My experience has shown me that this generalization is actually false.
It’s not so much how you buy, rather what and where you buy.
Buying from motivated vendors has long been considered a surefire way to grab a bargain.But investors should be extra careful about buying these properties and conduct thorough due diligence to ensurethey don’t overpay ..; for a lemon.
The real value of real estate is not price, nor is it getting into a home with nothing down, buying a foreclosure or buying from a motivated seller. Price is one of the lowest priorities you should be thinking about when buying a great investment property.
A motivated seller who is willing to let you buy a property with “nothing down” should be the first sign to double check values in the area. Many motivated sellers are motivated for a reason.
Overleveraging a home when prices were higher and then letting you take over the mortgage with nothing down is common in areas where values have decreased over the past few years. The only value there is that you can get into a home with nothing down.
By taking over their debt, should your own situation change for the worse, how are you getting out? You have zero wiggle room. Not much value there. Motivated sellers can be good sources or leads. However, just because they are motivated does not mean that they have a valuable property. Nor does it mean you are automatically getting a good price.
Here are the first five of 10 steps to ensure that you are buying a valuable property and never overpay again.
Look at the big picture
Examine the country you are considering buying in. Does it have a stable national government and how does the rest of the world view it in terms of stability, growth and GDP. Does it have property laws similar to those you are familiar with and that you understand? It is always best to buy what you know and understand.
Check the local economy
Is the region, area or city you are considering buying in sustainable longterm? What keeps people there in terms of industry and jobs? For example, is it a steel town? If so, is steel in demand long-term?
Is it a one-industry town like a gold mine that tends to boom and then bust? You are always best to have diversity in terms of
multiple industries that have long-term growth sectors such as commodities or healthcare as our population ages.
Select the growth areas within the city
The closer your property is to employment, transportation and amenities, the more protected it will be from recessions as people tend to move closer to their work in economic downturn, not further away. In turn this puts more pressure on real estate values and rents in those areas.
Look at the individual property
If you want to buy a valuable property, then buy one that can protect you from a downturn in the economy.
Buy a property that covers all its costs. If you lost your income and had to rent it out, make sure the market rent would cover all the expenses including the mortgage, property taxes, insurance, repairs and maintenance, property management, utilities and a vacancy allowance.
You may be saying, “the only properties that cover themselves are $300,000 and I don’t want to live in a $300,000 property.”
There are residential properties in Toronto for sale for $900,000 that cover all their expenses so keep digging.
Check out the market
Make sure you know what other properties are selling for so that you don’t pay more than other buyers. Don’t assume the prices
on internet sites like MLS.ca, realtor.ca or realtors’ personal websites reflect prices people actually pay.
These websites show the asking price of homes that are currently for sale, not what price those homes actually sold for. Many end up selling for less and several sell for more.
A common tactic in more buoyant markets is to list a property below market value to attract multiple bids. Since most buyers do not see the final sales price, this can distort your perception of value if you think the underpriced home sold for its asking price. Before you make an offer, always look at comparable sales in the neighbourhood you are considering.
This story from tthe CREW archives appeared in the December 2011 issue of the magazine.