Buying Real Estate Online? Top 10 Traps to Avoid
Until recently. With the popularity of eBay and other online land auctioneers and straight sellers, buying real estate has become something the most ordinary and resource limited person can do. You can now buy a deed to a quarter acre of land in the sunshine for under a thousand dollars. Whole houses can be had for under five thousand. You could spend a few thousand and buy yourself a 20 acre ranch! To a city dweller accustomed to cramped spaces, these offers are very tempting.
Even when the picture clearly states “not the actual property”, people plunder savings, empty out paypal, max out credit cards, take on debt, wire money into the void, all for the privilege of being fined, taxed, stranded underwater, or flat-out suckered. So much for your dream.
How can one buy land safely? Rule number one is actually look at the land you are buying, in person. Pictures always hide the truth. Rule number two, due diligence. That means check things like taxes, deeds, insurance, liens, structural integrity, zoning, road access, etc. before you buy it.
If you don’t, here are the ten most likely scenarios for that little piece of property you dropped a couple of thou on over the internet.
1) The Antiquated Subdivision:
Many of these date from the 1960’s, although some may date from the 1920’s and earlier. In essence, these are subdivisions that were proposed, surveyed, and platted on maps, complete with proposed streets (sometimes with street names). Often these were speculative in nature, banking on future growth that never came. Sometimes, they were intended to deceive out-of-state buyers right from the start, and are making a comeback now that the internet has provided new buyers unaware of the old scams. The most frequent locations that turn up online are around Southern New Mexico, Central Florida, California City, CA, Southern Arizona, among others.
In many cases, new regulations have been put into place to prevent development of these sites, in order to protect the environment, manage growth, or to discourage the purchase of unbuildable land. These regulations are often based on the size of the land you own, with a 2 acre minimum being a common number in New Mexico. This means that a typical 1/4 acre parcel, commonly traded online, far from any utilities whatsoever, has no chance of being granted a building permit. So while 1/4 an acre in New Mexico near the Mexican border in drug-smuggling territory might sound like a good deal for a thousand bucks, all your thousand bucks is buying is a square of dirt surrounded by other squares of dirt that will forever remain a square of dirt. To get there, you’ll need to take some dirt roads, and then just dirt.
2) The 5 Acres of Scrub:
Popular locations are Western Texas and Southern Colorado. Typically the offer advertises “ranchland” in vast, unpopulated, poverty-line living counties where buying a carton of milk really does require a 60 mile drive. These parcels have been chopped from larger chunks of nowhere, and seldom do roads exist, dirt or otherwise, to reach them. 5 acres is nothing in these areas; typical property owners own hundreds. Under 20 acres usually means you wouldn’t be allowed to build on it, even if you could reach it, which you most assuredly can’t. 5 acres of this scrub-and-rattlesnake filled land of hills and gullies frequently trade hands in the $4,000-$8,000 range, some suckers have shelled out up to $20K. A few have attempted to see the land they own the deed to, only to learn that a helicopter would be the only way, and no permits would be forthcoming even if you brought that helicopter with you.
3) The Crackhouse:
“Needs TLC” claim the ads, showing homes in long-declining and shell-shocked cities including Flint, Detroit, Buffalo, Pittsburgh, Youngstown, and Dayton. Very real property damage, from collapsed ceilings to burned out attics to rampant vandalism to filth is visible in many photos, when the seller actually includes them. Still, at only a few thousand, the idea of buying a house in a city, paying someone to fix it up, and renting it out for cash sounds very tempting. Buying one of these is perhaps the most dangerous investment of all. Not only are you buying a home that is well beyond salvage, many buildings are in fact condemned, and you’ll have to pay for demolition. Most are located in the most impoverished, dangerous, crime-filled areas of cities with rapidly declining populations; even if the house were brand-new, you’d never be able to rent it. If someone is injured by it while it’s vacant, you are liable. While it’s out of your sight, it is a tempting lure for vandals and squatters. A favorite with “property flippers”, they destabilize real property values in a neighborhood. Steer clear.
Another common peril is when the seller offers to hire a contractor to fix it up for you. He’ll put in new windows, slap up some sliding, and send you the pictures along with a substantial bill. Inside, it’s still a gutted wreck. Never buy a house you can’t drive to in a day; anything could be happening there, and you’ll never know about it.
4) Swamps and Cliffs:
The yuks comedians got in the 1960’s about someone buying swampland in Florida, with property underwater and teeming with alligators wasn’t just a goofy bit someone dreamed up; it was based on places lake the infamous River Ranch Estates near (and indistinguishable from) the Everglades, stuff you’d imagine the guys in Glengarry Glen Ross pitching to New Yorkers. Or, people were duped into buying subdivided lots in Shelter Cove, CA, a remote mountaintop perch far from the freeways and many basic services, where lots were plotted directly into cliffsides, far too steep to build on. Some plots no longer even exist, having crumbled into the Pacific Ocean from erosion. After laying dormant for four decades, those very same properties trade on eBay now, luring the same suckers who buy land sight unseen as they did in the 60’s. So many have been taken in that when they arrive in the swamps of River Ranch to check out their property, they are limited to a campground/trailer park “near” the property to stay. There is no access to the land they bought for $200-$2000 a quarter-acre; they’ll never see it.
5) The Inner City Lot
Similar to the crackhouse, on the surface it seems like a smart deal. A city lot, in a famous city, with city sewers, electricity, gas, and cable all at your future doorstep. Freeways nearby; public transportation. All for the ridiculously low-seeming price of $2000 or so for a lot. Here’s how it goes sour; these lots, picked up for next to zero by the sellers, are located in some of the most spectacularly depressed parts of the most spectacularly failing cities. Among them are the roughest parts of Detroit and Flint Michigan, the greater Gary Indiana area, and trusty old Buffalo, cities where entire blocks of abandoned houses and vacant lots go on for miles. There is no market for vacant property whatsoever; these cities have a staggering housing surplus, due to their dwindling populations. In such environments, vacant lots are magnets for illegal dumping, like refrigerators, sofas, stolen and junked cars, chemicals, bodies. The city, hurting for cash, will gladly charge you serious dough to remove it, or fine you for neglecting it. Not only is nobody, including you, going to want to set foot on the property, let alone build on it, you’ll have city taxes to pay and fines to dread.
6) Recreational Use
What would be nicer than to know you have a little plot in a place “near” Grouse Creek, Utah? Just a modest 1/4 acre; it costs only $800 or so. Even if it turns out to be junk, it’s cheap enough not to care, right? That would be one way of looking at it, although flushing $800 down the toilet would net you the same benefit. Zoned for recreational use only, which means you can’t build anything on it, you’re buying a hunk of dirt. Some might take solace from knowing they own a hunk of dirt somewhere (very far from any town, as usual), but you need to understand what recreational means; it means that dirt-bikers are tearing across that hunk of dirt at will, as they do in that part of Utah, and you can’t really stop them because you’re not allowed to build anything. It’d be cheaper just to do what everyone there does and ride that dirt for free. Carved from enormous acreage into useless 1/4 acre squares with no road access or way to find the place without GPS, no utilities (you won’t need them), nor any practical use, nor will there ever be any, you might as well have bought a deed to property on the moon. And framed it.
7) Quit Claim Deeds
So you went ahead and bought that land anyway, even when I said you shouldn’t buy land sight unseen. And you got a deed that says “Quit Claim” on it. Sounds good too, like the owner has quit his claim and now it’s yours. It’s not good; Quit Claim means the seller is quitting all responsibility regarding the land, thereby transferring them to you. This may be because there’s something wrong with the property, liens against it, ownership is contested, or the seller only owns a partial share of the property. In such a case, all his headaches are now yours. A Warranty Deed assures the buyer that the owner vouches that the property is lien-free, full ownership rights have been transferred. You can insure a Warranty Deed, you can’t a Quit Claim Deed. Niether assure you about the suitability of the land, its utility, accessibility, or buildability. But at least if you get a Warranty Deed, it’s all yours.
8) Owner Financing/Taxes/Mortgages
No credit check! That’s the first come on to owner financing, usually mentioned in the title or at the top of the description, and it’s a bad idea unless you’re rich enough not to care. Payments are high; $300-$500 a month for 3 years. Sure, they offer good terms sometimes, sometimes as low as 8%, some offer zero percent financing. But since they’ve picked their own price (even at auction; that’s what reserve prices are for); they can claim any amount is interest, the stat is meaningless. What good is zero percent interest when your payments total $14,000 for a square of nothing an appraiser would put at $1,000 or less? The bottom line is, you’re making what is essentially a car payment on something that is a great deal less usable than a car. Miss a few payments, and it’s gone; you don’t get to touch the deed until it’s paid off. Even if the land is usable in theory, it’s usually at an inflated price.
Another money trap is property tax. Those vacant lots in Detroit command around $150 a year in taxes; invest in a few of those and you could be paying thousands in property taxes on things like useless, dangerous, toxic land. That causes things like missed payments, forfeitures, and credit woes.
Never count on mortgaging undeveloped land; banks don’t fall for any of that bogus land stuff. They don’t like lending on property that has zero cashflow, they won’t lend on dilapidated boarded up houses and weedy vacant lots, they won’t finance your pair of ranchettes near Deming or your Appalachian woods or your dirt at the bottom of the Pacific. So if you do get in a tax pinch, or rack up fines, don’t expect the bank to bail you out. They probably wouldn’t take the land if you gave it to them.
9) Where’s a Sucker When You Need Him?
If you’ve already bought some of these properties, or are even more tempted now despite everything, you may be thinking in the back of your head, “I’ll just dump them off on another sucker; there’s one born every minute…” Hats off to you if you can make it happen, because the small time lot, parcel, and acreage buyer is at the losing end of what is essentially a Ponzi scheme. Jow Blow buys 200 acres; carves them into 20 acre parcels and sells them to people who carve them into 5 acre pacels, which eventually get chopped up into 1/4 acre lots. By the time you shell out $800 for that 1/4 acre, you’re paying the maximum that 1/4 acre is ever going to get. Even at the bulk economy rate, only the top of the pyramid makes any real money. Now that the market in Grouse Creek is saturated, some of those 1/4 acre lots have started selling at $200 apiece, a loss of 75% on your investment, and no, they’ll never be “hot” again, because they’ve been divided as far as the law permits. Many properties like these are sold by infomercial real estate guru types at seminars they charge hundreds of dollars a head to attend. Stay away from those guys, too.
10) The Usual Perils.
The internet is rife with rip-offs, scam artists, and fraudsters. eBay is notorious for its multitude. While the majority of eBay sellers will handle your transaction honestly and responsibly, there is that omnipresent risk of getting burned. As usual, the most vulnerable are the elderly, and those with poor credit scores. Even the honest ones will include the all encompassing disclaimer “sold as-is, where-is” and often admit that they’ve never seen the property either. And as always, remember: you can’t get something for nothing, you can only get nothing for something.
There’s something romantic about knowing you own a piece of land somewhere, even if you’ve never seen it with your own eyes. If it’s in a rugged place like Texas or Colorado, even more romantic. That’s what the sellers play on most, just like Al Pacino in Glengarry Glen Ross when he went in for the kill. You want to believe you have that retreat somewhere, that piece of the earth nobody can take from you, a place of spiritual freedom in your mind. You’ll buy a piece of paper that represents that dream, and the seller will pocket your cash.
If you’re not a romantic type, then maybe you’re a hustler with stars in your eyes, thinking about turning $500 into a Donald Trump-like empire of real estate, trading casinos like they were poker chips, online. Consider every dollar you sink into a surefire land deal on the internet gone; if you manage to recoup half of your investment at some point, you did pretty well. Unless you’re at the top of the pyramid.
This romantic smallfry was sorely tempted by the beautiful, cheap land I imagined these places to be. I looked them over for a very long time. And then I did my research.
Are there good, cheap property deals on the internet? Maybe, but I haven’t found one yet.
Good thing I did due diligence.
