July 18, 2009
In’s And Out’s Of Bargain Property
Home foreclosures and fixer-uppers have long been a focus of many real estate investors looking to make big profits. Of course, if the target property doesn’t meet certain criteria, an investor can lose their investment as well as any profit that was to be gained
A step by step approach is best in order to make a solid decision before committing to the investment. Make a check list and use it. And dont forget to add these to your list.
Nothing on this list is really more important than anything else. Its just here to get you to think about what exactly you need to look for. While you may have an investment that excels in one area…it cant be problem heavy in another.
I give you…THE LIST:
KNOW WHY ON PRICE
Price is the first thing and investor sees.
They search for properties they think are selling below market value. This makes sense buy low and sell high right?? However think about the reasons behind the sales price? What is their motivation? Are they relocating or in financial duress? The 3 D’s come in to play here most of the time. (Death Divorce, Debt)
Are there problems with the property that will cost a small fortune to fix? Out dated plumbing??? Poor electrical wiring? In older houses these problems are VERY common. Dont forget to consider holding costs.
Holding costs are one of the biggest profit killers to investors. Taxes, mortgage, commissions to agents (both selling and buying) gas, and electric…all these things add up…and FAST.
Poor determination of true market value is another obstacle to the successful deal. Market value is essentially a subjective exercise where the true value is not known until someone buys the property.
Check out other property near the one youre looking at investing in. what prices are they pulling in? Are they the same size? Lot size close to the one youre looking at? Same style of structure?
PAY ATTENTION TO TERMS AND CONDITIONS
While price and location are important; don’t discount other profit leveraging tools like the terms of the financing.
In fact, used wisely, an investor can pay full price and use this positioning to negotiate lower interest rates or a smaller down payment. Over time, the rental cash flow will be in the black because of the terms agreed upon by the buyer and seller, combined with gradual rent increases and price appreciation.
RESEARCH THE LOCAL MARKET
Learn everything you can about the market your shopping in. What are the schools like? How close is the local hospital? Is there a local police station or sub-station? Also look at the floor plans of surrounding homes. How many bed/baths? Whats the average price in the area? What are the prices of the last homes sold in the area? Etc…Etc.
As the man said…it is all about location.
Most investors think location is the second most critical thing in the investment next to price. Truth be told…it is only critical if you are looking for a long term residence/renter scenario. If you can make a great profit on an ugly house in a less then great area. It may out shine the “perfect condo” by the beach.
FIX AND FLIP AND FORECLOSURES
In the case of a fix and flip and sometimes a foreclosure. It is the job of the investor to factor in the repair costs. A keen eye can save you lots of money in a very short time. (Not to mention a good understanding of home repair work)
Fixer properties are a treasure trove to a savvy investor. If you have a good eye for details and can spot maintance problems you can make a nice return on your investment. Things like a bad roof, poor plumbing or a bad foundation can be very costly to repair. Once you have an idea of what youre looking at for repair cost, do yourself a favor and add a little buffer say 5%…just to be safe.
Understand the ZONE
Zoning provides an opportunity to put the property to a higher or better use and is an area many investors ignore. Higher and better use means that the owner is getting the most out of the land. For example, if a lot is zoned for three units but contains a single lot, then it is not getting its highest and best use. Or if a lot is zoned commercial, yet there’s a three unit residential building sitting on it, it is not getting its best and highest use, like a business or a store.
Understand that a single use zoned property is always cheaper than a multi use.
Classic zoning “no-no’s” are garages converted to bedrooms. Non-permitted granny flats and detached garages.
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