What to look for in a “Bargin Property”.
August 19, 2008 by Doc Schmyz
Filed under Wealth Building
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Fixer’s and forclosure properties have always been the “jewels” that RE investors look for in order to make big profits. However if you dont do your home work before hand you may loose not only your investment but your profit as well.
Use a step by step mind set. “Go by the numbers” when reviewing all the areas of the investment that you want to focus on here are a few things to think about and add 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 a investment that excels in one area…it cant be problem heavy in another.
Here is the list I have used:
HOW MUCH AND WHY
Most investors focus on price first.
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 electircal wiring? in older houses these problems are VERY common. Dont forget to consider holding costs.
My personal opinion is that the holding cost 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.
A poor understanding of the current market value is another major deal killer. Remember market value is a educated guess at best. No one really knows untill the apprasial is complete.
Price other property inthe area. Come as close to the size/style/lot size you are looking at buying.
TERMS AND CONDITIONS CAN HELP YOU
While price and location are important; dont 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.
LOCATION. LOCATION. LOCATION.
Location is usually seen as the most critical component of finding a good deal next to price. In reality, this matters much more if you?re looking in terms of finding a long-term residence than it does for a quick sale. It’s more critical to focus on the potential profit margins than the area it’s located in. If the ugly home by the dump is more profitable than the fashionable condo downtown, then it’s a better deal, aesthetics aside.
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
Make sure you research the zoning for the property BEFORE you buy it. If you are thiking of adding a second floor or a granny flat…is the zoning available? Make sure you know before you commit to doing anything that will add or change the SQ footage of the property.
Understand that a single use zoned proerty is always cheaper then a multi use.
Garages converted with out permits, Granny flats that get added..etc..etc. These are common examples.
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