Researching potential investment properties can take a considerable amount of time and effort. The process involves two main steps:
1. Finding potential properties at good prices
2. Assessing the value of properties before buying
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How to Find Properties at Good Prices
Before you can assess whether properties that interest you represent good values, you need to get a broad sense of the valuation of properties in your area—a process real estate agents call education of value. For instance, you need to know the approximate price range for each property type (single-family homes, condos, and so on) in each location that interests you.
Using the MLS Database
To get a sense of property values in the area, you’ll need to peruse a database of listings, brief descriptions of properties for sale that include all the details you need to know about the property, such as pricing, location, and size. The real estate industry has streamlined this process by including nearly all property listings nationwide in one database—the Multiple Listing Service (MLS). There are two ways to access MLS data:
- Work with a real estate agent: Agents pay a membership fee in order to get access to the complete MLS database. They can search the database for you and print out listings of properties in locations that interest you.
- Search online: A few websites, such as Realtor.com and Homes.com, allow the public to search the MLS database for listings nationwide.
Alternatives to the MLS Database
One drawback of the MLS database is that it doesn’t include every property on the market—instead, it includes properties listed by real estate agents almost exclusively. That leaves out the entire for sale by owner (FSBO) market, which features homes offered for sale directly by the property owner, cutting out real estate agents entirely. Since FSBO sellers are often financially strapped, the FSBO market can be a great source of motivated sellers (explained below). You can search available FSBO properties online at ForSaleByOwner.com and equator.com.
Buying Bargain Properties from Motivated Sellers
Most investment markets price investments efficiently, meaning that the price is set by the forces of supply and demand among buyers and sellers. The real estate market doesn’t always work that way, which creates opportunities for investors to find actual “bargains.” Bargain properties are offered most often by motivated sellers—people who are compelled to sell their property below market value for financial or personal reasons.
- Financially motivated sellers: Sellers who must sell their property to generate cash in a hurry. Often, these sellers have suffered a financial calamity, such as the loss of a job, that has rendered them unable to cover the costs required to own the property.
- Personally motivated sellers: Sellers who have experienced an unfortunate personal event, such as the death of a family member or a divorce, that has compelled them to sell.
How to Find Properties with Motivated Sellers
Often, sellers or real estate agents include “motivated seller” wording in the advertisements they place for the property—a clear sign that the seller will entertain offers lower than the property’s asking price. Other ways to uncover properties with motivated sellers include:
- Local networking: Talk to the residents of houses next to or near for-sale properties that interest you. Often, neighbors will know why the seller is selling, which can help you assess how motivated they are to sell the property at a low price.
- Consulting real estate agents: Visit a local real estate agency and ask to speak with agents who have property listings owned by motivated sellers. Since the agent’s interest is always to sell the home as soon as possible, he or she will be happy to show you listings that could lead to a quick sale, even at a bargain price.
- Scanning local publications: Read the real estate or classified section of local magazines and newspapers. Look for properties that remain in the listings week after week. Often, these properties have motivated sellers—just be sure to check out the property thoroughly to determine why no one else has bought the property yet. It may be languishing on the market for a good reason, such as a bad location, poor build quality, or a nearby construction project.
How to Value Properties Before Buying
Contrary to popular belief, location isn’t the only factor that can affect the value of a property. Consider all five of the following factors when assessing the value of potential investment property.
- Comparable sales: Looking at comparable sales means researching the selling prices of properties that compare closely to ones that interest you. You can find comparable sales information by consulting a real estate agent or by using a website such as Zillow.com, which lets you compare estimated current and projected values of tens of millions of homes nationwide for free.
- Expected annual income: The gross rent multiplier (GRM) is a simple equation you can use to generate a rough comparison between the values of two or more rental properties. To calculate it, divide the likely purchase price by the monthly rent amount you expect to receive. The property with the lowest GRM is considered the best value, assuming all else is equal.
- Appreciation potential: This refers to a property’s potential to appreciate, or increase in value. Price appreciation depends on a variety of factors, such as the local economy, demographic trends, and the property’s specific location. Properties with the greatest appreciation potential tend to be in the path of progress—where high demand exists for jobs, high demand for housing will follow.
- Location: Two of the most important factors to consider regarding a property’s location are local crime rates and the quality of the local public schools—low crime and good schools attract tenants and push up prices. Local neighborhood traits, such as appearance, friendliness, access to shopping and transportation, and population demographics can also contribute to tenant quality and property value.
- Building quality: Building quality, often called build quality, is an overall assessment of the materials and workmanship used to construct the property. The best way to assess build quality is to hire a home inspector to inspect the core features of the home, such as the foundation, building material, insulation, appliances and fixtures, roof condition, and flooring.