October 15th, 2018

6 Red Flags You’re Buying a Bad Deal

In a seller’s market it can be difficult to find real estate investment deals worth your time and the money. Before you begin to stretch yourself thin searching for opportunities that end up failing or demanding too much capital, look for these red flags.

The deal isn’t within your budget.

As the real estate market fluctuates and shows more favor to sellers, it’s tempting to spend more cash on deals you would otherwise pass on. While the market does shift, numbers don’t lie. If you can’t afford to take the investment risk, don’t do the deal.

The asking price is too low.

In many markets, there are good, cheap deals to be found. Properties in certain areas may carry a lower list price because there’s a motivated seller or the comps support the price. However, you should be on the lookout for possible issues like needed costly repairs – as with the home’s foundation or roof – as well as any structural damage that would drastically cut the property’s value. While prices can fluctuate based on the market, the price is a good indication of the property’s value, so if it seems like too good of a deal, you need to investigate why.

There are gaps in the title.

There are fewer real estate investment horror stories that those with title issues at the center. If you spot irregularities and gaps with the property title, the likelihood of the investment going through shrinks. If it’s unclear who actually owns the property according to tax records or if the owner isn’t the person trying to sell the property, you may not be able to secure title insurance. If you can’t weed through the oddities with the title, it’s not likely your next buyer will want to deal with the headache either.

It’s a stale listing.

It’s possible that a seller simply wasn’t motivated until now and there are deal-worthy properties that take a while to get through the foreclosure process, but if the property has been sitting for awhile, you need to find out why. Properties that have spent years on the market likely present a challenge that other buyers didn’t want to tackle. Do your due diligence and investigate the property thoroughly before entering a deal.

High number of vacancies.

For multifamily properties, a high vacancy rate is often a symptom of a larger challenge. Speak with the tenants and neighbors of the area to get a feel for possible issues. The current property owner could be the problem, but if you take on the property, you inherit the challenges. When you crunch numbers for the property, consider that some tenants may not want to stay under your management, causing even more vacancies. In addition to that, some tenants may be behind on rent and refuse to get caught up in order to stay. Factor an initial loss in rental income into your numbers to make sure the deal is still worth your time.

The local economy is on a downturn.

What has happened in the market over the last few years? If the census shows the population is dwindling, jobs are becoming more scarce, or the local government isn’t investing in roads and infrastructure, it may be difficult to sell or rent the property. Consider how attractive the market is as a whole, not just the investment property.

As you scour the real estate market, keep these 6 warning signs in mind. Do your due diligence to protect your investments and partner with a closing firm that has your best interest in mind. These real estate resources will help you walk through the investment process.