Home foreclosures and fixer-uppers have long been a focus of savvy real estate investors looking to quickly make big profits. Of course, if the target property doesn't meet certain criteria, an investor can lose their shirt almost as fast as a rock star on a tour bus. A cautious and methodical approach is best for rewarding and risk-averse decision making. Keeping that mindset, here are some critical area's that must be considered when looking for real estate bargains for investing purposes. They are not all equally important. But they must all be considered in their entirety. The property should firmly meet at least one of the criteria, and should have no unjustifiable issues in any one area. Following these principles is essential for achieving a higher return on your investment and lessening your risk.
KNOW WHY ON PRICE
Most investors focus on price first and foremost. They search for properties they think are selling for below apparent market value. It seems easy enough but there are several things to watch out for. First off, never buy for less than market price until you know exactly why the seller was willing to cut the price. What was their motivation. Are they relocating or in financial duress? If not, there may be problems with the property that require costly, time-consuming repairs. Structural problems such as a compromised foundation, or outdated plumbing and wiring could be deal killers.
CONSIDER HOLDING COSTS
A usually unforeseen profit drainer is underestimating the liquidation costs of holding and selling the property. This is not surprising when one considers all the cost components, including commission payments to real estate agents, closing costs, mortgage payments, taxes, plus repair and maintenance costs. An faulty 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. It's essential to analyze similar properties in the area, keeping in mind that prices are set at the margins and may reflect the extremes of a particular housing market environment.
TAKE ADVANTAGE OF TERMS AND CONDITIONS
Investors often focus obsessively on price and location and discount other profit leveraging tools like the terms of the financing. This is especially advantageous if the property is intended an income producing rental. 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 generous terms given, combined with gradual rent increases and price appreciation.
KNOW THE LOCAL MARKET
Experienced real estate investors often rely on the fact they know more about the market than the seller does. Rental market bargains come about because you know more about the market than the seller. Consider the absentee owner of a rental property. They might be primarily concerned with vacancy rates, so they keep prices low instead of upgrading the property. In contrast, your research shows that particular upgrades like air-conditioning, second bathrooms, or enhanced security allow for both lower vacancies and higher rental rates.
LOCATION IS RELATIVE
Other than price, location is usually seen as the most critical component of finding a good deal. In reality, this matters much more 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 investors 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. Those slipping down the hillside and selling for a quarter or less of normal area values. Or the 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.
GET IN A ZONE WITH ZONING
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. These are often bargains because the price is based on current utilization. So the single unit residential is priced low while the double unit duplex could be sold higher or rented out. Harder to find as developers stay more aware of zoning allowances these days. Watch out for "midnight conversions" where owners, aware of the zoning ordinance, have made changes without the oversight of the local building authority. Garages being converted to second units on a duplex lot are common examples. Zoning maps can be found at the local planning department. The biggest thing to watch out for with zoning bargains is properties with multiple zoning that is not reflected on the map. Even if its not your core strategy, the zoning should be looked at just to avoid negative consequences. Something to beware of is a future zoning change from residential to commercial which might affect an income producing rental property.
BEWARE OF SQUATTERS
A common instance of buying bargain properties at foreclosure is handling a former owner who still resides on the property. Not facing reality or citing mortgage fraud, they refuse to move out. You can begin action to get the individual evicted, but if they battle it in court the judge may not dismiss the case and now you have a potentially lengthy court battle on your hands. Costs totaling in the many thousands and time measured in multiple months could be the end result of the purchase. In any other type of purchase, always stipulate the conditions of occupancy, such as the house must be empty, before closing the deal. In closing, these are some important areas you should use as a framework when searching for bargain properties. It serves to remind us that there's a bit more more to it than simply price and location.