My first deal
Breaking the ice
The decision to make my initial investment in Florida land was by far the toughest hurdle in my real estate investing career. There is no dipping your toe in the water -- buying investment property is a head first dive from the high board. You can read about the factors that led me to investing in SW Florida in a previous post titled The Four Ws.
This article provides a step-by-step view of this initial investment including a time line of the complete investment life cycle. The good news associated with this deal is that I netted a 20.8% ROI in just 57 days of ownership. The unfortunate aspect is that I could have significantly increased my return if I had hung onto the property a little longer.
February 23, 2004
I tour Cape Coral with a local Realtor. This is my first visit to Cape Coral and I have very mixed emotions about the place. I am most excited about the fact that you can't drive two minutes anywhere in the Cape without seeing new construction activity. I am also concerned about the overall appearance of Cape Coral, with the fast food and convenience stores dominating the landscape in a manner that is common throughout Florida. Most of the commercial areas in the city are along main streets like Del Prado, Cape Coral Parkway and Pine Island Road. I am also concerned about the sheer number of undeveloped housing lots in this city. It is hard to believe that property values are appreciating so quickly with so much vacant residential land available.
Navigating around Cape Coral is fairly straightforward as it is divided into quadrants and laid out in a grid format with numbered sections called units that are approximately one square mile in size. The avenues, boulevards, courts and places usually run North to South and the lanes, parkways, streets and terraces usually run East to West. In navigating individual street addresses, the first one or two digits of the street number identify the cross streets.
The Realtor shows me several properties mainly in the NW and SW quadrants where the most explosive growth is occurring. A number of factors are contributing to the growth in this area including the interconnection of Veterans Memorial Parkway with the Burntstore Road Extension. This new roadway creates a direct four lane highway from Western Cape Coral to the Midpoint Memorial Bridge which crosses the Caloosahatchee River and provides into Downtown Ft. Myers. I elect to view property located on freshwater canals as this is where the best return can currently be realized and after a while have a tough time differentiating one lot from another. The Realtor helps me narrow my search to a couple of Units that he prefers and I pick a property in Unit 50. Unit 50 is located close to Pine Island Road where significant new commercial development is underway. Pine Island Road also is a divider between the SW and NW quadrants in this part of Cape Coral. The lot I pick is located on a street with several beautiful new homes and backs up to Shadroe Canal which looks wider than some of the other canals that we toured. Wider canals are more desirable and command a premium price over some of the narrower canal locations.
Back at the Realtor office located on where else but Del Prado Boulevard, it is now time to consummate the deal. On this particular property, the Realtor executed on February 13, 2004 a purchase and sale contract for $36,500 with the seller through a company that he controls. The Realtor prints an MLS report of the other fresh water canal front properties that are currently on the market in Unit 50. I am excited that most of the comps that are on the market are in the high $40's, so it certainly looks like this property will yield an attractive return on resale. The purchase and sale contract has an assignability clause, so the Realtor presents me with an assignment of contract form that we both execute. I also write a $500 check made out to the attorney that is processing this closing. The closing date specified in the purchase and sale contract is March 24, 2004.
March 6, 2004
A package arrives today from the closing attorney with the documents that I need to execute and return to complete the purchase. These documents consist of the following:
1. Closing Settlement Statement detailing the net cash of $36,006.53 due to close property.
2. Tax Proration Agreement
3. Instructions How To Hold Title
4. 1031 Exchange Document (seller doing a tax deferred exchange)
Other documents in the package include:
1. Copy of the Title Commitment
2. Copy of the Warranty Deed
3. Copy of the Owner's Affidavit
4. Wiring instructions for me to send required funds
At first, all these forms can be intimidating, but after a few deals it becomes fairly routine. Over time, I have learned to understand the logic behind the various entries on the Closing Settlement Statement and have caught a few mistakes that would cost me money if not corrected. Items that typically require adjustments between the buyer and seller on a routine land sale are expenses like real estate property tax that is paid in arrears, and lot mowing and storm water fees that are paid in advance. The Cape Coral Web site has a great automated payoff calculator to view current account balances on a particular piece of property.
After signing all the documents, I make copies for my files and return them to the closing attorney. Most title companies, or in this case, a closing attorney include a prepaid addressed overnight mailer to facilitate a timely return of the documents. This type of closing is commonly referred to as a "mail away" transaction.
March 23, 2004
I prepare a letter to my bank that I send via fax providing the details to complete the wire transfer. I receive confirmation back from my bank that the wire has been sent. Usually I send the wire the day before the scheduled closing date.
March 24, 2004
I call the closing attorney and receive confirmation that the closing has occurred. I am now officially a real estate investor. One thing that surprised me was that the closing occurred over a thousand miles away without any involvement from me. It also seemed strange that no one called me to let me know it was completed. This was a very different experience for me than traditional home purchases where financing is involved and you are at an attorneys office signing a foot of paper.
March 25, 2004
I call my real estate agent to let him know that the deal is complete and to discuss listing the property. He faxes me a listing agreement to sign and return. The key aspect of the listing agreement is the fee that I will pay to the realtors for selling the property. The de facto going rate in Cape Coral for vacant land is 8%. While this rate is higher than I was accustomed to for homes that I have sold in Massachusetts, I view it as a cost of doing business in this hot market.
The Realtor recommends that I list the property at $49,850 based upon MLS comps in Unit 50. This represents a 36.5% mark-up on the property, which if the property sells fairly quickly, would be a stellar return even after closing expenses. After receipt of the listing agreement, my Realtor enters my property in the Florida Gulf Coast MLS at $49,850 and faxes me the printout detailing the listing. I really like the remarks that he has included with this property, "southern exposure, center of it all, growing area, many new homes being built." Now the waiting game begins.......
April 12, 2004
Just 18 days after the property was listed in the MLS, I have a call from my Realtor advising me that he has a "solid" offer on the lot. I ask him what solid means and he says that the offer is for $48,850, $1,000 off asking price, with a $1,000 deposit and a 30 day closing scheduled for May 12, 2004. The offer includes a mortgage contingency clause which would allow the buyer to walk away if financing cannot be obtained in 30 days.
I decide to accept the offer as is and not counter as I might today with significantly more transaction experience under my belt. The buyer has not made any modifications to the standard Florida Association of Realtors contract. I sign the vacant land contract and fax it back to my Realtor.
In Florida, it is customary for the seller to pay for the title insurance and also pick the title company to close a transaction. my Realtor recommends that I use his preferred title company. This was fine with me, so he "placed" the file at the title company.
May 10, 2004
I receive notification from the title company that the closing has been moved from May 12 to May 20 due to buyer financing issue.
May 18, 2004
A closing package arrives from the title company. Included in this package are the following:
1. Closing Settlement Statement detailing adjustments and expenses and the net cash proceeds payable to me of $44,088.97.
2. Warranty Deed
3. Affidavit of No Lien By Owner
4. Non-Foreign Certification
5. IRS W-9
6. Positive Proof of Identification
7. Seller's Affidavit (Gap)
May 19, 2004
With a mail away closing, most of the documents are required to be witnessed and notarized upon execution. Although it varies slightly by title company, in this scenario I need the warranty deed, affidavit of no lien by owner, non-foreign certification, positive proof of identification and seller's affidavit all notarized. I go to the clerk's office at my local town hall where I know they have several notaries. This proved to be a mistake as these notaries were not comfortable with notarizing Florida documents. Ultimately, they did notarize my documents but it was a rather unbelievable experience that even included a call to the Massachusetts Governor's Office about the legality of notarizing Florida real estate documents. I have since switched to my local bank and the process is very routine and painless.
I make copies of all executed documents for my files and then drop the package in the UPS box. The title company uses a legal size UPS mailer that can be re-used to return the documents to them.
May 20, 2004
I receive notification from the title company that the transaction has closed and that a check has been cut payable to me.
May 24, 2004
Check arrives from the title company for $44,088.97. I owned this property for 57 days and realized a profit of $7,558.97, an ROI of 20.8% and an annualized ROI of 133%. After this positive experience in the Florida real estate market, I was hungry for more.