Analyzing A Property: How To Know If Your Deal Is Solid
Most real estate investors are in a constant search of their next deal. Even if they have projects they are currently working on they usually have one eye on the future. There are times when this quest for a new deal leads them to places they don’t want to be. They begin entertaining deals, properties and projects that don’t really fit with what they want to do. Soon enough they have committed hours to a property and are considering making an offer. It is at this point when you need to step back and think about whether or not you really want to move forward. Getting your next property to contract is nice but not if it sets your business back months. Here are five things to consider before making an offer.
- Cost Of Repairs. The basic concept of any deal in real estate is to generate value after you buy. This is usually done through buying in the right market or adding value through improvements. If the cost of improvements outweighs the return the deal may not be as good as you thought. Before making an offer you need to evaluate your cost of repairs. For starters make sure you are using realistic numbers. If your repair numbers are not accurate you will be running uphill trying to recover the minute you take ownership. Next, take a look if your repair numbers give you the return you anticipate. Blindly making upgrades and improvements does not work with every property. Regardless if you are buying to rehab or rent you will probably need to spend money on the property. Getting a property that needs excessive work without an appropriate return is a deal you need to reconsider.
- Numbers. In addition to the cost of repairs there are several other numbers that should influence your decision. The numbers are the backbone of any deal. It is not enough to simply glaze over your numbers and assume they are accurate. If you are off even slightly with the numbers you won’t make the profit you are looking for. There are a handful of simply formulas that you can use as a guide. These formulas may seem tired and old but they still work with almost any property. Start with the most basic number for any purchase, the price. Are you comfortable with what you plan on offering? As obvious as it sounds if you don’t think the numbers work at the asking price offer what you think is fair. You never know what a selling is thinking and may accept. Next think about your after repair value and current market conditions. It is critical that you compare apples to apples. Looking at properties that don’t match the subject property will give you an unrealistic expectation of value. Breaking down all the numbers on a deal may be overwhelming but is the most important aspect of deal evaluation.
- Due Diligence. Do you know everything about the property and the deal? The most successful investors are those who leave no stone unturned. They don’t accept the sellers or their real estate agents numbers as fact. They take the time to verify everything about the property and rarely have any regrets. They have no doubt as to the condition of the property and are usually never thrown off by an unexpected item. There is a lot of work that goes into making an offer. You need to spend the time to verify everything about the property, neighborhood, title, numbers and deal. Since there are so many moving parts all it takes to one slip up to be left disappointed with the deal. There are always things that pop up that are out of your control. You need to do everything in your power to leave as little to the imagination as possible. Due diligence is necessary prior to making any offer.
- Legality. Only after you are comfortable with the numbers and the property should you move forward with the offer. Even if it looks like everything is clear sailing you are not out of the woods yet. You, your real estate agent and your attorney need to review the contract, lease and any other legal document associated with the property. As much as you may like a property if the contact is written in a way that does not provide protection you may need to walk away. Here is where a good attorney will make their money and negotiate to get these items fixed. If there is a stalemate and things cannot be resolved you have to weigh the risk and reward of making an offer.
- What Needs To Happen After I Take Ownership? With any property your vision must meet reality. The final piece in moving forward with your deal is making sure what you want to do is realistic. You and your contractor need to be on the same page as far as the budget and scope of work. Additionally you need to reach out to other members of your team to gauge availability and interest. If your team has other projects they can’t get out of your timeframe may be pushed back. With any real estate investment time is of the essence. You need to hit the ground running as soon as you take ownership. If there are any delays it will impact your bottom line. Before you make any offer you need to know that your time is on board and ready to go when needed.
Never make an offer just for offers sake. Eventually you will get an offer accepted on a property you don’t really want and you can’t get out of. Prior to making any offer always consider these five areas.