When the market is healthy and real estate values are climbing, everyone wants to get involved with real estate investing. To many, the idea seems like an exciting get-rich-quick scheme that can pay massive dividends. And while there are certainly situations where investments can turn quick profits, the reality is that good deals are few and far between.
If you want to be successful and make smart choices with your money, you must be capable of differentiating the good deals from the dangerous ones. In this article, we’ll discuss some of the common red flags that often prelude poor investment opportunities. Keep them in mind as you sort through the opportunities that come across your desk.
The first thing to consider is the credibility of the individual who has presented you with the deal or opportunity. You should always do some research on the individual – especially if you aren’t familiar with them – and look for the motivation behind the opportunity. In other words, what’s in it for them?
While this may or may not have any bearing on your decision or involvement, it almost always does. Unless they’re simply being a good friend and shedding light on a wonderful investment, they have some stake in your decision. Sometimes it’s as simple as they want to make money, but need someone else to come on board. Other times, there’s negative motivation beneath the surface. The moral of the story is to always check the credibility of all parties involved and find the facts.
While people may lie to your face, the truth can typically be found in the numbers. As part of your due diligence, commit to scrupulously reviewing all documentation and information prior to getting more heavily involved.
“It’s imperative that investors use their ‘investment sense’ and conduct proper due diligence prior to signing any documents and purchasing the securities being offered,” says Joseph Sierchio, managing partner of a New York-based corporate and securities law firm. “Buyers must be aware of just how realistic the financial statements and projections are with regards to property type, the area in which the property is located, as well as the anticipated life of the project. Without this information investors might not know what they are actually getting into.”
While past performance isn’t always an indicator of future success, it often gives you a pretty good gauge of the highs and lows of an investment opportunity. Don’t overlook financial documents simply because they’re overwhelming.
Sometimes the individual bringing you the investment opportunity is honest and legitimate, and the documents and numbers say the investment makes sense, but the deal is still guaranteed to be a major bust. How is this possible? Well, people and documents don’t tell you anything about the physical condition of the property you’re looking at.
Properties often have major physical issues that aren’t worth taking on from an investor’s standpoint. We call these “lemon” properties. A lemon is a property that has too much to fix. For example, it may have structural issues, an old roof, mold and mildew, erosion problems, or a number of other issues that could be expensive to correct. Think about these things as you evaluate any investments.
How long has the property been on the market? This is one of the first questions you should ask. If it’s been for sale for months and months, there’s likely a reason why. A good deal won’t be available for more than a few days – or a couple of weeks at the most.
If a property hasn’t moved in months, it’s likely due to bad pricing, cost of repairs, poor location, or some hidden risk that you haven’t yet identified. Be very wary of investments that seem too good to be true.
If a property’s seller refuses to allow you to bring in your own inspector or appraiser to evaluate the property, then walk away immediately. There’s absolutely no reason an honest seller would prohibit you from doing your due diligence. If they really believe the property is as wonderful of a deal as they say, they’ll have no hesitations regarding your desire to learn more.
As you know, location is everything. But you can’t just look at the current makeup of the area. If you’re buying as an investment, you must think about location through the lens of your investment strategy. For example, if you’re planning on buying and holding for ten years, you need to evaluate based on where you see the area in a decade.
In order to account for the future quality of location, consider the current upkeep of neighboring buildings. Do they seem to be going by the wayside? Look at vacancy rates in both residential and commercial buildings. See if you can gain any insight into new construction plans in the area. All of these things can help guide your decision-making.
When evaluating real estate investment deals, there are always two forces at work. There’s facts, and then there’s your emotions. As any successful investor will tell you, there’s no room for emotions in real estate. However, we’d argue that emotions do have a place. Just be careful how much power you give them.
While you should never invest in a property based on emotions, there are times where you can say no to a deal based on intuition. Even if the numbers line up, you have to feel comfortable about an investment opportunity. If it still feels wrong after doing your due diligence, it’s probably best to listen to your heart. You’ll rest much easier at night.
At Green Residential, we understand the Houston real estate market like few others in the area. We’ve been in business for more than 30 years and understand exactly what it takes to be successful in the industry. If you’re looking for help with property management or advice regarding anything from listing a home on the market to collecting rent, we can help. Contact us today and we’d be happy to provide you with more information.
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