Dean Graziosi Real Estate Blog

When investing in a home that is falls under the authority of a Home Owners Association, it is sometimes difficult to know what you are getting into in the deal. The HOA’s tend to have an air of mystery about them, and it can be tough to break through to get to the real facts. Before you invest, it is important to understand why it matters and what you can do.

Why It Matters

It is important to investigate HOA-related investment deals thoroughly for a number of reasons.  The first is that the HOA will not automatically tell you the things you need to know to make an informed decision. After the sale, you will find out everything you wish you had known before the sale.

For instance, there may be costs that the owner of a property is required to share with the other members of the Home Owners Association. These costs may have nothing at all to do with the property you are investing in, but they affect you because you become liable for a share of them the moment you sign that contract.

If a new clubhouse is being put in, a rundown home is being taken over and refurbished or the Home Owner’s Association has run into some legal fees, you might be on the hook for a part of it. The HOA is not likely to be forthcoming with this information, but they will certainly tell you once you are locked into ownership. Then, they may require you to pay these costs before you sell the home to someone else.

What You Can Do

Start each investment in an HOA home with a fact-finding mission. Ask directly for information from the HOA administrators. Request minutes to HOA meetings so that you will know the current problems facing the group. You can also ask the homeowner if you are buying from an individual, or ask neighbors near the home what is going on in the HOA.

Do your due diligence in terms of the HOA financials as well. Try to get a look at the monthly financial reports, recent annual budgets, information on overdue assessments, and any long-term plan that is in place for the HOA’s financial future. Find out if there is any legal trouble in the HOA. Finally, get a copy of the rules and regulations the Association requires its members to sign and follow. With all this information, you will have a better idea of the financial situation and demands in the HOA where the property you are interested in is located.

At the end of this search of the facts, you can assess the possibility that you might have to pay high costs between the time you buy and sell again. You will have a better idea of whether the property will be an outstanding investment, a mediocre one, or a downright loser. It is well worth the time and effort to learn all you can in this real estate investing situation.

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In the past 100 years the housing industry, despite its short falls, have exploded. Since the early 1900’s, the housing industry has been building at record pace. To keep up with that frantic pace, certain materials were developed and put into use before a proper analysis could be conducted. Below are some of the most important factors to look for and know about before buying any real estate property, home or otherwise.

Man Made Hazards

Asbestos

The most famous of the man made materials that have been used, only to be recalled and banned across the country, is asbestos. It is a mineral that was manufactured as the primary ingredient used to make insulation. It was considered one of the great discoveries, until it turned deadly. The mineral was used for wall, and water pipe insulation, ducts, floor tiles, and even exterior siding.

Asbestos has been the main cause for the sky-rocketing cases of mesothelioma, a very deadly form of lung cancer. The material tends to break into tiny breathable flakes that inevitably make their way in to the occupants lungs.

Formaldehyde

Formaldehyde is a gas used in building materials that can cause several medical conditions. Wheezing isn’t uncommon after exposure to formaldehyde, irritation to the eyes and skin is also common. Formaldehyde is responsible for the epidemic known as sick building syndrome, or SBS. It is an illness that is caused from lack of air flow and quality. Most people who suffer the symptoms of SBS feel fatigued, nauseous, they can get a headache, and develop an ole factory sensitivity to odors.

The main uses for formaldehyde lies with insulation. Extracts of formaldehyde have been used in the creation of residential and commercial real estate, mostly for electrical components.

Environmental Hazards for Real Estate Investors

Radon

Radon is, probably, the most dangerous of the hazards, simply because of its radioactive nature. Most home owners are unaware that radon is a radioactive gas trapped beneath the surface of the earth. It forces its way up through cracks and openings below the foundation of a building. If the house  or building is air tight, as many are, the radon can slowly build over time and fill the entire building.

The biggest danger related to radon gas is the fact that it’s radioactive. Lung cancer is radons most common side effect, caused from the gas mixing with oxygen. There are radon detection kits available to detect the levels of radon at your property.

Mold

Mold comes in multiple types and species. When there is moisture on food or any other organic substance, like wood, paper, or even leather, there is a good possibility for mold growth.

Mold growth damages what ever it grow on, weakening weight supporting beams, walls, ceiling and roofs. Mold damage can stop a property sale in its tracks, so be sure to have a professional do a thorough inspection to avoid any unpleasant surprises later on.

If the mold isn’t  found, or is purposely hidden, it can cause long term destruction to the property and cause a certain amount of damage to the buyers as well. Molds, very often, cause allergic reactions, asthma attacks and other medical problems to unsuspecting buyers, who later have sued the seller for liability, due to failure to disclose.

Be smart when you invest, inspect, inspect, inspect! Real estate agents, investors, or every day home buyers can use this information to make sure they’re not getting the short end of an unpleasant stick.

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The short sale investor needs to be more exacting and more committed than an individual who is acquiring a residence.  If you have had good luck buying low and selling high on your past residences, that has little bearing on your success as a short sale investor.  In other words, throw the amateur playbook aside and get serious about making money through your real estate investment.

Of course, you will need all the tools used by any business.  That means a business plan, a budget, a marketing plan and the right team.  If you are going to be investing in multiple properties, the more urgent these needs are.  If you intend to start slow and work your way into the business, then set your overall business plan accordingly.  You may want to do some projections for two, three, four or five years out so that you understand all the nuances of growing your investment business.

In any case, one of the first decisions you will need to make involves the use of a real estate agent.  If you get out and about at all, you know someone in the real estate business. That should have no bearing on your decision.

There are good short sale real estate agents and there are less than good short sale agents.  If you determine to add an agent to your team, the agent must be experienced, willing to wear more than one hat and someone you can communicate with comfortably.

Not all agents have taken advantage of the real estate short sale courses.  That should be a requirement for your team agent.  You should also ask for a list of short sale transactions the agent has successfully and unsuccessfully negotiated.

You need a strong negotiator and if the agent is not up to the task, you must sharpen your own negotiating skills.  The agent will serve other purposes, but ideally your long-term investment success depends on the ability of your agent to pull the pieces together.   

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There was a time, not very long ago, when home ownership and real estate ownership in general was a one-way ticket to increased equity.  As the recent recession has demonstrated, residential and commercial real estate ownership is no longer a guarantee of increased equity.  Real estate is a market and in any marketplace, prices and values go up and prices also go down.

Like every marketplace, real estate values are driven by supply and demand.  When supply is high, the real estate market is a buyer’s market.  When demand overshadows supply, the market is a seller’s market.

In the equity market, the demand for Goldman Sachs stock could be up when the overall market demand is down.  So, the price of Goldman Sachs stock is up.  Conversely, the demand for BP stock shares could be down even though the demand for the overall market is up.

In real estate, the demand for a property on Heavenly Way, the most popular address in the town of Stardom, could be up despite the overall downward trend for other properties in town.  In other words, location is still the name of the game in both the commercial and residential real estate markets.

Real estate investors are always aware of location.  In fact, location is one of the investor’s primary considerations.  Analyzing location does not mean exclusively evaluating current market conditions. 

For savvy long-term investors, location is more about the future than the present.  Knowing what factors might influence a location’s value in the future involves doing detailed research.  Experienced investors look at an area’s projected developments, plans for future highway development and even an assessment of local school systems.  Investors take pride in learning more about an area than many longtime local residents may know.

If you do not understand everything about a certain location, you are at the mercy of zoning boards, highway departments and other developers whose actions can adversely effect your investment.  In the long run, fully understanding what will or what will not happen to your location is your responsibility.  Do not entrust this information gathering process to anyone else. 

When you know everything about an area, you are empowered to invest.  In real estate investing, information is all-powerful and investors with local knowledge are well positioned to make profitable investments.

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