It can be scary to buy your first couple of investment properties, especially if you’re still learning the industry ropes. So what do you need to know before you buy? As you consider an investment, remember; “if it looks too good to be true, it probably is.” Heed that advice and watch for the five red flags outlined below to avoid pitfalls and make smart, profitable purchases.
Red Flag #1 – businesses are folding and property demand is low:
This is a big problem for a couple of reasons. First, businesses shutting down can quickly mean a reduction in overall property value. Second, if businesses are steering clear of the area, it may mean resident demand is low. Both of these things combined mean you’re likely not going to get as much for your property and it may take a long time to sell.
The lack of interest in the area could be due to any number of things; rising crime rates, poor school systems, new developments nearby or even a bad economy. Whatever the case, it’s wise to carefully select areas that are up and coming or that are already established as good potential places to buy to avoid future profit loss.
Red Flag #2 – the seller is hard to reach or is avoiding your questions:
Generally speaking, a seller should be willing to connect and answer any questions that you have about a property. If you’re dealing with an investment group, you may not be speaking to the homeowner but should still have a point of contact that you can direct questions to.
A seller who is difficult to reach or one who consistently and deliberately gives you vague answers may have something to hide. If you encounter a suspicious seller, make sure you get thorough inspections to rule out any major issues or simply walk away if you don’t want to take on the risk.
Red Flag #3 – the sale price seems abnormally high or low for the area:
This one falls into the “if it seems to good to be true, it probably is” category. If a home is massively under priced for the area, it’s highly likely there’s something wrong with it. There’s no incentive to sell property for way under market value unless there’s a reason to. Conversely, if you’re dealing with an extremely overpriced property, you may have a homeowner who is suffering from seller bias on your hands.
So how do you figure out if a home is over or under priced? Use real estate comps to get a general idea of prices for similar homes in the area. If the property you’re evaluating is significantly different than neighboring homes, do some investigating to find out what’s up.
Red Flag #4 – listing photos or descriptions and reality don’t match:
Creative photography can easily disguise issues you would never know existed until you step foot inside the home. Make sure you always do an in-person walk through before you put down an offer to see the condition of the home for yourself, especially with your first few purchases. This is extra critical if the listing has very limited exterior photos or no photos at all. You’ll quickly learn that just because the outside of the home looks orderly, it doesn’t necessarily mean the inside will be in good shape.
Red Flag #5 – the homeowner is anxious or pushy about the sale:
If you encounter an owner who seems genuinely fearful that you won’t make an offer or that you’ll back out of the sale, you could be dealing with a serious issue. This goes double for anyone who acts secretive about parts of the home, by covering up walls with heavy curtains or simply refusing you access to certain areas. There may be damage from water or fire they are trying to hide.
You can always negotiate the price down based on anything you find during the inspection, but if you’re new to the game, you may be better off moving on to a more confident seller.
Use these five red flags as a guide when you investigate potential investment properties to avoid common investor pitfalls and make smart financial decisions.
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