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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.

I give you…THE LIST:

WHY THE ASKING PRICE

Price is the first thing and investor sees.

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 electrical wiring? In older houses these problems are VERY common. Dont forget to consider 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.

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.

TAKE ADVANTAGE OF 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

Experienced real estate investors try to learn everything about the market they are shopping in. Sometimes its the small details that give the property you’re looking at the best chance to appreciate. For example: How close is the nearest church? Is the area family friendly? What is the local crime rate… is it close to good school? Where is the closest Fire/police station? Does the neighborhood have a community watch program? Next factor in the local floor plans that surround your target property. Was the last owner 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.

As the man said…it is all about location.

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.

Fixer properties are a treasure trove to a savvy investor. If you have a good eye for details and can spot maintance problems you can make a nice return on your investment. Things like a bad roof, poor plumbing or a bad foundation can be very costly to repair. Once you have an idea of what youre looking at for repair cost, do yourself a favor and add a little buffer say 5%…just to be safe.

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.

Understand that a single use zoned property is always cheaper than a multi use.

Watch out for “Owner 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.