What To Look For In A “Bargain Property”.
Distressed real estate is the diamond in the rough that all RE investors are seeking. HOWEVER, without doing your research you may lose far more then you will gain.
A cautious and methodical approach is best in this decision making process. Keeping that in mind, here are some critical area’s that must be considered when looking at real estate bargains for investing purposes.
Keep in mind…this isnt listed in any particular order. Its just things to keep in mind the target real estate should meet at least one of the criteria, but not be too heavy in any other areas.
Doc’s List:
HOW MUCH AND WHY
Price is the first thing and investor sees.
We are all looking for below market value. Buy for a little, sell for a lot. But why are they selling so low? Is it to solve one of the “3 D’s”? (Debt, Death, Divorce)
What problems does the property have if any? Old cracked and faulty plumbing? Bad electric? If its an older craftsman style home those problems are very common. Is the foundation in good order? Don’t forget holding costs.
My personal opinion is that the holding costs are the number one profit killer. YOU HAVE TO BUDGET THEM IN. Commissions to agents, mortgage, closing costs taxes, all repairs…and dont forget the gas and electric.
If youre not up on the market youre shopping in…Youre going to lose money.
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
Price and location are important this is true. But dont forget about 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.
STUDY 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.
LOCATION. LOCATION. 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
Most new investors and some seasoned ones, seek out fix and flips and distressed foreclosures for the opportunity to increase the profit margin. If youre going this route make sure you have a good eye for the details and a solid understanding of basic home repair.
With small repairs such as painting, minor landscape, and basic flooring, profits may be available but not really worth the risk. More significant profits are found with extremely distressed properties. Plumbing is corroded, the roof needs replacing, and the interior needs to be gutted and remodeled, but the seller is asking 50% of the market value and you can repair it for much less. Always factor in the amount of work that you are looking at once you have a rough idea of the cost of the expense, add on another 5% as a buffer.
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.
Think of it this way, what could make you more money…a single small house on the land you just invested in…Or a duplex on the same land? One tenet or two? Zoning is a gift or a curse depending on your plans with the property…makes sure you know before you buy it.
Garages converted without permits, Granny flats that get added…etc…etc. These are common examples.
