Don’t Discredit A Property Based On Looks Alone
By JD Esajian on July 7, 2014
The real estate investing business would certainly be a lot easier if we got approvals on every property we made offers on. With increased investor competition and a reduction in foreclosed and short sale properties, you need to look outside the box for your deals. One of the areas you can look into is properties you didn’t considered just a few months ago. These are properties that, from the outside, you have no desire to walk into. If you do walk in by chance, you want to run as fast as you can out of the front door. However, don’t discredit a property based on looks alone. On closer inspection, these properties can fit perfectly with what you are looking to do and can be quite profitable. Sometimes the ugliest properties can be exactly what you are looking for.
We have all heard the story of the ugly duckling. In the real estate sense, the ugly duckling is the property that has an overgrown yard, old carpeting with stains, holes in the walls, fixtures removed or broken and garbage up to your ankles. There is nothing about the physical appearance that is appealing in any way. In fact, most investors don’t even step foot in the door before driving away. But, on closer inspection, all this property needs is a little TLC and some basic work to restore it to workable condition. If you are in an area with reduced inventory, you need to work every deal possible even the ones that look poor from the outside.
One of the things that turn buyers off most is a house with a bad smell. As an investor, you are obviously a buyer. It is not always easy to do, but you need to look at the big picture of a property instead of its current condition. The reality is that most everything in a house can be fixed and restored if you have a large enough budget. Carpets can be ripped up, walls can be replaced and bathroom floors can be updated. You need to look at the neighborhood first and then the foundation of the property second. Smells can be a deterrent, but they can be remedied quickly and rather easily. If you are looking at this property as an investment and know you will need to put some money into it, the current condition should only be a small factor. Keep your eye towards the big picture to see exactly what type of property you have on your hands.
One of the things that make these properties attractive as an investor is that you may be able to use the condition against the seller. Regardless if you are dealing with a traditional seller or a lender through short sale or foreclosure, the current condition is a big factor. With these properties you need to hammer home the point that the house is a mess and will need a lot of work. They are probably aware of this, but if the seller is a lender they may need some updating through pictures and even estimates. Most lenders have companies that take care of the yard and winterize the property, but some are overlooked or have been in the foreclosure process for months. If you can point out all of the weaknesses of the house and show the current condition, you may just be able to get a great deal on a property that has real upside.
The biggest factor in realizing a profit on these types of properties is a perfect budget. This will come with experience, but the more accurate you are with your estimates, the more potential the property has. Many new investors see a distressed property and have wonderful visions of all the work they are going to do. When they get started with the rehab, they quickly go over budget because of all the work that is needed. instead of having a profitable property they slowly leaks into the red. Depending on what you want to do with the property, you need a defined list of exactly what you want to do, for how much and in what order. Big flop projects like this require a lot of time, money and organization. If you can successfully pull it off, there is quite a pot of gold at the end of the rainbow.
If you have a trustworthy contractor that you work with, it is a good idea to take them with you to the property so they can get a feel of what they will be in for. They will also be able to give you a much more accurate budget if they see the property and everything that it entails. They may scoff at the condition of the property as well, but it is important to keep in mind that this will not be the end-condition and that the property is an investment. Some of the biggest money makers are on properties that nobody else wants. Even if your business is robust and things are going great, you should take the time to do your due diligence on distressed properties. You never know when you will come across the needle in the haystack and find a jewel of a property.
The ugly duckling of a property can be your most profitable deal if you give it a chance. Take your time and look at every property that comes your way, even the ugly ones.