Identify Good Real Estate Investment Property
You're driving along the road when you spot it. There in the middle of
a shaggy lawn sits a disheveled house. It may need a good coat of paint, or a shutter
straightened out, but it's easy to see that with a little work it could be a little
gem of a house. Best of all, sprouting in the middle of the unkempt grass is a For
Sale by Owner sign. It looks like the perfect fixer-upper, but how do you know for sure?
First, consider your reason for buying. If you're looking for a house
to 'flip' - to buy low, fix up and sell for a profit - there are a number of things
you'll want to take into consideration. If your intent is to buy it as rental property,
there's a different set of consideration, and if you're looking for a home of your own,
there's yet a third. Let's assume, for the sake of this article, that your intent is to
flip the property for profit.
The Pricing Test
Is the home listed with a Realtor, or is it a FSBO (For Sales By Owner)? How
realistic is the asking price? Is it in your price range? Can you work out a low or
no-money-down financing option? How open to negotiation is the seller?
Will you be able to realize a profit after making needed repairs?
The Neighborhood Test
Before you invest another hour, do yourself a favor and take stock of
the surroundings. The old saying in the real estate business that the
three factors in selling a home are 'location, location and location'.
What is the location like? No matter how wonderful the house is, you'll
have a difficult time selling it for top price in a bad neighborhood.
That doesn't mean that it's a bad property - depending on how low a price
you can bargain, you still may be able to make a decent profit from it.
Are there 'amenities' nearby? Depending on the neighborhood and your
prospective market, those amenities might include a neighborhood school
with a good reputation, a corner store within walking distance, or a
park right down the street. In one Massachusetts city, for example, the
value of houses in a formerly depressed neighborhood skyrocketed when a
local university announced a commitment to provide full tuition to the
children of neighborhood residents, and provided additional incentives
to home buyers within several blocks of their campus. Investors who bought just
before the announcement realized excellent turnaround on their investment.
Another consideration in the Neighborhood Test is a bit more subjective,
and you'll have a feel for it if you're local and keep an ear to the ground.
Is the neighborhood in transition? A neighborhood that is on the cusp of a
renewal effort like gentrification can be a great place to invest, as long as
the upward momentum continues. An area that is on the outskirts of new
development will often benefit from that as well. If, on the other hand, the
neighborhood shows signs of slipping into a decline, you might want to pass
the house by. If you can see that the neighborhood is slipping, so will prospective
The Condition Test
This is one of the most important tests. The property you want to buy doesn't
require any extensive, expensive repairs. It should be structurally sound, without
any major plumbing or electrical problems. If you're just starting out, you'll want
a house with repairs you can manage yourself - repainting, replace old blinds,
refinishing floors and a little landscaping. If the house requires more extensive repairs,
it will cut into your profit, or eliminate it altogether.
When you view the house, really kick the tires. Look for indicators of
hidden problems. Here are a few things to look for:
Separations between floor and wall, especially outer walls which could
indicate structural problems.
Moisture stains on walls and ceilings could indicate plumbing problems
Lift tiles in suspended ceilings to examine the ceilings above for loose
plaster, moisture stains and other indications of problems
Little piles of sawdust near corners or woodwork could mean termites.
The Title Test
The final test is the title test. Be certain that the title to the
house is clear, with no liens or attachments that could sour the sale. If there are,
and you still want the house, work out a conditional sale, where your purchase is contingent
upon the liens being satisfied.
If the house passes all of the above tests with flying colors,
congratulate yourself. You've got yourself a house that could turn a pretty profit for you.