Precautions to take when investing out-of-state and sight unseen?

24 Replies

I am very new to real estate investing but have been diligently reading everything that I can here on BiggerPockets.  One thing that is holding me back is that I live in a high cost of living area so I've concluded that I'd have to buy out-of-state if I want to cash flow.  I know that you can still do your due diligence when investing out-of-state by going online and checking citydata forum, Zillow, and neighborhoodscout, to determine whether you want to invest there.  Are there any other sites you would use?

Another hang up is that I will likely buy it sight unseen.  I'm not sure if me actually seeing the property holds much value if I'm getting a professional inspector and an appraisal, but I can't help but get a sense of paranoia being that I won't physically see it and that I'd have to trust someone else's word.  Is there any other precautions to take?

One of the areas that I'm looking into is the Kansas City area, and I found a company called investmentscouts dot com (sorry not sure if I'm supposed to post links) and they appear to be an independent third-party which will check out the property giving you an overview of the condition and/or make sure the contractors are doing as they say (if you are rehabbing).  Has anyone heard of them and is their service something that is worthwhile?

Thanks!

I say trust no one!  There is to much money in the game to trust total strangers.  Trust can be slowly built with an entire team in an area and then I might consider buying sight unseen.  I strongly suggest investing in traveling to the area of interest.  Everytime you go you will learn more and more about the area and will make more and more contacts.  You also get a feel for the city and the people you are going to be working with. It is also the best part of investing....shopping.  It is crucial to establish a team on the ground in that area.  In my opinion the only way to do that is to get out there and meet these people in person and actually see the homes and areas.  Houses can easily look good on paper and through pictures and people can easily woo you over the phone.  If you actually go out there you will see the real deal.  Be careful!

No one has an incentive to make sure you're not getting screwed except you.  My husband and I have bought 3 rentals out of state (AZ and CO), and we went and looked at all of them during escrow to check them out ourselves.  An appraisal tells you exactly nothing.  An inspector will give you some info about the condition of some items, but they aren't going to list all of the little deferred maintenance issues that may exist (worn/scratched counter tops, chipped sinks, worn carpet, evidence of prior plumbing leaks in cabinets, etc.).  A lot of that stuff can add up to big bucks for you to take care of, so you definitely want to check out everything yourself.

 Yes make the trip to the area.  You can probably make contact with with a possible ground team.  I would imagine some BP members would be in the mix.  When you do find a property that interest you, you should get opinion found 2 or more of your ground team of the property and neighborhood.   This is your money and no one care as much about taking good care of it as you do.  Cash is king.  Do your due diligence. 

Also airfares are much cheaper when you make reservations two weeks or more in advance or more.  The farther out the cheaper.  

I enjoy working with out of town investors to help them find properties locally. I know the market very well and wouldn't present any properties about which I didn't feel good. Nevertheless, I would not feel comfortable with any client purchasing a property on my word alone, or that of an inspector and/or appraiser.

Ultimately it's your decision, your property, and your bank account on the line. It seems imprudent to me to spend $60,000 on a property without spending a few hundred dollars on a airline ticket to take a look at it personally.

@Andrew C.  I think it is too risky to buy a property out of state and sight unseen, especially for someone who just started in RE. 

Some of the BP podcasts talks about investing out of state. Check them out and you will learn a lot, good or bad...

Thanks for all your comments.  Would it make a difference if I was investing from a reputable turnkey company?  No doubt due diligence is very important when investing, but I still question if me personally seeing it is necessary.  While I know that photos and a video walk-through may not be an exact substitute for seeing it first hand, I think it's pretty close.  Especially if I also had an uninterested third-party provide me with those photos/videos as well as from the seller.

I think @Account Closed    makes a good point though that it probably is more wise to build trust with a team then consider buying sight unseen in the future. 

@Andrew C.  Nope!  Go see it.  You'll  enjoy the experience and will be able to start the process of establishing those trusting relationships.  You will also have the opportunity to pick there brains for a few days and learn from them. Ask questions and take notes.  If you want to take this seriously you need to get on the ground yourself and see everything in person.  

If you don't go there you are putting a lot of trust in someone you don't know.  There are people out there that will treat you right and look out for your best interest however how can you be so sure that the individual working for you is one of these people.  It's to risky for a new investor and you miss out on learning and networking opportunities.  

Buying site unseen is more for an experienced investor who has already established his ground team and done the lag work.  

Hey Andrew! Great questions. I live in LA and have always bought out-of-state. I'll give you a couple thoughts that I've concluded in my experience. 

A lot of it depends on what types of properties you are buying. If you are shopping for properties on the MLS, I highly recommend you check out the properties before you buy them because online advertising can be soooo misleading. I remember one time I was in Atlanta hanging out and a friend and I got bored so decided to go shopping via the MLS (which I don't usually do). He's an agent so if anything caught our eye we could go check it out. We found a handful of properties that looked super cute, great numbers, on a map they looked like they were in an advantageous area, and I got really excited. So we drove out to see them, and....ewwww. They were bad. They were in much worse condition than explained or shown in the pics, and the area they were in, while surrounded by a decent area, was in a huge area that had had a lot of devastation during the crash and I'd say about 90% of about an 8-mile radius was in shambles. These properties were right in the middle of it. Nothing about it was good. The types of people that were living there were really bad, and it would have been really risky.

With that said, there are other ways to go about getting perfectly good out-of-state properties. My point of the previous story is to dissuade you from just finding random properties online or wherever you are looking and jumping in. An inspector would help tremendously with it, but you could be sending him on a wild goose chase for properties too. The other way to go about finding properties, and especially if you prefer to buy sight unseen, is to work with companies who specialize in the type of properties you are interested in. When they do that, you can trust that they won't provide properties in bad areas, the condition of the properties is known fully, and everything is much less risky and more easily managed with trust. I don't know that KC outfit, but there are lots of ways to get teams going. That's how I've always done it and it's worked out great. I've bought more sight unseen than I have seen.

@Andrew C.  

I buy out of state turnkey properties, and do so both seen and unseen.  The key being that the first property I buy in an area or with a property I would want to see.  Then when you have an understanding of what that provider provides and you have an established relationship with them, additional properties can be bought unseen.  The travel investment is worth the journey and should be factored into your investment costs.  Just my 2cents.

@Andrew C.   I agree with the other posters you should definitely go visit the area you plan to invest at least the first initial time, to get an understanding of the area, the team on the ground, etc. Once you have this knowledge and confidence in your team it will be easier to make future investments without visiting.

While I generally agree it is best to inspect in person I have bought properties site unseen several times.  I had visited the city a few times and bought all through an agent that knew I would buy more properties so she benefited from my trust.  I still have nearly all of those properties after 12 years.  I have one I have never been in but drive by occasionally

I invest for cashflow so the numbers are what drives me not whether I an inspector may have missed a cracked sink.  I have not purchased properties based upon inspectors reports.  I hire reputable people that give detailed reports not just anyone advertising or a local contractor.  A real appraisal by a certified appraiser, not a BPO from a broker, should contain most of what you need to know about value.  If a cracked sink or a missing tile upsets your day you shouldn't be buying rental property anyway.

I should also add when I want to invest in a new area I read that city's daily paper on line, I call lots of agents and usually a couple of contractors before I even spend much time looking for houses.  You need to familiarize yourself with the city or town so you know the areas within the city and get a feel for crime, rental availability houses for sale and general income levels of the residents.  

I also call a few property managers to get a feel for the rental market.  They are my best source when considering buying a building.  They can tell me the expected rents for that location better than any of the agents I use.

My preferred  locations are cities under 50,000.  Large cities like St. Louis are KC are too full of pockets for my taste.  I love KC and lived there for 5 years but I wouldn't personally buy property there.

If you expect to get screwed you probably will, but you can do your due dilligence without going to the property.

@Andrew C.  

Hi neighbor!

I understand the desire to invest out-of-state because the cost of entry where we live can be quite prohibitive. It can be done - maybe not in Forest Hills where we are, but listen to Podcast #107 with Jonathan Makovsky (who has an enviable amount of energy!) - he made it work with a partner (from BP!) in Riverdale, Bronx. We had very close friends up there, some of them have since to moved to Austin.

That said - I would NOT recommend investing out-of-state sight unseen. I've done it. It was my 1st and it was unforgettable, like all firsts should be. However, this is the kind of unforgettable that is much like natural child birth, but with no baby to show for it. I was a total newbie (still am years down the road) who made a bad and ill-informed judgement on an investment that raises my heart rate and blood pressure every time I think about it. 

Yes, the pictures were so, so nice. All the comps, all the demographics and neighborhood info, all the pro-formas, all the promises of support after closing (just a phone call or email away!). A while after closing, reality hit home and what was a well-qualified tenant became a nightmare, the rehab that looked so pretty in pictures and videos were shabby, etc. 

We still have it. We are underwater. So underwater, we know the ocean floor like the back of our hands. There is really nothing to do (we are not willing to ding our credit - both of our FICOs being above 800). 

Now...having somewhat told that story...we still invest out-of-state. But we now do it where we have family, we go visit a lot so we've gotten to know the neighborhoods and communities, we will retire there and we have a wonderful broker/pm who is also an investor. Even though we are a flight away (short 1 hr flight), we have people that we trust/are experienced look at the properties, vet the community, walk the neighborhood. If they say yes/maybe, then we fly down and see. And when we go down, we look at 6 properties/day - that's about all I can do in one day. That has been working out well, so far. 

I don't want to discourage you to take the leap. I think you should,but vet any company that you are thinking about working with and keep your eyes wide open. I think there are some really reputable turn-key companies on BP. Ask around and at the end of the day, I still say you would need to make an initial trip out to your target market and just browse/drive/walk around. 

Best of luck!

Betty

Originally posted by @Andrew C. :

I am very new to real estate investing but have been diligently reading everything that I can here on BiggerPockets.  One thing that is holding me back is that I live in a high cost of living area so I've concluded that I'd have to buy out-of-state if I want to cash flow.  I know that you can still do your due diligence when investing out-of-state by going online and checking citydata forum, Zillow, and neighborhoodscout, to determine whether you want to invest there.  Are there any other sites you would use?

Another hang up is that I will likely buy it sight unseen.  I'm not sure if me actually seeing the property holds much value if I'm getting a professional inspector and an appraisal, but I can't help but get a sense of paranoia being that I won't physically see it and that I'd have to trust someone else's word.  Is there any other precautions to take?

One of the areas that I'm looking into is the Kansas City area, and I found a company called investmentscouts dot com (sorry not sure if I'm supposed to post links) and they appear to be an independent third-party which will check out the property giving you an overview of the condition and/or make sure the contractors are doing as they say (if you are rehabbing).  Has anyone heard of them and is their service something that is worthwhile?

Thanks!

Hi Andrew,

Check out a few Bigger Pockets blogs below that I wrote as they relate to your post :)

http://www.biggerpockets.com/renewsblog/2014/07/26/sight-mind-real-estate-investing-afar/

http://www.biggerpockets.com/renewsblog/2014/12/20/first-investment-property-important-things-consider/

http://www.biggerpockets.com/renewsblog/2014/11/15/3-types-of-risks-real-estate-investors-regularly-take/

I hope you find them useful.

Thanks and have a great day.

@Martin Scherer Thank you for your comment, you explained my thought process much better than I ever could.  It's probably because you're a more seasoned investor.  I'll invest if the numbers make sense, and of course, I will do due diligence when it comes to the area, the turnkey company, as well as the other things you mentioned.  A missing tile is not gonna be a deal breaker.  Ultimately, I think networking with experts in the area, vetting them to make sure they are reputable and trustworthy, and running the numbers in addition to researching the area/rental rates etc, is more important than my eyes seeing the property.

@Betty T.  Thanks, I'll have to check that podcast out.  And thanks for sharing your story.  I probably can't relate to the natural childbirth analogy =), though my wife did have a natural childbirth as well as unintended home delivery since the doctors sent us home twice (that's probably a story for a different forum).  Anyway, I'm sorry to hear about your bad experience...was it through a turnkey company?  I'm not sure seeing the property would have prevented a bad tenant though, that may be more on the PM or just bad luck.  As for the shoddy rehab job, you're right that pictures can be deceiving, but I'm hoping an independent third party can help me see through a broker's fraudulent photos.  Since you said the numbers and the neighborhood worked, do you mind expanding on why it turned out so bad?  Was it solely a bad tenant plus bad renovation?  

I don't really have family located in an area where rental properties will cash flow...expect for Buffalo,  but I didn't find any turnkey companies out there.  I definitely will vet the turnkey companies and get references, plus there is a turnkey review site recently created by some BP members.

@Ali Boone   Yes, I'm looking at using a turnkey company and I do agree that it reduces the risk.  I understand that it is in the turnkey company's self interest to provide a property in a decent location since they will likely manage as well, plus they need to maintain a good reputation to sell more.  But, I'm sure people have had bad experiences with turnkey companies as well.  Can you expand on why you say that the condition is "known fully" and "more easily managed with trust?"  Why does turnkey automatically mean that there is trust?

@Engelo Rumora   Thanks for the links, I did read some of them already.  I absolutely agree that having a team that you trust is integral.  Building that trust is the hard part.

@Betty T.   Sorry, I think the @ thingy didn't work above but I had a few questions about your experience.  Thanks!

@Andrew C.  

 There are 30 plus markets and over 100 turn key providers in the US... its up to you to shop for them and decide .. you can usually track them and check on them via google .. One thing I like is if the owners announce who they are... so you can google the principals.

I invest in my state ( home builder and lender) and I invest out of state ( 12 different states) I not only build houses out of state I have owned up to 350 SFR turn key rentals all at one time. And form my experience I like to see the asset and the team in Situ ... I like to shop on line first compare markets and providers narrow it down then travel to the market and kick the dirt as it were.. I also like to ONLY deal with principals.. I might work through RE brokers as this Is customary practice in the US. But if its Turn Key I want to look the turn key company owner in the eye and his staff etc etc. I also wrote a little e book on the do's and don'ts of out of state investing I am happy to send along.. NO recommendations of markets or providers just things to think about when your in your search mode.. PM me if you would like it I will send right over..

Bottom line there are like any other industry great companies and not so great.. your job is to pick the great one !!

I recommend only buying from people in other markets that you can get recommendations for. The turnkey people I just bought properties from in Kansas City and Charlotte I got through recommendations from people here locally. It's going well so far. 

@Andrew C.  

Whoa on the accidental in-home birth! That's a brave wife you've got, sir. Hope both Mom and baby are doing fantastic and congrats!

To answer your questions:

1. Yep, it was a turn-key company.

2. If I had seen/walked the property/area, I would not have bought it. No matter how pretty the property itself was. I am now a huge believer of investing in the market first, then the property. The area is C, I'd say. I would not feel comfortable walking there at night by myself. 

3. Shoddy Rehab - the pictures and videos looked good. But you know what, you only see what they want you to see in pictures and videos, right? Yes, you can have an independent 3rd party to go inspect. But I believe at the end of the day, nothing compares to your own eyes and judgement. 

4. The numbers and information they gave me worked. I did not know any better and I made the huge mistake of trusting the nice & engaging owner with whom we were working with. I did not vet. I did not verify. Classic errors. If I could go back in time and shake myself out of the fog, I would. The #s on the pro-forma did not include much in terms of maintenance and PM fees. Shoddy rehab means a lot of ongoing maintenance means a lot of cash out. We have not made 1 cent in the 6 years we've had this one. By my husband's calculations, we lose 2-3k every year. Oh, we need a new roof this year. 

Bad initial PM (from the turn-key company) told 1st tenant no pets. She then "rescued" 3 dogs. Kept them outside and in lower level. The fleas. Oh, the fleas. After they moved out (which was over 1 year later, which included non-payment of rent), the pest guy went in and came back out. Called us and said he was afraid to go back in because he had never had so many fleas before. We might have cried a little right then and there. PM fired. That is just one story.

Definitely vet, don't trust and always verify many times over. Use conservative numbers. Reach out to BP members whom you think post insightful and helpful info. Worst they can say is they don't know your target area, but they might be able to refer you to someone who does and also offer nuggets of investing wisdom. That is what BP is about. Check out @Jay Hinrichs  & Brie's turn-key review site.

Good luck!

I too am an advocate for visiting it yourself, not just for the property but also the area.  If that is just not possible I would strongly suggest finding a BP member who is local and active in the market.  Hire them to be at the inspection and give you feedback on the area and overall condition.  

@Jay Hinrichs  Actually I e-mailed you a few days ago regarding the e-book and you sent it to me.  Thanks, it has a lot of useful information!

@Account Closed  I think it's a great idea to hire a BP member to be present at the inspection and to give me feedback on condition/area.  Maybe a more seasoned real estate investor like you would benefit more from visiting the area.  But I'm not sure I would know what to look for.  Driving around the area probably won't tell me as much as contacting a PM, a BP member or another expert in the area.  I'll have to leave that to the experts.  And thank you and Jay for creating turnkey reviews.  I think that site will help me as well as many others looking at going the Turnkey route.

Originally posted by @Andrew C. :

If you don't know what to look for then hiring a BP member is probably best.  Thanks for the support!  We are excited to see it grow

It definitely doesn't mean automatic trust, by any means. I just think there is more room for trust once you find a good company, because like you mention, there is a lot of incentive for a turnkey provider to perform properly. It's their only source of repeat business! There have definitely been bad turnkey providers out there, and still are some that I'd consider less desirable to work with, for sure. But if you find the good one, there is a lot of room there to then be able to trust the system.

But way more important than trust, because trust can't really be quantified, is the ability to verify. There is truly nothing about a turnkey property that you can't check up on and verify. So it doesn't matter what anyone tells you, you can check into everything yourself. The property condition can be verified using property inspectors, deed and title info can be verified, rents can be verified, tenant info can be verified....everything. 

@Ali Boone  

Your correct its the intrinsic nature of the market that one can really only get the feel by boots on the ground... Although not necessary a visit one time is not a bad idea... one just needs to calculate travel into the ROI as many Turn key's are not in markets that you would inherently go on vacation to...

Risk Reward is in play in all RE investing. 

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