Today’s TV shows love showing the most dramatic rebuilds and remodels of distressed houses all over the map, but are there some you just shouldn’t buy?
Wholesaling real estate, fixing and flipping houses, and acquiring, remodeling, and leasing rentals can all be great ways to make money. Still, many real estate investors may be getting in far over their heads by buying properties they shouldn’t. Where do you draw the line? What warning signs should you be looking out for when evaluating potential house deals?
1. Big Ticket Repair Items
Repair issues that are expensive and time-consuming can be very problematic. They can come with many hidden surprises and lead to lengthy renovation times and extra risk. When you do the real math, these issues can often outweigh any perceived or advertised “discounts.”
This can include items such as:
- Foundation cracks and leaks
- Structural damage
- Roof replacements
- Flood and mold damage
- Chinese drywall
- Septic tank leaks
- Rewiring needs
- Plumbing problems
2. Poor Local Economic Fundamentals
Sometimes it’s not the property itself, but the local area that is a bad investment at a given time. This can even apply to what have been some pretty trendy and expensive destinations in the past.
Red flags here include:
- One major employer or industry in immediate location
- High unemployment rates
- Numerous store vacancies and boarded up commercial buildings
- Lack of job growth and future proofed jobs
- High crime rates
- Limited buyer and renter pools (i.e. in rural areas and small towns)
- Declining populations
This last one is particularly important today. The new remote workforce and flee to affordability and away from high taxes is causing some major population shifts. Recent polls show as many as 50% of Bay Area California residents plan to move out in the next few years. Similar trends can be found in other parts of Southern California, too.
3. Doesn’t Hit Your Numbers
If the numbers don’t work, the deal doesn’t work.
Recently, many investors have been caught up in manufactured inventory shortages and bidding wars. They throw out their numbers and get involved in transactions they shouldn’t. That can be very costly and risky.
On that same note, there are others who have also been stuck on numbers that just might not be there anymore. They’ve tried to copy rules of thumb and formulas they saw online that just aren’t going to apply in their area in this phase of the market. It’s not 2004 or 2008 anymore. Don’t speculate, but don’t sit idle because you are trying to find something that doesn’t exist either. One hundred percent returns on no deals is still zero.
4. Too Many Vacancies
Too many local homes that are vacant and too many for sale and rent signs lingering can be a bad sign. It suggests low demand. Low demand leads to landlords cutting prices and offering concessions, which ultimately leads to lower asset prices. That’s typically not the phase of the market you want to be acquiring in. Check out other destinations that are growing instead.
5. Too Good to Be True
Often, if it seems too good to be true, it probably is. Not always, but often. If the pictures look amazing and the price is too cheap, there is a reason. Maybe it is a scam, or maybe there is something changing in the neighborhood or underlying repairs. Providing you know what the issues are it can still be a deal. Just make sure you conduct proper due diligence and know what you are buying.
There are still lots of opportunities out there to buy homes and other real estate investments. Overall, analysts still seem bullish on the market. But getting stuck with a bad buy can really take the profit out of everything else you are doing. It doesn’t take many mistakes to really get expensive. Get out there and take action, but watch for these signs when evaluating deals.
Any other red flags you’d add to this list?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.