by Doc Schmyz
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.
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.
Doc’s List:
WHY THE ASKING PRICE
Most investors focus on price first.
So the goal is to buy for cheaper than the current market value and sell within market value or above. So how come the seller is offering such a GREAT price. Is it to settle debt??? Is it due to divorce? Death in the family?
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.
A poor understanding of the current market value is another major deal killer. Remember market value is an educated guess at best. No one really knows until the appraisal is complete.
YOU MUST ANALYZE similar properties in the area. Keep in mind that prices are set at the margins and may reflect the extremes of a particular housing market environment.
TERMS AND CONDITIONS CAN HELP YOU
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.
RESEARCH THE LOCAL MARKET
Good investors get in the habit of understanding the lay of the land. What is the local community like? Where are the closest fire/police/EMS services? How good are the local schools? Don’t rule out these questions. Make sure to look in to the last houses sold in the area as well as any selling trends you can find.
LOCATION IS NO TO BE OVER LOOKED
If your shooting for a long term tenet or residence then location is the second most critical thing to look at…however if you have a chance to turn a good profit for a ugly house in a less than 4 star area…that profit might out shine a nice little bungalow on the beach.
FIXER UPPERS AND FORECLOSURES
A familiar area ripe for investment picking is distressed properties or fixer-uppers. Of course these are the houses that need repairs to some degree. And the investor’s job is to discount the costs of these repairs enough so that the profit is still suitable.
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.
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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