There are going to be many times in your real estate investing career where you encounter questionable deals. You know these ones. The ones that are border line deals or near deals. If you could justify a little less in repairs, a bit more in expected rental income or a little more for the after repaired value, it would be a definite deal.
These near real estate deals are really a test of our investing discipline. The most successful real estate investors are very disciplined. They set solid parameters and requirements that a certain deal must meet in order to pull the trigger on it.
When you start to play with the numbers a bit and change the parameters you place yourself in jeopardy of taking on a bad investment.
It really doesn’t take many of these near deals to put an investor out of business if they are not careful. While it is important to take risks as a real estate investor, these risks should be calculated risks.
Sometimes the best thing that we can do as investors is to walk away from a deal. If you really want to minimize your risk it is imperative that you stay disciplined and stick to your buying criteria. If you drift away from your buying criteria it could lead to a loss of thousands of dollars and a great deal of stress and headache.
As a wholesaler, if you end up fudging the numbers on a property to make it meet your buyers’ criteria, you are greatly increasing the odds that you will have to back out of the contract. This is bad business. Make sure that the deal will be a fit for your buyers before you ever tie it up by putting it under contract.
There will be times when you run the numbers on a potential real estate deal and everything checks out. It looks like you have a great chance at picking it up below your maximum allowable offer. On paper it looks like a great deal.
This is the time when you need to dig a little bit deeper and fully conduct your due diligence to see if there are any other negative factors that could adversely effect the deal. I call these “Red Flags”.
Here is a list of potential red flags to look for when analyzing a potential real estate deal:
Next to train tracks
Backs up to a freeway
On a very busy street
Under a flight path
Next to industrial, commercial, retail buildings
Next to a landfill
Too close to a cemetery
Overbuilt for the neighborhood
War zone neighborhood
Extremely high HOA fees
If you are looking to wholesale a property with one or more of these red flags, it is important to find out if your buyers are ok with them first. Otherwise you may be wasting the seller’s time by tying up his/her property only to have to back out.
If you are looking to fix and flip a property with one of these red flags you must adjust the ARV to reflect it. If most fixed up comps in the neighborhood are selling for 300k but they are not next to a freeway and your property is, you must use a much more conservative ARV to reflect that. I would also run the numbers using a longer turn around time in case the home sits on the market longer than expected.
If you are looking at a rental to buy and hold, these red flags can affect the amount of rent you can receive. They can also have a negative impact on the resale value when in fact you do want to sell.
When analyzing a potential real estate deal, if you feel uncertain whether you should move forward or not, seek out the opinion of a truly disciplined investor that you know. A second opinion can many times give you that extra confidence to walk away or move forward with a deal. Often times a second pair of eyes may catch something that you did not initially see.
The other option you have is to just walk away. There will be better deals that come along. It is just a matter of time. You will feel much better moving forward with a property that you are certain is a great deal than having the nagging feeling in the back of your mind that you made a bad decision.
Stick to your buying criteria. Stay disciplined and you will be a very successful real estate investor.
I hope that this post was very helpful to you. If it was, please share with someone who you think may benefit from it.
Here’s to your success!!!
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