The best possible scenario for a real estate investor is to find a undervalued house to be able to then turn around and sell it for a profit. Obviously, this can be a difficult prospect as real estate markets becoming increasingly clogged with willing investors, but what happens when you do find a possible target? How do you evaluate its viability? The real answer: Keep your cool.
Finding a target may seem like the most difficult part of the investing process, but gathering a variety of potential real estate possibilities will help you develop a more discerning real estate investing eye. Turning up undervalued prospect is an exercise in targeting sellers that have a motivation to sell quickly.
That motivation could come from a recent divorce, a fresh relocation or some financial difficulties. These situations are often emotional and if you get too wrapped up in the story behind each sale, you might be more prone to simply say yes to every opportunity instead of evaluating each investment properly. Here are some tips:
Before you ever go on a search for potential investment properties, write down the kind of profit margin you would require to get involved in a real estate deal. You will want to build in cushion for cost overruns and market fluctuations, of course, but many investors forget to compensate themselves properly for time.
By setting up your guidelines with time limits attached to them, you can avoid this problem. Getting involved in a property that will eat up six months of your time and return a small profit is obviously not worth the trouble. However, not every situation will be as clear as that, so developing a plan on the term of your investment and the profit level you want to target will help you more efficiently go through potential properties, undervalued or not.
Don’t Be Over-Eager
Keep many irons in the fire but only pull one out when the time comes. One of the pitfalls of finding an undervalued house is the tendency to forget about needed repairs or other work to get a house back on the market. You might be so excited to find a target after a long search, the story behind a seller’s motivation might prompt you to say yes before going through the math on the investment.
If you have developed guidelines, now is the time to use them. Don’t wait until late in the transaction when a seller is putting pressure on you to move to sit back and think about the investment. You are more likely to make a rash decision or submit to a seller’s negotiating point that you would not have otherwise. Just because a house is undervalued doesn’t mean the seller is resigned to getting the short end of a deal.
Don’t Be Fooled By Volume
While volume might be a valued statistic in the retail industry, real estate investors should avoid counting investments instead of counting profits. Just because you’ve found a handful of undervalued houses does not mean that you need to get involved with each one no matter how small the profit.
In real estate investing, you do not make up your profits through volume. Instead, strong real estate investors will spend time on the properties that will net them the biggest return and focusing on that one strong prospect instead of 10 inferior ones will help you develop that investing skill.
While it is exciting to find an undervalued house that you might think has the potential to be a solid real estate investment, don’t get carried away by that excitement and forget to evaluate the deal properly. Do your math to make sure that the time you put into a property will be rewarded, no matter what the selling price might be. You will be a better real estate investor over the long term if you do.