What I Look For When Buying A House / Investment
The one thing I look for in every investment deal I do is a hole in the marketplace.
What is a Hole in the marketplace? A HOLE in the marketplace can be many different things:
Hole #1 Physically Distressed Property
The first and most obvious hole in the marketplace is a vacant run down property. People who want to buy a home generally want to sign paperwork with their bank close and unpacked their bags. A run-down home is not desirable to most buyers. As an investor, this creates an opportunity to buy the home at a price where it can be fixed up and sold for a profit.
Hole #2 Financially Distressed Property
The next most obvious property is a bank owned, tax distressed, or home that is facing foreclosure.
Bank owned homes are automatically discounted by the marketplace an average of 15%. Many of them become distressed physically as well, which then creates an even greater opportunity.
Hole #3 Heir Owned Property
Another hole in the marketplace is inherited property or investors who have come to retirement age and have not kept up their investment property for several years. A favorite mentor of mine always said time and circumstance changes the mind of all sellers even you. Most heir owned property has less value in the minds of the sellers because they didn’t pay for it. Heir owned property also usually has multiple sellers so they will only be getting a fraction of the value, and heirs typically spend their portion of inheritance in their minds long before the get it. Likewise, an investor who is nearing retirement oftentimes wants to unload the entire package and realizes doing so requires discounting.
QuickTip: When buying heir owned property, make the purchase price easily divisible by the number of heirs. So if there are seven heirs then the offers should be $70,000, $63,000, $56,000, and so on. The reason this works is because the difference between $10,000, $9,000 or $8,000 is very slight in the eyes of the heirs. The speed of the money is way more important to them.
Hole #4 Lack of Inventory
Another hole in the marketplace is a lack of inventory meaning there are many more buyers then sellers. This is when building new inventory becomes very profitable as buyers become impatient and are willing to pay a little more to get into their home faster. When you see an average builder become an investor you know this is what’s happening in your marketplace.
Hole #5 Lack of Land & Municipal Will
The final hole is a lack of build-able space. In many cities it becomes impossible to increase the number of housing units based upon topography Like rivers and in bluffs. The inability of a given municipality to be able to improve infrastructure like roads or subways, which then causes property values to go up fast enough that adding a second story becomes very profitable.
Likewise municipalities put in rules and regulations that prevent new or larger buildings from being built to meet the needs of a given community. Putting buildings on historical registry is also causes this problem and in large cities creates a housing shortage that becomes very lucrative to those who know how to overcome this problem.
A real-life example is a 50-unit building I am currently planning after being approached by two separate investors looking for a larger rental building. As we began to examine the project, we found that in the La Crosse county market, there is a shortage of purchasable single-family housing below $150,000. So if we build a new 50-unit building, it’s worth more money sold as condos in a $150,000 market than it is just being rented out. How much more profitable? Somewhere between $1.5 million and $2 million.
If you’re interested in getting in on this deal give me a call on my cell phone at 608-306-1199.
In conclusion the most important thing to find while being an active investor is a hole in the marketplace that you can fix and turn into a higher profit margin than other investments.
As another mentor of mine likes to say, the purpose of an investment dollar is to go out into the world and bring back friends. If he fails to come back with friends or fails to come back at all, it really wasn’t an investment dollar.
Put your money to work for higher returns.
