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Real estate investing is all about perception. Your perception of where the market is going, in conjunction with where it’s actually going. The aim, as always is to buy low and sell high.

You want to buy a cheap tract of dirt and sell it as a high priced piece of developed real estate, after it’s appreciated enough to turn a tidy profit. Selling the property is an art in and of itself.

Buying an initial tract of dirt lends itself to some solid, rational guidelines:

First, look at trend lines for housing prices in your area. While most housing markets are in decline (and the housing markets in Florida and California are adjusting from more than a decade of over-valuation), there are markets where the housing prices are going up. This is a decent leading indicator that there’s a market for expansion.

Second, look for job related news. Home purchases require a steady source of income. New employers moving into a city, or a government branch office opening up are a strong indicator that good, well paying jobs are likely to come up. Where well paying jobs roost, home purchases follow.

Related to this, talk to your local city planning office. Are there recent purchases of “right of ways” to lay down sewer lines? Is the local telephone cable making plans to run out fiber optic lines – a “must have” trend in new home construction. These things point to areas where home growth is immanent. Other big tip offs are school bond issues (found in your local news paper) and new parks being opened up.

Before you look at the land, check out the adjacent commercial real estate usage. Look for “family friendly” or “residential friendly” commercial properties: Houses that are close to grocery and clothes shopping tend to fetch a higher price than ones that are farther away. If there’s a movie theater nearby, or plans for an elementary or middle school, factor that into the size of the homes you build, and what their amenities will be; buyers looking for those features are looking for “mover upper” homes – with a bit more floor space, and two (or three) bedrooms for the kids. Other spots to look for are anchor stores, like Wal-Mart and Best Buy. These companies spend millions on surveys of purchasing patterns before buying a store location; if they’re buying a plot of land, you’ve got about a year to a year and a half window to look into nearby real estate for single family residential and rental residential properties.

You can even flip this on its side – if you can talk to a group of commercial real estate investors, building a shopping center as the nucleus for home development is also a viable combined strategy. This also applies to highly urban areas. Many downtown areas that have been abandoned by businesses can be converted to apartment buildings, and some of the older housing projects are being torn down for mixed-use spaces with combined commercial and residential areas. In particular, you can often get block grants to help with the financing on projects like this, and there are programs from HUD that can help out a great deal with “urban renovations”.

Another source to investigate is the demographics in your area. Look at the US Census figures (and local county figures) for median age, and median birth rate per capita. You want to invest in areas where the population is growing already. High skews in the ’40s and ’50s indicate that you’ve got a bunch of people who are going to retire soon, and retirees are highly prone to selling properties off. Places to watch carefully are most of the urban parts of California, and great swaths of the rural Midwest, where demographic trends have been changing entire towns since the 1950s as the country’s population has shifted to urban areas.

If there’s a local planning council, or urban development council, make it a point to get the minutes of all the meetings from the past year. The city council offices will have them on file as a matter of public record. Also try to get into the next range of meetings as an observer. Discuss with the city and county managers where they see housing and construction trends moving. What you’re looking for is real estate that will be desirable in two to three years; look at road planning atlases, and look for all the data you can find. Also look for real estate that will be scenic – lake front property is as close to a guaranteed bet as you can get in real estate investing, particularly if there’s a lake that’s at the “far end” of a development axis. Likewise, if there’s land that the city council is looking to acquire for parks, buying the adjacent lots now means you’ll be able to sell them later.

Lastly, talk to the professionals in your communities. Talk to architects who can tell you if they’re busy or not. Maintain professional contacts with engineers, bankers and attorneys. They will usually know about projects well before the general public. Also make a habit of reading the local newspaper’s business section. Often times, the first clue that a business may move in to your area is buried at the bottom of a column on page 8.

Using the guidelines suggested above will help you to find “sleeper” raw land properties. These “sleeper” properties are perfect for the buy low, sell high strategy used by successful commercial real estate investors.

Creative Financing

When a Commercial Real Estate Investor is looking to purchase income producing property utilizing any number of creative financing methods, one of the most important keys to their success is that their ability to provide adequate, verifiable proof of funds – P.O.F.- to both the seller and the lender. The verification of funds can enhance the investors credibility with the seller as well as satisfy the lenders requirement to know that the borrower has necessary funds to complete their transaction.

Proof of Funds

There are a few ways acceptable to lenders and sellers to show P.O.F. to close your Commercial Real Estate transaction:

• Bank Statements or Bank Verification
• Brokerage Account Statements or Verification
• Escrow Account Verification

“Bank Verification” This is the most acceptable and widely used method to confirm the investors can complete the proposed deal. As such money must be put into a bank account and confirmed by statements or letter from the banker.  This is a “hard” (versus soft) method of verification, because money are deposited in an account in the buyers name to serve as proof the buyer can complete the transaction.

“Brokerage Account Verification” Similar to bank accounts, brokerage accounts show acceptable means to complete a purchase transaction. Likewise, statements or letter from the brokerage house representative will meet the requirement to prove adequate financial strength. This is also a “hard”  method.

“Escrow Account Verification” This is the one method that can be hard or soft evidence of necessary assets as the escrow agent simply needs to write a letter of confirmation attesting that the borrower has finances available to complete the transaction. It becomes hard when money is transferred  into an escrow waiting for the closing.

Companies

Finally, there are companies whose sole purpose is to provide evidence of the financial ability of Commercial Real Estate Investors to complete their transactions. Many of them provide “Proof of Funds” and Transactional Financing. P.O.F. is necessary at the beginning of the deal and Transactional Financing is for the day of closing only. Both of these methods are a necessary part of an investors arsenal when utilizing creative financing.

Real estate has several unique characteristics that affect its value. There are economic characteristics and physical characteristics. Real estate is a product to be purchased but it is different from anything else due to the characteristics that will be discussed here.

The economic characteristics that influence value are scarcity, improvements, permanence and area preference. Scarcity is simply demonstrated in the saying, “They aren’t making any more.” The supply of land has a ceiling and cannot be produced more than what exists today. This value of this supply however, is influenced by other characteristics.

Improvements, such as buildings on one parcel of land may have an effect on the value of neighboring parcels or the entire community. If a large company builds in a certain depressed neighborhood, the value of living their will probably increase because of the introduction of jobs. This value would impact on neighboring communities, thus increasing value in some ways to the real estate in these areas.

Permanence has to do with the infrastructure. As buildings, houses or other structures are demolished, the infrastructure, such as sewers, drainage, electricity, and water remain intact. Permanence effects real estate, or the type of infrastructure. If you buy a piece of land in an area with no utilities, drainage or paved streets, it will most likely be worth less than a parcel of land that has this infrastructure intact and developed.

Area preference refers to the choices of the people in any given area. This is usually referred to by most people when they talk about real estate as, “location, location, location.” The location of a preferred area, for whatever reasons, is what makes values of homes higher. Conversely, the location of a nonpreferred area, for whatever reason, is what makes the values of homes less. 8000 square foot brand new homes on the coast of Long Island’s, East Hampton will be worth much more due to their area preference, over an area with 1200 square foot starter homes in the middle of Long Island, located next to a garbage dump.

The physical characteristics of land represent its indestructible nature, immobility and nonhomogeneity. Working backwards, we’ll start with nonhomogeneity. This simply points out that no two parcels are the same. Two pieces of land may be very similar, but every single parcel is different geographically because each parcel is located in a different spot. This includes two lots right next to each other. It is important to remember that parcels are created by subdividing land, so as one large parcel of 20 acres is subdivided, each individual lot becomes its own separate piece of land.

Land cannot be moved, therefore it is immobile. Even when soil is torn from the ground, the part of the Earth’s surface will always remain. It is important here to note how this physical characteristic affects real estate law and markets. Immobility of land is the reason why real estate laws and markets are local in nature.

The indestructibility of land simply means that it is durable and cannot be destroyed. It can be damaged by storms and other disasters, but it remains and weathers the changing times and will always be there. This is a main reason why land is talked about as being a sound investment.

So the basic characteristics of real estate include scarcity, improvements to the land, permanence, area preference, nonhomogeneity, indestructibility and immobility. Please note there is a big difference between land and real estate. Land is the the part of the earths surface, subsurface and air above it. Real estate is anything that becomes attached to land. So when you’re looking for investments, it is important to note the infrastructure of the area, the surrounding neighborhood and the preferences of the area or…location, location, location!

State legal systems in the United States are based on one of two legal systems. Forty-nine states base their laws on the common law system, first used in England.

However one state, Louisiana, uses the French Napoleonic Code as the basis for their legal system. While common law-based legal systems rely on the rulings of judges to set precedents that are used to make later decisions, the Louisiana system does not.

The Napoleonic Code was intended to simplify the laws in a time when many people were illiterate or did not have access to printed information. Ironically, the effort to create a simpler and easier to understand legal system has resulted in one of the more complex and least understood set of state laws here in Louisiana.

There are many other distinctions between the two systems, but it is not as important to know every single distinction as it is to understand that there are significant differences between the state laws in Louisiana and those of most other states.

Real Estate Law Basics

Real estate laws are the laws that address the land and anything built upon that land including ownership, usage, and transfer of ownership of that land. As discussed above, Louisiana’s unique legal heritage has affected the current laws in many ways. One such way is the term used to refer to real estate in this state. While the rest of the United States uses “real estate” in legal documents, in Louisiana real estate is referred to as “immoveable property.”

Inheritance and “Forced Heirs”

Another area which requires the special attention is that of inheritance within Louisiana. The laws regarding inheritance derived from the Napoleonic Code were intended to ensure that assets remained in their family of origin, so while the other 49 states allow property to be transferred as the owner prefers after their death, this is not always the case in Louisiana.

The laws regarding inheritance of real estate can dictate that close relatives including parents or children inherit property before anyone else.

Community Property or Separate Property?

The real estate laws in Louisiana separate property ownership into two categories:

• Community property
• Separate property

While the difference between two distinctions may seem apparent initially, upon closer inspection, the line becomes less clear. For example, once a couple is married, all properties do not automatically become community properties, and in the case of divorce, one spouse may not have any claim to or rights in regard to certain properties. Some of the factors that are considered in this situation are when the property was purchased and which party’s funds were used, which can be a difficult fact to ascertain.

The letters NOI stand for Notice of Interest or sometimes incorrectly called a Memorandum of Contract or MOC. It is usually a one page document that stipulates that the person submitting the document for recording at the County Clerk’s Office has an equitable interest in a property because of a signed purchase and sale contract.

The NOI is most commonly used when an investor signs a purchase and sale contract with a homeowner/seller and wants to show anyone trying to make another offer on the property that he has a legal interest in the property. This is the case where someone else, usually another investor, comes along and offers the homeowner a higher price.

The practice by investors of up-bidding properties after they are under contract is getting more common in distressed markets but even happens in normal markets. The investors who regularly make statements to homeowners like, “Get your highest offer from those other guys and call me back, I’ll give you more money than any of them – I just need to see it in writing”. The ugly part of that statement is the term “in writing” because that usually means a contract had to be signed by the homeowner.

While I can’t blame the homeowner from wanting more money, what I have seen happen most often is a black-hat investor who is trying to steal the deal, actually gets to the closing table and re-negotiates the price to below what he had originally offered the trusting seller. How do I know? I have been on the other side of his offers and had to fight to keep my sellers.

So occasionally we have to fight for our closings and I have covered this in other articles about how to do this. The ironic part is that it is a criminal offense to “induce” someone to sign a contract when another contract is in place. The Attorney General’s Office will take these cases if you show proof and the seller cooperates – which is usually the case when the homeowner is threatened with a law suit or foreclosure.

So when we sign a contract with a seller, we almost always record a NOI in the public record which is effectively a lien against the property. I want to repeat this because the subtleties of this “lien” are very far reaching. This NOI now has to be released as a lien on the property before the title can be transferred unless there is a foreclosure action to extinguish it, or the lien holder (the original investor/buyer) starts a foreclosure action to take the property. If this sounds harsh, it is just a solution to a problem where one party to a contract won’t hold up his end of the contractual terms – just like a lender does to a homeowner.

The NOI does not need to be signed by the homeowner/seller so anyone can put a NOI on anyone’s property. Just remember, there is usually a sign in the Clerk’s Office that says something to the effect that “If you enter a lien that is not valid, it is a felony”, so think twice about what you are doing before you do it – don’t do it in anger or it could cost you a lot in attorney’s fees.

Having said that, the courts and sometimes the recording clerk treat NOI’s as unruly in-laws. They tolerate them probably for the fees, but they don’t like them much because of historical issues with the seller not knowing these liens have been filed. Many standard real estate contracts specifically forbid filing a notice of interest to be recorded in the public record. This prohibition can be overcome by striking this clause pertaining to it and having both seller and buyer initial it, or adding an over-riding clause or addendum to your contract.

Once a NOI is filed in the public record, the next time the title to the property is transferred, the title agent will have to have a Release of Lien for the NOI signed to write a title policy on the property or note it as an “exception” in the policy. If the NOI is not extinguished by a Release of Lien, the title has been “clouded” and needs to be cleared and a transfer to a new buyer may not properly take place.
This is where you come in to release the lien and it usually happens when you least expect it – just before you were planning on closing yourself! Sometimes the homeowner will call when he gets a copy of the recorded NOI from the Clerk’s Office and he didn’t expect it – either way, the seller is trying to renege on the transaction. Sometimes the seller changed his mind for a valid reason, most often it is not.

You have a couple of choices when the NOI “hits the fan” so to say:

1.) Release the NOI using a Release of Lien document and get paid to release the lien

2.) Honker down and fight the seller to come to closing or get paid to release the lien.

In summary, your choice is personal and determined by the potential lost profit in the deal, the homeowner’s/seller’s real motive for not wanting to sell, how much you can get paid for a release of lien, and your disposition on that day. In the final analysis, the choice is yours to force the seller to come to closing or release the lien.