To determine the value of a property, you must do an analysis and gather as much information about the property as you can. It’s been said that the most successful people are those with the best, most accurate information.

To survive and flourish in the real estate investment business, you need to establish goals and have a clear vision of those goals – this is the key. Then, as you create a list of potential property investments, make sure you always analyze every property before you make the seller an offer. Why? You want to make sure the property will be a profitable investment – one that will help you meet the financial goals you’ve set.

In-depth research on each potential investment helps lessen risks inherent in real estate investing. Such risks include:

·    Paying too much for a property – it pays to know the market!

·    Having more debt service than the cash flow from the property can sustain, especially if you can’t sell the property as quickly as you anticipated.

·    Bad tenants who fail to pay rent and damage property – which creates extra costs and stress for you.

·    A drop in the value of properties in an area or an uprise in vandalism and crime when you buy and hold property – stay on top of current situations.

·    Liabilities when you buy, sell, or rent – such as housing laws, zoning codes, disclosure laws, etc.

·    Keeping sloppy books and failing to pay taxes – don’t lose what you’ve worked so hard to accrue.

Correct and timely information are key to profits in real estate. With the right information, you can make sound decisions and make your investments as risk-free as possible.

Let’s Make a Deal

What is a good property investment? To most investors, it’s when you can purchase an investment property at 25%-40% below its retail value. Shoot for 40% below retail value, keeping in mind that anything below 25% is generally acceptable and is still considered a winning investment.

To figure out whether or not the property is a good investment, perform an analysis on it, which is what Step 2 is all about. This allows you to see if you’ve got a potentially profitable property that fits the 25%-40% rule. This built-in cushion is necessary to help protect you against unforeseen costs or repairs.

Realize that the real estate business can be risky. Thus, the reason you want to avoid properties you can’t buy at 25% or more below retail is because of the costs you’ll almost always incur with the purchase: closing costs, investigation costs, fix-up costs, marketing costs, and so on; these are some important variables to consider when deciding whether or not to buy a property.

In real estate, you actually make or lose money when you buy the property. Buying a property for the right price (25%-40% below its value) can help you overcome almost any marketing obstacle. You want a deal that lets you sell a property the day after the purchase for more than you paid for it.

Focus

There are many ways to get involved with real estate. You can buy single-family homes, duplexes, apartment buildings, commercial buildings, or anything in between. There are also scenarios where you can buy and sell, buy and rent, or buy and lease. You can even pay more or less money upfront. You will need to focus on the types of real estate properties that are attractive to you if you want to be successful. Don’t do a deal just because of large potential profit. Stay within your system and operate from a position of strength, always keeping your financial goals in mind.

As far as location goes, you’ll find the best investment properties in transitional neighborhoods that are just beginning to improve. In many cities, these are usually older neighborhoods where younger people are buying starter homes and fixing them up. To find transitional neighborhoods, look for people moving in and making repairs and for evidence that the city is investing money in the area.

Also, besides the practical aspects, think about what type of properties you want to focus on. For example, do you want to focus on single-family homes, a multi-unit apartments, or commercial properties?

Another factor to consider is that local real estate prices reflect the presence of jobs. The more jobs in an area, the more real estate prices go up – think New York City and Los Angeles! When there are no jobs, prices go down.

You can access information on an area’s employment and economy from local real estate agents and the chamber of commerce. Request and study this information before selecting an area in which to concentrate. Sometimes what you think is a good real estate opportunity actually isn’t. If it’s in an unfamiliar neighborhood, learn from someone who knows it. You don’t want to end up with a bad house in a bad neighborhood, which makes for a bad deal. This demonstrates the importance of having strong network ties with real estate agents and the chamber of commerce!

The U.S. Census Bureau also runs a web site with access to lots of information on local areas, at: www.factfinder.census.gov. This can be a great resource to the diligent real estate investor. In addition, many of your local or state government and sheriff’s offices have web pages filled with information on local areas, including crime statistics for a neighborhood in which you may be contemplating a purchase.


Validate Your Findings

When looking at a property, you’ll want to check into it carefully to validate your feelings that it’s a good potential property investment. You’ll do this by analyzing various aspects of the property.

First, you’ll want to confirm the property’s value. To do this, compare the property you are analyzing to other properties that have sold in the same area over the last year. Compare square footage, selling price, features, etc. to better estimate the price per square foot. For example, if a 1,500 square foot home sold for $100k, it cost $67 per square foot ($100,000 / 1500 sq. ft. = $67 per sq. ft.)

As you continue your analysis, follow these important steps:

1.    Do an on-site property inspection
2.    Look into the utilities
3.    Check zoning laws
4.    Insure a clean property title
5.    Confirm your findings with a professional
6.    Review possible profits and losses
7.    Determine if the property will sell

On-site Property Inspection
It’s important to carefully inspect a property to confirm its value and determine all, if any, repair costs required to make the property a marketable commodity.

Walking through and performing an on-site inspection with contractors is one of the most critical phases of analyzing a property. Contractors will point out those items that need to be fixed to meet code, as well as point out fix-up items that will increase the value of the property.

When you’re just starting out, it’s best to have at least three contractors walk through the details of a house with you. You’ll quickly learn the costs of repairing common items of concern, such as central air, heating, painting, carpeting, etc.

The more times you walk through homes and review these expenses with a contractor, the more knowledgeable you will become. Soon you won’t need a contractor, you’ll know what to look for and you will be able to perform these on-site property inspections yourself.

Also, with property inspections, call a certified appraiser or another experienced investor for a professional opinion on the value of potential property investments in neighborhoods you are unfamiliar with. A quick but professional appraisal of the real estate will confirm its value and can then be shown to potential buyers and/or lenders.

Utilities are commonly overlooked items when buying a property, but these are items that need to be figured into the value of the property, especially if they require fixing to make the property ready to sell.

So when analyzing a property, check the plumbing and appliances to make sure they are in good shape. Flush the toilet, turn on the air conditioning, turn on the heat, turn on the water faucets in the kitchen and bathroom(s) and make sure the water runs both hot and cold, and test a representative sampling of the wall electrical switches and receptacle electrical outlets to see that they function properly.

Check Zoning Laws
Zoning laws come into play when you want to take a property and  increase its selling profits or profitable value by altering it. For instance, you may want to take a home and turn it into a multi-unit apartment. In order to do this, you must check the zoning laws in that neighborhood to see if it is permitted. Even making outside renovations to a residential property requires that you check into zoning laws.

To do this, call your local zoning office to gather information regarding the state and city laws that apply to the potential property – you want to make sure you can get the highest and best value and use of the property you buy.

Zoning can turn a potentially great investment opportunity into a horrible deal – especially if you’re planning to turn a residential property into a more lucrative commercial property. If the city is not willing to change the zoning, it will have to stay a residential property. Don’t buy a multi-unit building only to discover later that the property it is sitting on is zoned for residential use.

Insure a Clean Property Title
Before you buy any property, you or your attorney should research every deed, trust, or lien recorded against that property to make sure you can obtain title to the property. You don’t want to invest in a property you can’t secure a clear on. Make it a policy to buy title insurance on every piece of property you purchase.

We recommend saving your time and energy and leaving the title search to professionals. Unless you already have such experience, it is a complex process that requires looking into legal issues regarding the current owners of the property.

A title search informs you of the chain of title, ownership, and what, if any liens exist: judgments, mechanic’s liens, tax liens, and quitclaim deeds. If any of these liens exist and they can’t be easily resolved, move on and look for another real estate investment. Again, you don’t want to invest in a property you can’t get clear title on.

Confirm Your Findings with a Professional
Once you’ve done a physical analysis of a property, check your findings – the location, pricing, features, etc. – with a real estate agent to make sure you’re on track. This step is one of the more simple steps in the analysis process, but it is still very important. Also, check to see if the property is undervalued or overvalued by calling local lenders. You want to make sure the property is worth pursuing.


Review Possible Profits and Losses

If you’re looking at a rental property you want to buy and hold – to generate monthly cash flow – ask the current owner or landlord for the property’s profit and loss statement, or at least try to obtain a record of the rent charged, occupancy rate, expenses, and yearly taxes for that property.

You’ll want to review this information to understand why the present owner is selling. If the property is not profitable, you can either look to find what it would take to make it profitable or skip it altogether and move on.

It could also be that the property is profitable but the owner is ready to retire from the real estate business. Profitable properties also run into other financial problems that can be reversed with new ownership and financing. For example: divorce, foreclosure, poor management, financing difficulties, transitional neighborhood, unforeseen damage or heavy repair costs, or liens. You need to find out what’s really going on.

Later on in this manual, we have included a list of sample questions you can ask to gain more information from the seller. Use these questions to help determine seller motivation.

Determine if the Property Will Sell

Now that you’ve analyzed the property, you need to determine if the property will sell. Think about who will buy it – the kind of person who will live there, how you’ll find such a prospect, etc. Remember, you make your money the day you buy... so buy right!

Will it sell? It depends on the property. To find out, talk to property managers, the police, religious organizations, and the neighbors. Neighbors know more than almost any professional because they’ve experienced, first-hand, the history of the house in question. Find out how long the property has been on the market. If it’s been on the market for over six months, find out why. This could determine how well you’ll be able to turn around and sell it. Also, keep in mind that the longer the property has been on the market, the more willing the owner will be to sell it at a better price.

To really determine if a property will sell and to avoid spending your hard-earned money on a property that won’t work, do this activity: Prior to buying the property, run an ad in the newspaper describing it; pretend you’re going to rent or sell the property in question. Look at the response you get. If no one calls, most likely it’s not going to be a good real estate opportunity. If you receive dozens of calls, this tells you the property is hot and most likely a great potential real estate opportunity. The exercise will also help you find buyers or renters for the property before you buy it, reducing your risk.

Wrap Up the Analysis

It has been estimated that 98% of all real estate purchases are emotional, which doesn’t usually make for the best buying method. If, on the other hand, you take a business-like, logical, and unemotional approach, you will have an advantage over most buyers and sellers and you’ll make money more consistently. This business-like approach comes through in-depth property analysis.

Remember, you are not buying this real estate property for you or your family to live in, you are buying the property as an investment. As such, you must think of the type of people who would be interested in that property. By developing an unemotional outlook such as this, you will be able to rationally think of the property and how to make that property more appealing to the targeted buyer.

Also, if a deal falls through, don’t sweat it. There will always be another one. Discipline over emotions is the name of the game.

Play the Numbers Game
Getting the best deals in real estate requires making many offers. Expect to review at least 40 possibilities and to make offers on only 20 of those properties. You should also only expect that one or two of these offers will be accepted. This is what the numbers game is all about – starting out with many and winding it down to one or two real possibilities.

The reason? You need to make sure it’s a good, solid investment opportunity... to make sure you’re getting the most for your money. Like any business, real estate investing is a numbers game... there’s a lot to do before you make a lot.