Knowing when the price (and potential) is really right

Cautionary Tale: A young, inexperienced investor is checking the MLS and finds a property that looks great and appears to be seriously undervalued in terms of price per square footage and comparable properties in the neighborhood.

Armed with a pal in construction and a vague sense of the numbers, he puts together the financing and purchases the home for what he thinks is a good–no, a very good–price. Construction proceeds with a pretty good sense of budget, though nothing really locked down–want to keep it loose, you know? Be able to respond to the market.

Construction wraps and a friendly local real estate agent puts the home on the market (at full commission) and it sits. Subsequent price reductions and carrying costs drain any remaining profitability out of the flip and the new investor comes away with just a few thousand dollars lost.

This is not just a common scenario–this is a best case scenario for a lot of inexperienced investors. It takes time and knowledge to avoid the mistakes that undermine so many investors’ bottom lines. So how can you avoid these errors in judgement and walk away from the closing table with a positive number on your balance sheet?

Be the early bird or night owl

You’ve probably heard the old real estate adage “You make money on the purchase, not the sale.” Adding value is never as easy as coming into the project with money already made. That means finding a great deal up front. But that can be easier said than done. One great way to get the deal is to either be the earliest person or the latest person to the party.

For example, once a home goes on the market, the homeowner has probably already done work to it, put in money and time for the sale, and started to plan for a certain sale price. So investors who capture homeowners’ attention before they’ve gotten to that point will have an advantage. Farm or otherwise market to potential home sellers before they’ve actually gotten to market and make the process quick and easy in order to further encourage them to sell to you rather than trusting to the unknown of the traditional real estate sales process.

By contrast, being late with a home that has high days on market can also be a winning strategy. Look for homes with problems that the average buyer might reject–outdated fixtures, wallpaper, lots of yard work–but that you as an investor will see as just part of the renovation process. Even if it’s still priced high, they might be more open to a lowball offer if they’ve been sitting on the market for months without a bite. Especially if they’re heading into a long winter with no love, they may be ready to get out, especially if you can come in at all cash and a quick closing.

Work with real numbers

It’s not enough to have a general sense of the market, or a pretty good understanding of the cost of a renovation. You need to be working with and researching real numbers throughout the process. You need to understand what every potential improvement adds in value. You need to know how sales and purchases at different times of the year will impact price. You need to thoroughly work the numbers for your financing to know just how much your carrying costs will be.

Something as simple as buying in the spring, renovating in the summer, and selling in the fall can have a huge impact on your bottom line since the spring market is generally somewhat inflated and the fall market somewhat flat. But renovating during the winter, you might incur added carrying costs if construction delays accrue from bad weather. Truly understanding your costs and potential income will help you make much better decisions throughout the process.

Negotiate everything

You can’t keep your costs low if you are paying “retail” for everything. Part of your responsibility is making sure you’re getting the best possible deal on everything from materials to labor to services. While it’s tempting to work with people you know and like, make sure you’re also getting the best possible deal on the value they’re adding.

If your real estate agent doesn’t understand the investment market, he or she may not be the best choice for you. If your buddy in construction is not able to keep a crew working at all times, that’s going to hurt you in carrying costs. You need to analyze the cost vs. benefit of every person who works on the transaction and ensure that they are adding to, not subtracting from, the bottom line.

Finding a great deal isn’t easy, but it can be exceptionally rewarding. Truly knowing how to keep your eye on the bottom line throughout the process will ensure that your real estate investment business flourishes. In order to take action on that great deal, though, you’re going to need cash and that’s where a hard money lender like Baker Collins comes in. We have the experience and resources to finance your project with private money, helping you avoid the time and frustration of a traditional lending process.

Contact us today and let’s get moving on your next project.