Insight 19
What a Full-Service Real Estate Investment Group Offers
Full-service real estate investment groups can serve as a great stepping stone into the US foreclosure market, and Canadians who are testing the American investment waters will almost always comes across at least one of these groups. Let's be clear: full-service real estate groups have their place. But they're not all created equal and foreign investors need to do their due diligence before hooking up with a group that could spend their money without giving them anything in return!
What Full-Service Real Estate Groups Do
Full-service real estate groups are generally made up of individuals with years of experience in the market. This can be especially good in the foreclosure market, as a good full-service group will already have relationships with local real estate owned (REO) brokers, contractors, property managers, etc.
Most investors will come to a fork in the road when they choose to invest in the United States. On the one hand, there is the option for wealthy individuals with a lot of time to forge relationships with American realtors and contractors to develop what essentially is a real estate business. Or, the other option, which typically makes more sense for people, is to look for a turnkey investment solution. In other words, the investor purchases the property from a big or small investment group that offers all of the services needed to manage a property business. The main reason that most people will choose the second option is because they are forced to do so. American work laws prevent Canadians from doing all of the work that is required, unless Canadians obtain a work visa.
The investor should look for companies that have good financial stability, and a full team of people ready to purchase, renovate, rent, and manage the properties. These groups are currently spending a lot of time looking for foreclosures and properties to acquire, a full-time job because of the competition that is in the marketplace for purchasing these properties.
Canadians who don't want to invest on their own can leverage off a full-service team and find their way into the market with considerably less risk. The relationship also can lead to much more effective investing. Since the greatest risks in a foreclosure deal involve finding the right property, upgrading it the right way and getting it back on the market with a qualified tenant and good management in place, a good real estate group minimizes those risks. Their market knowledge translates into finding properties at deeper discounts and offering better pricing on property renovations and repairs. Ideally, a full-service group will even connect you with a quality property manager and qualified tenant—all in the same deal.
If everything goes right, the service of a full-service real estate group actually costs you nothing because the arrangement quickly takes you from zero to cash-flow investing. But let's be frank. The deal's success really hinges on whether the group sells you the house at a fair price. There are great groups out there that will get you a solid turnkey investment property at a fair price. But there are also groups that will rip you off. The good full-service real estate groups can supply you a fairly priced property that is fully renovated and located in a good area with high rental demand. It will have equity and cash flow. The property also should be occupied by a qualified tenant and under a top-notch management group that has been tested and proven.
If this is the investment route you plan to take, be careful. Here we give you some general rules for assessing the quality of a full-service group.
Good Full-Service Real Estate Groups
As you work through your due diligence on a potential full-service group, you should look for a group that has a track record, has done many deals, and has an operation in place that is buying, renovating, renting, and has rental management. We tend to advise working with a larger group that has the benefits of scale, particularly with respect to the work that is required to undertake good due diligence. Generally, good full-service groups:
- Have a range of types of properties in their portfolio. You may find some specialists who work in a particular type, such as single-family homes.
- Have been active in their market for years and own investment property in that market.
- Are happy to have you visit the market and tour their business. They also are happy to supply information and answer questions.
- Do full renovations to get the property into top shape, including the roof, heating/cooling, plumbing, and electrical. They don't do “partial rehabs” to get the property back to a just-barely rentable condition.
- Steer away from bad neighborhoods. Even though they could make more money off their clients there, they are long-term players with integrity. They aim to make money and do right by their clients, so they shun the risks inherent in neighborhoods with high vacancy rates and criminal activity.
- Have happy existing clients and make testimonials and references available.
- Have property management that's been tested and proven. They have their own personal investment properties with this same management company.
- Sell you properties that are occupied by a qualified tenant. That tenant has been fully screened by the property management company and the supporting paperwork can be made available for your review.
- Provide a homebuyer's warranty on their properties and will go back and fix a repair if something in the renovation process was done incorrectly.
Bad Full-Service Real Estate Groups
The worst thing about bad full-service groups is that they make their money by tricking investors into the market. They are all about the smoke and mirrors, at least until they have your money. The wise investor's response is to focus on due diligence. Commit to finding out if a company merits your business. If you can't decide, walk away.
In general, the “bad guys”:
- Are usually new to the market that they are selling you on. They lack local experience and they will not own any investment property in the area. This is huge! This kind of full-service group does not plan to be in the market for very long. They want to take your money and run, and we call them “fly-by-night” operations.
- Don't allow you to visit their market or discourage you from visiting. They also are wary of supplying the information you request. Questions may be deferred or ignored. This is bad news.
- Are into what the US industry calls “partial rehabs.” They may do some cosmetic work inside, but they'll try to tell you that curb appeal doesn't matter in this market. Bigger repairs like the roof, heating/cooling, plumbing, and electrical will rarely be done. If you ask about this strategy, you'll get excuses, not any evidence that the work wasn't required.
- Tend to steer their clients into bad neighborhoods with a long history of drugs, prostitution, and violence. This is how they buy properties so cheaply. No one wants to live there and the banks just want the properties off their books! That makes the price-motivated investor a sitting duck.
- Don't have any existing clients available for references or testimonials. Remember your fundamentals. If a group refuses to answer your questions it's because you won't like the answers. Move on.
- Might tell you they assign little importance to property management because “the tenant will take care of a lot of the details.” Others have untested property managers in place. What? You value quality property management and market experience. This group offers neither.
- Claim to be a full-service group but then try to sell you a vacant property. This defies the sound investment fundamentals that might lead you to work with a full-service group.
- Do not offer any warranties or guarantees on the work they have done for you (or say they have done for you). Again, this is not a company you want to work with. Feel free to back away slowly, or run.