If you talk to any experienced investor about a prospective deal, they can probably rattle off a few pros and cons about the property, based on their experience alone. While this may look easy, it is really an accumulation of years of practice. How quickly and efficiently you can evaluate new deals will have a direct impact on your bottom line. Evaluating deals means more than just looking at the purchase price and some comparable sales in the area. You need to look at the big picture and factor in how quickly you can buy, at what price and what you can do with the property after you take ownership.
The most important factor in evaluating any property is the location. The location will dictate what your options are, your offer price and the amount of work needed to reach your goals. A property in a good location will always be in higher demand than a nicer property in a bad part of town. You can fix up almost anything on a property, but you can’t change the neighborhood. With every property you look at, you need to know the town’s mill rate, crime numbers, employment data and any other relevant information. You can get a great deal on a 5,000 square foot home in the middle of nowhere, but your options and demand will be limited.
Aside from location, price is the most important feature of a property. Some may consider this the most important, but a good deal is only a bargain if there is still demand after you buy. It is not enough to just buy the property at a reduced price; you need to strive to get a great deal on every purchase you make. This means knowing the real value after you buy and after any work and making an offer based on that. There is a fine line between getting a good deal and the best deal possible. This may not seem like much of a difference, but if you can save a few thousand dollars on a half dozen deals a year, you are talking about a lot of money.
Making good offers means knowing other homes in the area. Looking at just price or days on the market may not give you a full idea of their value. You need to look at the listings and see exactly what each individual home offers in comparison to the subject property. Some listings may be bank owned or foreclosure properties that are being sold in as is condition. Some properties may be short sales while others could be conventional sales, but with a cash offer at a reduced price. In addition to looking at listing sheets, you need to drive the area and look at the neighborhood and the layout of the area. Looking at pictures online can be a bit misleading and not give a real sense of house. If you see that the house is in a busier area than you thought or in close proximity, it will affect the value. With every offer you make, you need to know how prospective buyers will compare your home with others currently on the market or in the area. This is how demand, and ultimately value is judged. The more realistic you are in your estimates, the better investor you will be.
A hidden factor in getting a good deal is the ease in which you can obtain the property. You may see a property that is a short sale and appears to be a steal, but you will have to deal with the bank for six to nine months, follow up every other week and never know where you stand in the process. Conversely, if you have a motivated seller that wants to work with you and act quickly, paying a higher price may be may still get you a good deal. If you can turn the property over quickly and get in and out, you can close more deals throughout the year. Plus, not having to haggle with a bank over the sales price is worth something. Instead of spending time going back and forth making counteroffers, you can close the deal quickly and spend your time working on other areas of your business.
Agreeing to a deal and getting it to closing can be two completely different tasks. Along the same lines of working with a motivated seller, you should look at the other parties involved in the transaction. If you are working on a wholesale deal you should consider who you are selling to or selling from. If you are buying a property and the selling realtor or attorney keeps coming back with contingencies to the contract or looking for money, you may need to reconsider the deal. Very few deals are ever cut and dry and as easy as they appear, but the people involved play a huge factor in just how smoothly a deal goes. If you had a bad experience in the past with someone in the deal, their presence should be taken into account. You don’t want to judge someone on one deal alone, but if all things are equal, you may want to go another way if you have multiple offers.
There is a lot that goes into evaluating a deal. The property is always critical, but there are other factors involved. The more experienced you become as an investor, the easier it will be to see the big picture and quickly evaluate every new deal that comes your way.