Don't Overpay For Investment Property
Novice investors aren't the only people who make the classic mistake of paying too much money to acquire an investment property. In fact, overpaying can be a pitfall for experienced investors as well. Here are some strategies to avoid this error:
Be cautious about comps. An appraisal-like analysis of recent sales prices of comparable properties is a time-honored means to determine the market value of a for-sale property. But while very recent comps may be useful, they're still historical data, which inherently becomes less useful over time and isn't a reliable predictor of future trends. Smart investors weigh pending sales, current asking prices and future expectations as well as comps.
Track the market. While no one can predict the future, smart investors pay attention to the overall direction of property prices and try to estimate how much a property might be worth in the future. These projections may not be completely reliable, but they're still important to consider along with historical trends.
Plan for hidden defects. Expensive repairs can detract from the value of any property, particularly one that's older than the useful lifespan of its components. But obvious cosmetic problems may not be the only defects that need attention. Hidden issues like broken appliances, a cracked heating system, foundation problems or a leaky roof oftentimes can be repaired, yet the likelihood of such surprises should be considered in any estimate of the property's value.
Be aware of upgrades. Two seemingly comparable homes can have vastly different valuations if one has been upgraded to reflect homeowners' or tenants' current wants, needs and tastes while the other still has ancient amenities and accoutrements. Without those upgrades, the out-dated property likely won't be worth top-dollar.
Consider investment income. Investors whose focus is oriented toward income-producing properties can do well to add current and potential future income streams to the mix of factors in how much a property is worth. Are the anticipated rents adequate to pay for financing, owning and operating the property and generate a profit as well?
Ignore asking prices. An asking price is simply the seller's opinion of how much the property is worth, an opinion that may have little or no relationship to the true market value. Likewise, the seller's financial obligations with respect to the property or personal financial situation aren't relevant to the market value. The same might be said of replacement value, a term used primarily for property insurance purposes.
Ask about deal points. Experienced investors know the price of the property isn't the only cost of acquiring real estate. That's why they ask the seller about the proposed terms of the deal as well as whether the price may be open to negotiation. A higher price may be justified if the seller agrees to pay closing costs, purchase title insurance, offer a credit for repairs or add other inducements to the deal.
Copyright 2007. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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