Discounted Properties Are Not Always Deals
By JD Esajian on November 27, 2013
It is important to preform your own due diligence on every property and come up with your own numbers. When doing this, you may come across a property that you think is a steal. Pretend for an instant that your numbers have you making an offer for $100,000 and the seller is willing to take $75,000. Before you get too excited, you should take a step back and dig a little deeper. These are the properties that you should be leery of and give a second look. With all of the competition amongst investors, it is rare that a good property will slip between the cracks and fall into your lap. Just because you can get a property at a discount doesn’t mean you are getting a good deal.
Sometimes deals can be too good to be true. This does not mean that you should dismiss every good deal that comes your way, but you need to look at the big picture. Why is the seller selling at such a discount? Is there anything I am missing with the structure of the property? These are important questions, but the most important one is what are you going to do with the property after you acquire it.
If you are given an expensive set of golf clubs, but you have never golfed before, are you really getting something of value? The same analogy can be applied to your real estate purchases. If you buy a house in a terrible neighborhood, but get it at a severe discount, did you really get a good deal? At this point, you have to evaluate what you are going to do with the property and how you can squeeze the most value out of it.
If you can’t rent it for a reasonable amount and you try to flip it, there is no guarantee that you will sell at a profit. Now you may be looking at a property that you can’t sell or rent. The deal that you thought you bought below market value turns out to be a disaster.
Depending on who you listen to, you either make money when you buy or when you sell. For what it is worth, you need to have an exit strategy before you buy any property. It should be rooted in facts and supported by data before you even buy the property. You are setting yourself up for failure if you do otherwise. You need to have an exact plan with accurate comparables and only then should you proceed. If you have a limited amount of comparable sales or listings, you are taking a chance that the market may see the value closer to your purchase price than the one or two other sales. This should be viewed as a risky property and one that you should consider walking away from.
Look at the big picture every time you view a property. You may think you are getting a steal because you are buying below the listing price, but you may actually be the one getting sold. Buying cheap does not always mean you are getting a good deal.