should do your
homework. Find out how long the property has been on the market and if the
price has been reduced. Try to find out the real reason the owner is selling. You
want to get an idea of how motivated the seller is.
Also realize that most sellers set their price higher than they expect to
receive and you have seen the term, asking price. Since the seller anticipates
that negotiating will occur, accommodate him! Plus it will make you feel better as
everyone likes to get a bargain and always like to buy “whatever” at a reduced
price!
There are some important principles of negotiating that you would do well
to remember. The most important one, I feel, is the adage; “The first one to
mention a number, loses!!”
When you’re interested in buying anything that you think can be
negotiated such as real estate or perhaps a car, etc., attempt to get the seller to
quote a price, if one is not indicated.
And never mention a price yourself! Insist on the other person giving
you a price because the first one that mentions a number, loses!
And after the other person gives you a price, negotiate!
If negotiating to buy real estate, always appear nonchalant and perhaps
somewhat disinterested in the purchase. Don’t appear excited and enthusiastic
as the other party can read your body language and realize they have the upper
hand.
Tell the sellers to state their price and conditions. And don’t accept the
asking price… unless, of course, you are familiar with the property values in the
neighborhood and know for sure that you are getting a great deal.
SILENCE!!
If negotiating in person, a very effective tool is... SILENCE!!
As the other party presents you with a price... DON’T SAY ANYTHING
FOR A FULL 30 SECONDS!!
Look at your shoes! Look at the sky! But don’t say anything... the silence
can be deafening!
The other person can not normally be silent that long and will start talking
and will probably offer other choices. Try it on a friend or spouse when they
present you several choices and see what I’m talking about. They can’t stay quiet
that long and will probably present you with other choices.
Let’s say that someone just told you, “I’ll take $150,000 for the property”.
Look at your shoes, look at the sky, but don’t say anything for a full 30 seconds!
If the seller is motivated, they can’t take the silence and after several seconds will
probably say, “OK, I’ll take $140,000 and nothing less”.
Still, DON’T SAY ANYTHING! You will likely be presented with yet
another choice... especially if the seller is motivated.
Silence can be extremely effective if you will use it. Also body language
can be used to help with your negotiating. Always appear as though you aren’t
really interested and not too concerned. And when presented with an offer,
appear as though you can’t believe it! But don’t say anything! Stare at your
shoes, or the sky!
And never appear anxious! Even if you hear a number that really gets
your attention, appear nonchalant.
Silence can be used when selling a property as well as buying. If you
have a lot advertised for say, $15,000 and a prospect tells you they will pay
$12,000, appear as though you can’t believe it! And then don’t say anything! If
the prospect is really interested in buying the lot, and if you can just be quiet long
enough, you will probably get a higher offer.
The thing about using silence is that it’s hard to be quiet long enough!
Silence really works if you will only use it!
WHAT TO OFFER?
When you have been told the asking price of some property that you are
interested in, it’s good negotiation skills to never accept the price but make an
offer for something less. A rule of thumb that I have used is to offer 20-30% less
that what they are asking. Or even less, if I feel the property is overpriced.
Since your offer is much less than the owner is asking, they probably
won’t just jump all over it. But be patient! The owner will either accept your offer
and you will feel great about your purchase, or you will be presented with a
counter offer. You may accept the counter offer or you may make another offer
yourself.
When you are presenting your offer, you might point out any aspect of
the property that you feel justifies a lower price, such as wet areas, ravines, etc.
Also while negotiating the price of the property, you need to be negotiating the
terms and conditions you desire, as they can be as important as the price. You
may pay more for a tract of land if you can get the terms and conditions you
desire. And of course, the contingencies you need.
SUBMITTING A WRITTEN OFFER
Negotiating for real estate can be done in person or over the phone and
that happens frequently when you are selling smaller parcels such as single lots,
and the above mentioned techniques can be used.
But if involved in a large purchase, the negotiating is usually done through
written offers. One person submits an offer to buy at a price they are willing to
pay, and with the terms and conditions they feel they need, along with a check
for earnest money. The seller may accept the offer and everything moves to a
close, but normally they will submit a counter offer with a different price or
conditions. This at least shows you that the seller is willing to negotiate.
After you receive the new price, point out more of the deficiencies of the
property such as the fact that there are few large trees, or that there is no water
line, or no electrical power, etc., when you resubmit your offer. Your second
offer would be somewhat higher than your first one and if the seller rejects it and
sticks to a higher price, you still have a couple of choices. Either walk away or
perhaps offer a larger down payment or cash if you can arrange it, for a lower
price. Or maybe change the conditions or contingencies.
If that doesn’t work, either accept the price and conditions or forget about
it and look for another property.
A couple of important points to remember when negotiating on the sale or
purchase of real estate are;
1. If selling, point out the advantages of the particular property and have
an appraisal handy. Make the prospective buyer feel comfortable!
2. If buying, make the seller feel uncomfortable and unsure of your
intentions. Present the image that you may walk away. Keep them on the
defensive!
SPLIT THE DIFFERENCE
If a person mentions “splitting the difference”, that could be music to your
ears, but don’t jump all over it! Let’s assume that you like a parcel of land that is
priced at $200,000. You make an offer of $150,000 or $50,000 less than what is
being asked. The seller says, “Let’s split the difference”. So the difference that
you and the seller are now negotiating over is $25,000.
If face to face, don’t say anything and use SILENCE! If you do say
anything, say that it’s still more than you will pay. If this activity doesn’t get a
response from the seller, you might tell him that you will split the difference on the
$25,000!
Sometimes it’s difficult to know when you should give in and accept an
offer or whether to continue with the negotiations. You should continue trying to
get as good a deal as possible and as liberal terms as possible, until you feel that
you are at the bottom line. Then either sign the agreement or walk away. On
occasion the other party may tell you to get lost at some point, and at that time
you can assume that you are at the “bottom line”!
As stated earlier; don’t fall in love with any particular piece of real
estate! If one deal falls through, find another!
And as we discussed previously, the terms and conditions, or
contingencies, can be as important as the price of the property. If you fall in love
with a certain tract of land but don’t get agreeable terms, you may cause yourself
some sleepless nights, believe me!
As you know, the degree of success that you have in obtaining the
contingencies that you desire such as a delayed closing with escape clauses,
depends on the cooperation of the seller. If you don’t arrange what you feel you
need, then an option to buy may be better than a purchase at this time. Or walk
away!
RECAP OF NEGOTIATING
Things to remember;
1. On initial discussions, the first one to mention a number,
LOSES!
2. Don’t accept the initial price or offer when buying or selling.
3. Make a substantially reduced offer when buying.
4. Don’t appear anxious.
5. Read the body language.
6. Make a buyer feel comfortable.
7. Make a seller feel uncomfortable.
8. Use-------------------SILENCE!
CHAPTER 20
NOW; THE HOME!
The major portion of this book has been devoted to obtaining land and
getting it free and clear, or mostly so, because there is more effort and
knowledge required to accomplish that than there is to getting a home.
So we’ve spent a great deal of time discussing how you could first,
acquire the land you desire and then use the income you generate, or the equity
you create, to obtain the home you desire!
That’s a perfect way to operate... acquire the land you desire and
generate income for the other things in life you desire.
Or obtain the land you desire and use its equity for the other things in life,
such as a home.
EQUITY IN YOUR LAND
The first consideration would be to evaluate carefully the money you have
been able to generate and put away. Of course the more funds you have, the
more options that are available for you.
The other consideration should be how much equity you have in the land
you own. I would suggest that you obtain an official appraisal of your land so
there is no question of your equity.
You should have a good idea of your equity as you have been involved in
land sales in the neighborhood, but a formal appraisal could be of great benefit,
as the lending institutions require them. The equity in your land is important as it
enhances your net worth and as it could possibly be used as “land-in-lieu of a
down payment” for a new home.
So now we have a nice equity in our land and we need to use it to get a
home using land in lieu of a down payment, and with a reasonable monthly
payment.
TYPES OF HOMES
There are many different types of homes that can be obtained at a
affordable price. Of course, the smaller the house, the more affordable the price.
Reasonable sized homes can be built at prices most people can afford. And it
can be done with no down payment if you have proper equity in your land and
will be explained later.
If you desire a larger house but with more affordable monthly payments,
you could build it yourself. You could serve as the builder and normally save 1025%.
Another means of obtaining a reasonably priced home is to invest in a
partially completed home and complete it yourself. Most contractors will give you
a price for constructing a home that is not totally complete. You could tell them to
what degree you wanted the house completed and receive a price accordingly.
There are many builders who specialize in this endeavor.
Manufactured housing has become increasingly popular in recent years.
The design and quality of manufactured homes has been improved to the extent
that they are much in demand, due primarily to the reasonable cost.
BUILD YOUR OWN HOUSE
You may want to build your own house and save the contractor fees in
order to enjoy a lower monthly payment. Contractor fees are from 10-25% and
can be a substantial sum. It’s possible to build the house yourself and save some
or all of the fee amount and it’s not as difficult to build your own house as you
may think. Plus it can be fun and satisfying. There are many books in the
bookstores that explain the process in detail, as to how to serve as your own
builder.
You will first need to talk with several banks or mortgage companies about
building the house yourself, if you intend to have a mortgage on it. Now days,
some lenders required a licensed contractor, where others will go along with the
owner serving as the builder.
The banks know that the house will get built properly as each step of the
construction has to be inspected and approved by the county inspectors as well
as the bank inspectors.
Basically a “builder” is simply a “coordinator” as everything is
subcontracted out. The subcontractors are very specialized and can be found to
accomplish almost any task you need. You simply need to visit several houses
that are under construction and talk with the various subs and accumulate a list of
names and phone numbers.
As you’re visiting the construction sites, talk with the builders themselves
and ask them for the names of reliable subs. Normally the builders will not
hesitate to give you various names and numbers of people they have used and
are pleased with.
Once you have your blueprints drawn, farm them out to some general
contractors and have them give you an estimate to build the entire house. Then
take the prints to various subcontractors and put together an overall estimate
yourself. Then you can decide if the savings would be worth your time and effort.
One problem with building your own house and that is we have a
tendency to run the price up more on our own house. If we had to live with the
prices and allowances that a contractor had given us, we would not opt for the
more expensive carpet or fixtures, etc. We can run the prices up in such a
manner that it would negate any savings we were planning on!
USING YOUR EQUITY
Let’s look at an example of how you could use the equity in your land.
Say the house you want to build has been appraised at $100,000 and you have
three acres free and clear that is worth $40,000, so the appraisal of your
completed house and land is $140,000.
With today’s liberal lending, you could obtain a loan for 80%-100% of the
appraised value of the house and property. An 80% mortgage would be a
mortgage of $112,000 and 90% being $126,000.
You have estimates from three builders indicating that they will build your
house for $100,000. We will assume that you can build it for 80% or $80,000,
which is about normal if you do it yourself.
So since your land is paid for, you would have to obtain a mortgage of
$80,000, or only about 57% of the appraised value of the land and the house!
($140,000 x .57= $79,800)
If you got an agreement with a building contractor to build your house for
$100,000 and your land was paid for and appraised at $40,000, with the total
appraised value being $140,000, you would only need a mortgage of about 72%!
If you have not gotten your land free and clear by using the techniques
explained earlier in this book, but have an equity of $14,000 and you desire to
have a builder build your house, you would need a mortgage of 90%, or
$126,000. So if you do not have your land paid for completely but have an
equity, you should be able to find a lender who will use the equity in the land in
lieu of a down payment.
Simply visit some of the local banks that have mortgage departments and
ask them to explain their loan policies. Normally if you have a good equity in your
land, it is possible to obtain a permanent mortgage for enough to have the house
built without requiring a down payment.
PARTIALLY COMPLETED HOUSES
A excellent source of reasonable housing is the Jim Walter Homes
corporation. Most people are familiar with the Jim Walter Corp. as it is one of the
nation’s largest builder of single family houses.
The advantage of Jim Walter homes is that they are reasonably priced
and you can have the house completed to the extent you desire. It can be a
“shelled in” home, to one 90% completed.
If you are handy, you could have it completed to a certain point and then
complete it yourself. This arrangement is very accommodating and can result in
substantial savings!
There are many models to choose from and a catalog can be obtained via
the Internet. To obtain a catalog, go to; www.jimwalter.com and complete the
request form.
The corporation has several sales and model locations across the US,
and can be found in the local phone books and at the company website. The
selection on homes is quite extensive, from about 900 square feet to several
thousand square feet in size.
One reason the company has been so successful is that they provide
financing with no money down and no points or closing costs to qualified buyers
who have their land paid for. Obtaining this type financing with nothing down can
be a real advantage for many people.
There are many reasons to have land that is paid for and to have a nice
equity in it and this is one of them... you have more options!
MANUFACTURED HOMES
One of the best ways to obtain a very affordable home is to use a
“manufactured” home. The manufactured homes are build at the manufacture’s
building warehouse and then transported to the desired location. The construction
is very controlled and thus the costs are controlled which results in a better value
for the money.
The quality of the construction and the design features are such that the
homes are very attractive and much in demand.
A quality home of 1,200 square feet can be bought for $39,000 or about
$259 per month! And most of the dealers have several lending sources and many
who will use equity in land in lieu of a down payment.
There are many successful builders of manufactured homes in the US
and can be located in various cities or on the Internet. Simply check the phone
book for locations and visit the sales locations to see the homes. Or go to the
Internet and search “manufactured homes”.
You will find many excellent websites such as www.mawilliamshomes.com
The Manufactured Home network at www.mhn.net , www.manufactured-homeguide.com
When you search “land in lieu of down payment” will find numerous
companies that are available. Most indicate manufactured homes but some
indicate stick built homes also. Some impressive ones are; www.aaamortgagebuyers.com www.theloanplace.com www.zerodownloans.com
Mortgage Finance Directory at www.seekon.com/B/Finance/Mortgage
If you have credit problems but desire a mortgage, search for “bad credit
mortgages”. Many are available such as; www.i-bad-credit-personal-loans.com ,
www.bad-credit-loans-mortgages-loan.com or
www.1stopbadcredithomeloans.com
So, you have acquired your land and have made a profit, or have
created an equity by selling a portion of it. Now you are in the driver’s
seat to
complete putting together your “family estate”!
CLOSING COMMENTS
So, you want to be in the “driver’s seat” on your way to establishing your
dream homestead. You just have to take your time initially and let land put you in
a better position to acquire the impressive family estate you have dreamed of!
As mentioned earlier, most of the book relates to land, as that can be the
key to your obtaining the homestead you really desire.
I have related stories which drive home the point that I feel the best way to
produce an income or build an equity with land is to keep it simple! Especially if
you’re doing it in your spare time.
Regardless of the fact that I preach to keep it simple, there are many full
time developers around the country with large projects that are complicated, yet
they are extremely successful. The information provided concerning using your
engineering firm to help raise the funds for a major development could aid in
launching you into this profitable world. I wish I had realized that earlier.
Remember to consider a couple of things; one is to go spend an hour or
two with a real estate attorney that is familiar with your state and county
regulations and licensing requirements. Be sure you visit the County Engineer’s
office as well as the Health Department and Building Permits Department. Make
these visits BEFORE buying anything!
I would strongly recommend that you have someone from an
engineering firm visit the property and look at the ariel photos to ensure you
don’t get involved with a piece of land that has problems such as wet areas or
“green belts”.
Also if you are looking at farm land, visit the local Soil
Conservation Office as they can show you on their maps any problem areas
such as green belts and areas that are prone to flood. They can estimate
how many acres drain through a certain area, which could alert you to
possible flooding problems. And believe me, if they tell you there are
problem areas, I would stay away!
And another is that each county is different and if one county is too
restrictive on breaking up land, go next door. Call or visit the County Engineer’s
office in other counties and ask them about their subdivision requirements. Make
sure you do this before you commit to buying a piece of land that you might not
be able to work with.
If the county that you want to live in is too restrictive, you might go work
next door and generate income to buy the land you want in your desired county.
Another item to consider is that if your area is a seller’s market, you might
go to another area that is more of a buyer’s market until you have gained
experience and resources.
Also don’t rush out and bite off more than you can chew. Start off with a
relatively small tract. Take your time and find property with the terms and
conditions you need, and use escape clauses. And don’t fall in love with any one
piece of land! Don’t complicate your life!
Sometimes it’s best to walk away!
And be sure you have competent professionals to advise you! When you
select a real estate attorney however, don’t select the oldest and most
conservative one in town as he will try to throw cold water on your ideas. You
just need him to make sure you are up to speed on any rules and regulations you
need to know and to help you protect your assets!
Make sure you have a complete plan in mind as to how you would
subdivide a particular tract, as well as how you are going to accomplish your
resells! Are you going to provide “owner financing”, and how, or are you going
to require the buyers to come up with the cash or get their own financing?
Having a feasibility study done or at least having an appraisal done of the
value of your lots after you “chop up” the tract, before buying the tract, could
prevent you from getting into a jam.
Reread the book several times and pay attention to the things that I
mentioned that could complicate your life. I can’t emphasize enough that you
don’t want to run out unprepared and careless and get yourself in trouble.
Initially if I couldn’t find a parcel of land that had road frontage so that I
could just slice it up and sell lots, even lots behind lots, I wouldn’t become involved
with it. Even with great terms. (And that’s assuming my research had turned up
no negatives.)
I’m sure some of the stories of my experiences will scare some people
and they won’t become involved in land. However it’s not that treacherous and
can be very satisfying and rewarding. Even though you may not go into
business, a great deal of the information should come in handy throughout the
years with your personal purchases.
You may simply desire to obtain a parcel of land and then resell portions
of it in order to be financially able to get your “dream home” built on it. That’s OK
and it can be done using the techniques in the manual, just don’t rush things!!
One last thought; as I have related, I have been involved in many areas of
real estate. If I could back up and start all over, I would acquire land free and
clear, as I have discussed. Then I would build duplexes, serving as the builder
myself and then keeping them and renting them.
Consider this; if you had your land paid for and then served as the builder,
constructing the duplexes for approximately 80% of the appraised value, your
mortgage would be so low that you could have an impressive cash flow as you
build equity!
Let’s say you found 40 acres and sold 30 acres in small parcels and have
10 acres free and clear. You start building duplexes at the front of the property
and only build a private road as you fill the property with duplexes. It could provide
a heck of a monthly income while increasing net worth considerably!
Something to think about.
Good luck in your endeavors.
©Copyright 2001 by Huey C. Walsh
All rights reserved. Printed in the United States of America. Except as
permitted under the United States Copyright Act of 1976, no part of this
publication may be reproduced or distributed in any form or by any means
without the prior written permission of the author.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter. It is understood that the author is not
rendering legal, accounting or other professional advice. If legal advice is
needed, seek the services of a professional specializing in that area.
The author has used his best efforts in producing this information and makes
no warranty of any kind, expressed or implied, with regard to the suggestions
contained in the manual. He also makes no guarantees of your financial
success and shall not be liable in the event of any incidental or consequential
damages in connection with the use of the materials in this manual.
Special Report #1
Experience The Thrill of Condo Ownership!
One thing that most people desire is to be able to enjoy leisure
time away from their normal routine.
And to able to enjoy quality time with their families.
One of the best ways to accomplish this is to have a resort
condo at which to spend time away from the hustle and hustle.
But as most people have realized condos are very expensive.
So, What to do?
Forget about enjoying a condo? Rent one? Or join a time share
organization?
Many people choose to just forget about it and let time pass
them by. And believe me, it will!
But you don’t have to let time go by without enjoying one. You
could rent one, but most people won’t put the effort into setting aside the
time and money to rent one. They talk about it but never go ahead and do it.
The other possibility is that they could invest in a time-share and
have the one week per year use of a unit. However a majority of people
decide not to become involved due to the huge number of families using the
unit each year. Plus all the various costs involved.
MODIFIED TIME SHARE
A great method to really enjoy a picturesque resort condo is to
put together a modified time-share!
How about being one of a handful of families that owns a beach
condo, or a mountain unit, or both?
It’s possible and is a great way of enjoying the luxuries of a
fantastic family get-a-way...a modified time-share!
A modified time-share can provide two large benefits. The
biggest advantage is that first, it can provide the means for a family to be
able to afford ownership of a condo.
And second, it can cause the families to go ahead and take the
time off to enjoy a vacation.
Wouldn’t it be nice to spend “quality time” with your family every
few weeks without having to worry about the expense!
Sometimes we postpone vacations for one reason or the other.
But with a luxurious condo waiting on us, we have a tendency to use it! We
fell guilty if we don’t use it. Which is great as we force ourselves to use it
and consequently enjoy more leisure time.
An advantage of a modified time-share is that there can be a
small number of owners of the unit but still cause the condo to be
affordable.
With a small number of families involved, the unit does not
experience the wear and tear of constant use. Plus the families can
communicate and trade time slots with each other.
YOUR CONTRIBUTIONS
The big advantage to yourself in organizing a modified timeshare is that it can be arranged so that it doesn’t cost you any money!
You can get a group together and divide up the costs, with your
contributions being;
Coming up with the concept.
•
Putting together the organization.
•
Selecting a unit.
•
Serving as manager or overseer of the organization and condo
•
unit.
And you and your family get to enjoy the condo because you
went to the trouble to put the organization together.
share!
So, that is the basic concept...put together a modified time-
Now how do you do that?
THE ORGANIZATION
First, you must decide on the area that you desire to own a
condo...either a beach or mountain resort or perhaps a golfing community.
Then you will have to visit the area to select a unit.
To make it easy to get a small group of families together, you
should select an area that is relatively close to a couple of large cities, say
2-3 hours driving time.
If you are arranging a group for an expensive condo, you could
expect that type party could afford to fly to the condo area so it could be
further away.
However, if you were to select an area within 2-3 hours driving
time you would probably be able to locate more interested families. You may
find enough for 2 or 3 condo units!
Once you have decided on the area and type condo unit you want
for your first endeavor, you must decide on a specific unit.
As you decide on the unit, you will need to sign a contract and
place a binder deposit with the purchase agreement. It would be to your
advantage to extend the closing date as much as possible, such as a 3-5
month closing. Or even a 6 months closing if the seller will go along with it.
Of course, it will depend on how fast the particular units are selling and how
anxious the seller is. BUT, extend the closing date!
Usually the binder deposit can be as low as $500 to $1,000 but
may be higher, but this can be recovered as your organization closes on the
purchase.
Of course, now you need to decide on the number of families
you want in your organization so that the individual contributions can be
decided.
And you will have to decide whether your group will pay cash for
the unit or finance it with a mortgage.
If it is a cash transaction, each family will have to produce their
portion of the total costs at the closing.
If it is to be a financed arrangement, contributions will still have
to be produced by the closing in order to cover the setup and closing costs.
BASIC STRUCTURE
So, some very important decisions will have to be made by
yourself in a addition to the area and specific unit, and they are...
How many families will be involved?
•
Will the group pay cash for the unit?
•
Will the group finance the purchase with a mortgage?
•
There are two ways to analyze this. One is that the various
families will each arrange to have their share of the total costs at the
closing and thus complete a cash transaction.
Or arrange for the down payment to be collected from the
families prior to the closing and put a mortgage in place.
MANAGER
The best arrangement for yourself as manager, would be to pay
the unit off totally with a cash transaction so that there is no worry of
collecting and making the mortgage payments each month.
However, it may be easier to get a group of families together
depending on the income level you are seeking, if the purchase is to be
financed.
If it is financed, you or your spouse will have to collect the
monthly mortgage payments, as well as the condo fees.
An arrangement can be made so that you collect the monthly
payments and condo fee payments on a quarterly, semi-annual or annual
basis to reduce the effort required.
If you establish an organization that pays cash for a unit, should
a family not have the cash, they can obtain it by some other means. If they
have to borrow it, they would make their own payments and you would not
have to bother with it.
CONDO UTILIZATION
An important decision will have to be made as to the number of
families involved. The more families involved, the cheaper it will be for
everyone and thus the easier it will be to find interested parties. However,
you will have to find more families.
There are 13 weeks in each quarter (13x4=52), so if you were to
put together an organization of 12 families, plus yourself, each family would
have one week per quarter use of the unit.
Or, if you wanted less families say, 6 or 7, then basically it
would work out as 2 weeks each quarter.
Once I put together a modified time-share with a six families,
(all friends) and each family had use of the unit a great deal. But each
family could loan or rent out the unit when it was their designated time and
they weren’t going to use it themselves. We also had the flexibility of
calling one another and trading time slots as the need arose.
Each of the families came up with their share of the total cost
and the unit was paid for. My wife and I served as the managers of the unit
and took care of getting the unit set up initially and then took care of it.
It was fun to set the unit up initially as we selected the
furniture and other furnishings. The unit has three bedroom plus a loft and
is a beautiful beach condo unit.
NUMBER OF FAMILIES
Should you decide to use several families, the costs will be less
and it might be easier to get a family interested but of course, you will have
to go to the trouble to get more families involved.
Personally I think that if you are putting together an
organization made up of friends and other family members, I would use 7 or
13 families and each one would have one or two weeks use of the unit each
quarter.
If you are using friends and family members they may want to
limit the number of families in the organization so that the unit would suffer
less wear and tear.
Actually more than one week per quarter causes most families a
great deal of difficulty utilizing their time slots. But of course, they could
loan or rent it out.
I would say that it would be best to loan it out as it would be
loaned to friends and family members and they would take care of it. If it
were rented out occasionally the renters probably wouldn’t take as good
care of it.
You have to make a decision as to the number of families in your
group. As you are deciding, you will probably be guided by the total expense
of the unit.
YOUR EFFORTS
As you are setting up the organization you will incur expenses
(which can be recovered), that will ultimately be paid by the other families
on a pro rata basis.
Since you are setting up the organization you can make the
decisions on the expense and whether you recover your set up expenses or
let them be part of your contribution.
Since it requires a great deal of effort to set up and maintain an
organization and you certainly can justify your contribution by those
efforts.
When you start your efforts you will need to visit a real estate
attorney to discuss your plans. The attorney will be able to give you advice
to help with your decisions on how to structure your group.
OWNERSHIP
There are several ways the unit can be owned. It can be owned
by a corporation, limited partnership or just as a group of families all on the
deed.
With a corporation or partnership the title would be in the name
of the corporation or partnership. If neither of those vehicles were used,
all the owners would be on the deed as joint tenants.
More on ownership later.
START UP COSTS
The real estate attorney you visited would probably conduct the
closing of the purchase. He or she will be able to provide you with
estimated costs of setting up the organization and to complete the closing.
There are many costs associated with a real estate closing such as title
insurance, doc stamps, recording fees, etc.
Plus other expenses such as insurance and tax considerations. It
is extremely important that you get all the estimated expenses together so
that they can be covered by the partner contributions. (Always refer to the
other members as “Partners” and not “Investors”.)
Some of the expenses that will have to be covered are;
•
Your visits to select the unit
•
Legal advice and services
•
Binder deposits on the condo
•
Advertising costs
•
Closing costs
•
Furnishings
If you are purchasing a preowned unit it should be furnished.
You would have to decide what furnishings would have to be replaced and
the estimated costs.
Let’s assume that you found a condo that you liked for $190,000
which would give everyone a chance to get away from the rat race but
would not break any family budget.
So, lets say the total expenses to set up the organization would be;
Two visits to the condo resort at $250 each------------------$
500
Binder deposit----------------------------------------------------1,000
Attorney fees for consultations and setting up corporation-----1,500
Advertising---------------------------------------------------------500
Closing costs (4% of $190,00)---------------------------------- 7,600
Furnishings-------------------------------------------------------21,000
Total------------------------------------------------------$32,100
$32,100 divided by 12 (not 13), would be about $2,700, per family for set up
costs, closing costs and furnishings.
Until you get the organization set up and the closing completed,
you would need about; $500 for resort visits, $500 for attorney visits and
$500 for advertising, or $1,500, which you could recover at the closing.
CASH TRANSACTION
Now, with a unit cost of $190,000, the total contribution per
family to completely pay the unit off would be $15,800 per family, (12
families). Your contribution would be your efforts as explained earlier.
Plus $2,700 for organizational set up would put the cost per
family at $18,500 to completely pay for the unit leaving it free and clear of
any mortgage. This investment would be for 1/13th ownership and four
weeks use per year forever and ever.
Each family could come up with their share and if they needed
to borrow all of it from a bank at say, 8% for 10 years their payments would
be about $225 per month. Of course, after 10 years the payments would
stop.
With any condo unit there are items that must be paid such as
taxes, insurance and condo fees, in addition to the monthly utilities which
will be discussed later.
If the taxes were $1,200 per year and insurance $1,000 per
year, that would be $2,200 yearly for the unit. Plus the condo fee of
approximately $100 per month would be $1,200 per year putting the total
annual expenses at $3,400 for the condo. Divided by 12 would be about
$280 per family per year, or $23 per month per family for the taxes,
insurance and condo fees.
FINANCED TRANSACTION
OK, let’s look at a financed arrangement. If 90% financing was
obtained for the $190,000 condo, the down payment would be $19,000 or
$1,600 per family. 95% and even 100% financing can be obtained now days.
Financing the balance of $171,000 for 30 years at 7.5% interest
would require payments without tax and insurance, of about $1,200 per
month, which would be $100 per month per family. Or $1,200 per year per
family. Of course, taxes, insurance and condo fees would have to be added
each month.
So, $1,200 per year for mortgage payments plus $280 for
taxes, insurance and condo fees would be about $1,500 per year total
contribution for each of the 12 partners. Or, $375 per quarter, or $125 per
month.
With a financed arrangement, I don’t think you would want to
collect the partner’s contributions monthly but would probably collect them
at least quarterly or maybe semi-annually or annually.
MONTHLY COSTS
There are other costs to consider also. Those are the utilities
and the cost of replacement of the furnishings as they wear. The only way
to avoid
arguments would be to assess, say $20 per month per family or $240 per
year for a furnishing escrow to be used as needed. That would provide for
about $3,000 per year for condo furnishing replacements.
The monthly utilities would have to be estimated on a monthly basis and
divided by 12. Estimates would be;
Electrical power--------------------------------------------------$200
Water and sewer----------------------------------------------------50
Basic phone service---------------------------------------------------40
Cable------------------------------------------------------------------50
Garbage---------------------------------------------------------------20
Total----------------------------------------------------------$360
So, $360 per year per family or $30 per month per family.
THE BOTTOM LINE
Now, let’s put it all together.
First, we will look at a situation where the condo is paid off at
the closing.
As noted earlier, the contributions to get the organization set
up and the unit closed on would be about $2,700, and $15,800 to pay it off.
Or a total of $18,500 per family (12 families).
Then the annual costs per family (12) would be as follows:
Taxes and Insurance---------------------------------------------$285
Furnishing Escrow--------------------------------------------------240
Utilities--------------------------------------------------------------360
Total----------------------------------------------------------$885
About $900 per year or $75 per month.
Now, let’s look at a financed arrangement.
First, $2,700 per family would be necessary to get the
organization set up and the closing accomplished, as previously discussed.
And the down payment share per family would be $1,600.
So, with the unit financed at 90%, each family would have to
come up with about $4,300 to cover the set up costs, down payment and
closing costs.
Plus; $100 monthly for the mortgage payment.
20 monthly for furnishing escrow.
30 monthly for utilities.
25 monthly for taxes, insurance and condo fee.
Total $175 monthly per family.
So, using 13 families, with your contributions being your efforts
as discussed earlier, and dividing all the expenses by 12 looks like this;
Set up, close, and pay the unit off--------$18,500 and $75
monthly.
Set up, close, and finance 90%-------------$4,300 and $175
monthly.
If you shop, you could probably find 100% financing but it would
be a little more expensive, maybe 8.5% interest. The payments on $190,000
at 8.5% at 30 years would be $1,460 per month or $122 per family.
So, the initial contributions would only be $2,700.
Plus $122 monthly for the mortgage payment.
20 monthly for furnishing escrow.
30 monthly for utilities.
25 monthly for taxes, insurance and condo fee.
Total $197 monthly per family.
monthly
Set up, close and finance 100%------------$2,700 and $197
TYPES OF OWNERSHIP
As mentioned earlier, the condo unit could be owned by Joint
Tenancy, by a Corporation, or a Partnership.
If the organizational structure is as Joint Tenancy, the owners
to be on the deed as joint tenants with each owner having an undivided equal
interest in the condo and share in the financial obligations of the
organization.
If a Corporation is to be used then everyone would be issued
shares of stock, and when an owner decided to sell their share, they could
simply sell their stock in the corporation.
Also if a Limited Partnership is used, the owners could sell their
percentage in the partnership.
Probably the easiest method of ownership would be to use a
Limited Partnership. With a Limited Partnership, the partners are only liable
to the extent of their contributions, while the General Partner has unlimited
liability. The General Partner, (or General Partners), is the only one who
makes the decisions for the partnership. (You could be the General Partner
and serve as manager of the organization and buy insurance to cover any
liability.)
With a Corporation, each owner has shares of stock in the
corporation and should they decide to sell their interest, they simply sell
their shares. It might be a good idea to put the “right of first refusal” in the
by laws. That way the other owners could have the first opportunity to
purchase the stock before it was offered to the public.
The attorney would produce Articles of Incorporation, Bylaws
and Shareholders Agreement and the corporation would be managed by a
Board of Directors in accordance with the Bylaws.
Everyone could be a member of the board with the officers of
the corporation elected by the board with everyone having one vote unless
they had bought more than one time slot. The officers would be the
President, Vice-President and Secretary-Treasury.
The Bylaws would state what percentage of the total votes
would have to be cast for approval of decisions by the corporation. Annual
stockholders meetings would need to be conducted with all owners invited.
The attorney could put the language in the shareholders
agreement as to how the corporation would handle a situation where one or
more of the owners did not pay their monthly or annual contributions to
meet the organization obligations. The Board of Directors can vote to sell
the shares of any shareholder who does not pay their assessments. The
corporation should keep funds set aside to meet monthly obligations should
an owner fall be behind in their payments.
You should confer with a CPA or tax attorney as you are setting
up your organization to make sure you receive the proper tax treatment. If
you use a corporation, you might be better off to term your corporation as
a “non profit” corporation, but you will need proper tax advice on that. The
corporation will not make a profit and its use is strictly for ownership of the
unit.
You would probably elect a Sub Chapter S corporation and some
of the expense of maintaining a second home could possibility become a tax
deduction for your partners. That would be great to have a second home in
a resort area and have a tax deduction.
I would not call the families “investors” , because you don’t want
any problems selling securities. I would refer to them as partners even
though they would ultimately be stockholders in a corporation that has been
put together simply as a vehicle for condo ownership.
You really need to rely on a real estate attorney to help you get
your organization set up properly.
CONDO ENJOYMENT
This endeavor could certainly be fun as my wife really enjoyed
decorating new condos with new furnishings, etc. It’s a real thrill to be able
to visit really nice condos...at no expense to yourself!
There is no reason that you can’t arrange more than one
modified time share. How would you like to be part owner in a beach resort
condo as well as a mountain or golf community unit? Or maybe a ski resort
condo.
You would have more use than you could possible utilize. So, you
could rent you time slots to others. Let’s say that you have four units in
different locations with one week use per quarter, so four weeks each
quarter times $800 would be $3,200 per quarter or about $1,100 per month
increase in your income.
SCHEDULING
As Manager you would probably be elected President of the
corporation, if one is used, or the General Partner if it’s a partnership, and
you would arrange the schedule for the owners use. If you have a total of
13 families, each one would have one week per quarter and would rotate.
If each new year you constantly moved the families up one
week, that would cause each family to be able to use the condo at different
times and not have one or more families also having the use on the same
holidays. Each family would have the other families schedule and phone
number and could trade time occasionally.
FINDING YOUR PARTNERS
When you start to locate families that are interested in ownership in a
condo, you might look first to other family members, friends and coworkers.
This would make it easier to put together the group.
Talk to them and try to keep your organization with that group
as it will make your efforts easier.
I talked to friends and also I put pictures up on the company
bulletin boards. I put pictures on 3x5 cards, along with an explanation, and
placed them on the company bulletin boards. Also a friend that had decided
to become one of the owners, put some pictures on his company boards. A
visit could be made to various office buildings, churches, etc. and cards and
pictures placed on the boards.
If you place ads in the newspaper in cities within 2-3 hours
driving time of the condo unit that you have selected, you should get
response. The ads could be simple such as; “Become part owner of a
beautiful condo at ----, private families, not a time share company, very
affordable, call ----.”
It seems that the short simple ads work the best. If you have
trouble deciding on which section of the classifieds to use to get noticed,
you might opt for a small display ad in the front section of the newspaper.
That way someone might see it that would not have been specifically looking
for a condo, probably because they didn’t think they could afford one. It
would get a lot of attention.
Be prepared to provide any interested party an information
packet. Providing them with a map to the area, brochures from the complex
and floor plans of the unit would be very important. And amateur pictures
that you take walking around the complex. Also, you might go to a local
airport and have a pilot fly you over the resort while you take aerial
pictures. This would be very effective in getting the prospects attention and
interest, especially if it is a beach resort.
Locating the families for your condo ownership should be
relatively easy but make sure you have consulted an attorney because you
don’t want to get into trouble selling corporate securities. You just want to
locate co-owners in a condo unit.
TEST THE WATERS
You could test the waters for interest in the concept and condo
location before you sign a contract for the purchase of the unit. You could
accomplish your planning efforts up to the point of signing a contract and
then talk to your friends and relatives or place a couple of ads to see what
kind of response you get.
Then you could continue or back out, on the purchase of the unit
you had decided on. The price or location of the condo unit could be great
and you get good response or it could be wrong and get poor response. But
this would let you know early.
When you do sign a contract on a unit and place a binder deposit
on it, make sure you have some escape clauses to allow you to get out of it
in case you aren’t successful in getting the required number of families and
funds together. Something like; “sale and purchase contingent on your being
able to arrange financing by such and such date”, or “subject to your
attorney’s approval.”
Make sure you have an arrangement with a real estate attorney
or a title company so that your friends deposits would be placed in escrow
until the closing. Also you would need to provide the attorney’s name,
address, etc. to your friends so that they would feel better about the
entire arrangement.
RECAP
Items to consider are;
Decide on an area and make a couple of visits to locate an acceptable unit.
Visit a real estate attorney and discuss the preliminary arrangement.
Test the waters on interest levels.
Sign a contract on the unit, with escape clauses.
Have an attorney establish a corporation or partnership.
Locate partners.
Complete closing.
Obtain insurance.
Furnish unit.
Establish schedule for time use by the families.
ENJOY THE CONDO!
Special Report #2
Build Your Own Dream Home, or Become a Builder With
Very Little Experience or Resources!
Being able to serve as the contractor , or “coordinator” for the
construction of your own home can provide a means of saving a considerable
sum. Of course if you have the ability, knowledge and time to physically
construct the house, the savings can be even more impressive.
However, most people do not possess the abilities or have the spare time to
actually construct their own house so the use of sub-contractors is the
norm.
In today’s construction industry the sub-contractors have become very
specialized and very professional, and a “builder” is actually a coordinator of
sub-contractors.
There is of course, a certain sequence of events that must be accomplished
in order to construct a building. Basically the sequence of events is the same
regardless of the type building.
For any new construction, you will first need to arrange a building site and
have the necessary blue prints or architect’s drawings completed.
The physical construction of a house consists basically of the following;
1. Survey or lay-out of the foundation.
2. Construction of the foundation.
3. Initial plumbing structure is put in place.
4. Concrete is poured forming the floor.
5. Basic framework is erected along the installation of the doors and
windows.
6. Heating and air conditioning ducts are installed.
7. Initial electrical wiring is accomplished.
8. Insulation is placed in the walls and ceilings.
9. Drywall or paneling is installed and finished.
10. Kitchen cabinets and bathroom vanities are built and put in place.
11. Exterior siding or brick work is completed.
12. Roof covering is installed.
13. Trim work and painting is completed.
14. Electrical, plumbing and heating and air conditioning installations
completed.
15. Floor covering is put in place.
16. Landscaping accomplished.
In order to ensure that a house is built properly, the local county employees
inspectors to inspect the construction in various stages.
And if a construction loan is in place, the lender will normally employ someone such
as an architect to inspect at various stages.
For the construction of a house, two loans are normally utilized. One is a
construction loan which is short term, normally six months, to be used to construct
the house, while the other is a permanent loan of 20 to 30 years.
After an owner qualifies for a permanent loan, they can then arrange a construction
loan using the permanent commitment. Some lending institutions have permanent
construction loans whereas the construction loan converts to a permanent loan when
the house is finished thereby saving some closing costs.
If an owner has the funds necessary to pay for the materials as the house is being
built, there is no need for a construction loan. But usually a construction loan is used
and funds are disbursed as various stages of the building are completed.
Normally a portion of the construction loan, (a “draw”), is made when the foundation
is completed and another after the framing, etc. The lender will provide the
borrower with a schedule of what must be in place in order to receive disbursements
during the construction.
The builder or owner receives funds during construction which is used to pay the
sub-contractors and material suppliers. Before construction begins, the owner or
builder must establish credit accounts at several material suppliers, such as
concrete suppliers and lumber and building supplies.
The construction of the house is accomplished on a credit basis with the owner
paying the suppliers and sub-contractors out of the construction loan disbursements,
or draws. So basically, if a person has a decent credit rating, they can obtain a
commitment for a permanent loan, put in effect a construction loan, establish credit
accounts and provide for the financial requirements for the construction of their
house.
Now for the physical aspects of the construction. Serving as the contractor or
coordinator is not that difficult but it is time consuming and has it’s frustrations.
Frustrations such as when one sub does not show up to accomplish his work as
scheduled, and screwing up the work scheduled by 2 or 3 other subs which is
predicated on the first one finishing his work. There are frustrations but overall
the savings are worth the effort.
An obstacle that must be overcome early in your planning is to locate a lender that
will go along with you serving as your own contractor with no previous experience.
You may have to shop around but you should find one who will agree to that because
the lender knows that their inspector as well as the county inspector will ensure
that the house is constructed properly, regardless of your construction knowledge.
So you locate a banker who will allow you to serve as your own contractor and that
is one obstacle out of the way. Now you just need to locate the sub-contractors so
that you can “coordinate”.
Sub-contractors for the various phases can be found by reading newspaper ads,
reviewing the yellow pages, by asking suppliers and bankers for names and phone
numbers of subs they are familiar with and by visiting building sites. As you pass a
house under construction, stop and talk with the subs and possibly the builder. A list
of competent subs can be put together rather quickly.
You could stop at a site at which workers were installing a foundation and show
them your drawings and ask what part of your job could they do for you and also
give you an estimate. Then locate electricians, plumbers, etc. and ask them the same
thing.
As you establish a list of sub-contractors and learn what they can do for you, as
well as what they will charge, you are basically ready to start construction.
A recommendation is to visit the county inspector’s office and introduce yourself to
the building inspector, electrical inspector, etc., and tell them that you might be
calling them occasionally to ask a question about the construction of your house. This
will really impress them as most people do not ask the inspectors to come out to look
at questionable areas. The probably will be happy to help you.
So you can rely on the inspectors, friends with construction knowledge, other
builders, sub-contractors and anyone that might be of help to you, and you will get
your house built!
Now we will discuss how you can accomplish all this even if you don’t have tons of
money available, but you have an average credit rating.
Of course you will need a lot for a building site. If you have the funds to buy one,
that is great. But if you don’t, there are a couple of options available. One is to talk
to the developer of sub-division lots and ask him if he will “subordinate” a lot
purchase for you.
What this means is that for about 10% of the price of the lot, the developer will
agree to go to a subordinate or second position behind the construction loan
mortgage. He will receive the remaining 90% balance when your permanent loan is
put in effect.
An advantage to building your own house is that you may be able to provide
complete financing of your home and lot with very little funds required upfront.
Let’s say that your home appraised at $150,000 and your lot at $30,000, so your
house and lot would be $180,000. With today’s liberal lending, you could obtain a
loan for 80-100%, with 80% of $180,000 being $144,000 and 90% being
$162,000.
We will assume that you can build your house for 75% of the appraisal or 75% or
$150,000 would be $112,500 and with your lot costing $30,000 that would total
$142,500.
So, you find a building site you like and get the developer to agree to subordinate it
for you. Then get qualified for a permanent loan for 80-90% of the appraised value,
arrange a construction loan and before long you will have a new home with a sizeable
equity in it and all accomplished with very little upfront funds.
There are several books available which go into complete detail on how a house is
built and they can be referenced. Also you should seek professional advice prior to
starting your efforts to construct your house.
Special Report #3
Become Wealthy Working With Houses That Are In
Foreclosure!
A foreclosure is the process by which a property which has been pledged to secure
a debt, is sold to satisfy the debt. A large percentage of foreclosures involve houses
and this is the area we will concentrate on.
The phases of the foreclosure action are as follows. The pre-foreclosure starts
when a person misses a mortgage payment that he has agreed upon, and is said to be
in default. At this point, the lender will send a letter asking for payment. When a
second payment is missed, another letter will be sent out which has a stronger
message, and the loan will normally be turned over to the lender’s collection
department. Should a third payment be missed, the lender will normally start a
foreclosure.
If the loan remains in arrear, the lender’s attorney will file court papers in the
states which use mortgages, and advertise for the sale of the property. The sale of
the property is completed by an auction conducted at the court house steps, at the
property, or at an auctioneer’s office.
The borrower can normally make up the payments and reinstate the loan to prevent
the foreclosure right up until the date of the auction. Or declare bankruptcy.
Lenders don’t usually want to bother with a foreclosure and would prefer that the
loan be brought current.
So, sometimes you can locate a property which is in foreclosure, bring the payments
current, assume the loan and become owner of a house with a sizeable equity in it.
Working with houses in foreclosure can be very profitable and it can be rewarding
in that you can help people out of stressful situations. Nothing could be more
stressful for a person than losing their house and at the same time, really damaging
their credit rating.
By locating a house in default and preventing a foreclosure, you can possibly make a
nice profit, and by stopping the foreclosure, prevent the damage to the owner’s
credit rating.
A technique that has been explained at some expensive seminars is to locate houses
in foreclosure and go visit the owners. Explain that you will take the house and it’s
financial and physical liabilities off their hands and prevent the foreclosure. And
that you will give them $500-$1,000 for moving expenses. By assuming the mortgage
and bringing it current, the foreclosure will be prevented and their credit rating
protected.
You can imagine that when you contact the owners, they probably won’t be too happy
to see you, since they are for the most part in a desperate situation. But you could
explain to them that you can prevent them from really damaging their credit rating.
Of course, you have to do your homework to determine if the situation is worth it
financially for you to become involved. You would need to visit the neighborhood and
get an impression of the value of the house. This would help you decide if you would
use the house as a primary residence, a rental or a resale. And there are other
investigations you must do which will be discussed later.
And of course, you should seek proper legal and professional advice as you start
your activities so that you can conduct business in a professional manner.
Working with foreclosures can provide an impressive income by locating houses with
large equities and reselling them. Also accumulating several attractive rentals for
the income and depreciation, can be very beneficial. However, some purchases will
require the investment of several thousand dollars.
When you have resold several houses with large equities, you could accumulate
enough capital to start retaining ownership of more of them to use as rentals. Each
purchase will have to be analyzed carefully to ensure success in the endeavors. Once
you have located a property in foreclosure, which will be explained later, through
analysis is required.
There are several items recorded at the court house in the public records,
pertaining to each property. Deeds, mortgages, (or in some states , trust deeds),
liens, judgements and sometimes promissory notes, are recorded at the county court
house deed room.
A deed is the instrument used to transfer title of a property from one person to
another, where a mortgage is an instrument used by which the buyer pledges the
property as collateral for a loan. Trust deeds are similar to mortgages except for
the rights they offer the lenders during a foreclosure. A promissory note spells out
the terms and conditions of the repayment and makes the borrower personally
responsible for the loan. And a lien is a claim against a property which is used as
collateral for a loan and some common ones are for taxes or judgements.
Prior to purchasing any property, the public records should be investigated to
determine the general “health” of a property. A property may have several
mortgages and liens filed against it and you would certainly want to have this
information. You could visit the county deed room and research the records or if you
are unfamiliar or feel more comfortable, have a title company do a search for you.
Don’t ever take the owner’s word for the obligations against a property! Research
the public records and be well informed.
Each mortgage or trust deed will have to be investigated to determine the balance
remaining, payment amount, interest rate, how many payments are past due and if the
lender had included a “due on sale” clause.
And it is very important to determine which mortgage is the most senior and which
ones are the junior ones. This is determined by the date on which each was recorded,
with the one with the earliest date being the senior, or first mortgage. And you will
need to know which mortgage is being foreclosed on.
If the first mortgage is being foreclosed on and it goes to an auction, the proceeds
of the sale are applied to the first mortgage and anything remaining will be applied
to the junior mortgages. So on occasion, a purchase can be made with a bid of only
enough to cover the first mortgage, even though there may be several mortgages
recorded.
If a junior mortgage, such as the second mortgage is being foreclosed, the minimum
bid would normally be for enough to cover the second as well as the first mortgage,
but could still provide for a nice profit margin.
Each situation will have to be looked at carefully and you will have to determine the
estimated market value of the property as well as the balance on the mortgages and
thus the expected minimum bid.
The combined total of the mortgages on the house should not exceed 70% of the
market value! 50-60% would be even better! But don’t go over 70%.
Normally there will be some repairs necessary on the house and this can be
expensive. So you have to decide if there is enough equity in the property minus the
estimated repairs for you to go to the trouble of acquiring it.
To determine the market value of a property you will probably need the services of
an appraiser or the opinion of a very experienced realtor. Normally a realtor that is
active in your area and market range can provide a closely accurate estimate of the
market value.
So you’ve analyzed things and decided that if you could assume the payments, the
property would produce a significant profit. This is the point that you talk to the
owners about bringing the payments current and assuming their loan. You wold be
getting them out of a stressful situation and providing funds for moving expenses.
Of course, as you can see, this process can require that you have several thousand
dollars of operating capital. The first couple of transactions may be difficult but as
you stay involved with the business, you can build an operation reserve.
Normally the easiest and most profitable situation would be to obtain ownership of
the property while it is still in the pre foreclosure phase prior to the auction.
Especially if you can assume the present loan.
As you are investigating a property, contact the present mortgage holder and ask if
you can assume the loan. And if they will provide you with funds to make repairs. If
they will accommodate you it makes the entire process easier. That is, if you have
the necessary funds available to bring the mortgage and any other obligation
current, such as taxes.
If the lender will not allow you to assume the loan, you will need to investigate a new
loan and make sure you have this worked out before you agree to buy a property or
before you bid on one at an auction.
To ensure that the bidders are serious, lenders will require a deposit of in the form
of cash or cashier check be made prior to the auction. Usually you have to settle
within 30 days on a purchase, so make sure you have the funds arranged.
So you become involved in the bidding process with your predetermined high bid in
mind. Don’t get caught up in the bidding frenzy and exceed the high bid you have
established. Remember, you will probably have repair costs and other expenses.
If you are the successful bidder, you provide the financing or assume the loan and
complete the settlement upon which you will receive a deed to the property.
Hopefully the prior owners are out of the house but if they aren’t, you may have to
go through an eviction process. When the previous owners have vacated, you can then
complete the repairs and either resell the house or use it as a primary residence or
rental unit.
Locating property in foreclosure or in pre-foreclosure will require some effort on
your part.
There are several ways of learning of property in financial trouble which could be
of interest to you. Notice the newspaper for any ads of financial distressed
property or any foreclosure activity. The court house docket will tell you of any
impending activity and you can review the docket and obtain the property owner’s
name, address and phone number.
Also you can look up the property owner’s name and address in the Grantor’s Index.
This will list the deed book and page number of any impending action. And you can
determine what mortgages are recorded and the original loan amount.
Contact banks, credit unions, mortgage companies, insurance companies and mortgage
brokers and ask for the department that handles property in foreclosure or
property that has already been foreclosed on. Normally if the bids at the auction
are not high enough, the lender will simply take the property back and they are
interested in getting their investment back or at least of sizable portion of it. So,
it’s possible to find a house that the bank has taken back and which the lender may
be in the mood to make a good deal of the property just to get rid of it as they are
not in the property management business.
And contact Realtors as they often hear of someone in financial straits and might be
in the pre-foreclosure stage. Plus you could call real estate attorneys, accountants
or land surveyors and engineers. Or talk to your mail carrier or newspaper delivery
person for information on houses that are vacant or if they know of anyone that
might need your assistance in avoiding a foreclosure.
If you locate a house that is vacant and it appears that the owners have abandoned
it, this may be just what you are looking for. Go to the trouble of locating the
owners, which would start with the neighbors. They may be able to tell you where
the owners are or give you information about their financial situation.
Plus advertisements can be placed in newspapers and local throw-outs. Advertise
that you will provide relief from foreclosure or that you buy houses.
Locating and investing in distressed property can be profitable and rewarding for
you. Of course there is effort involved in the process. First try to find property
that is in pre-foreclosure, throughly analyze the obligations against it, determine
the market value and either pursue it or forget about it.
And don’t fall in love with any piece of real estate and keep your bid or investment
to 70% of the market value. But don’t try to squeeze every dime out of a property
owner and make their situation more distressful.
Consider this activity as a business and conduct yourself accordingly. And always
seek professional advice when unsure.