When to Buy in Bad Areas???

Question

Hi All!  I am a newbie with one successful flip under my belt.  I work mostly with preforeclosures, but am also interested in fixer REOs.  I have 20 offers in and have recently begun focusing on the bad areas of town as this is where the deals seem to be(REO).  My question is, besides price and repairs, what are the things to look for when buying in these areas to insure that they will resell.  Some of the areas seem so bad but yet there are people living there. Thanks in advance for the advice!

Account Closed · Answer

The most obvious problem that I can see is that there are no longer any sub-prime mortgages.

The people who will buy a house in a bad area for retail are not the type of people who can qualify for a 20% down standard residential mortgage.

So how you gunna sell that house?

Pam Grim · Answer

I'm really new and don't have anything productive to add, but I just wanted to say that what you're doing Mike is really cool. Beyond just being able to make a profit, it has to feel good to be able to make a difference in those neighborhoods.

I do have a quick question though...how do you deal with the tenants in the those bad areas? Especially the drug/gang types you talked about? Do they ever threaten you? How do you handle those situations?

Michael Rossi · Answer

Yes, I get threatened from time to time, but most druggies will back down to authority figures (like a landlord, the police, etc).  However, I do take the situation seriously and I never work without my handgun.

Mike

Michael Rossi · Answer

What is a "bad area"?  I think that's the first question to answer.  What characteristics would make an area a "bad area".  I think that everyone has their own idea.

My idea of a bad area is one that is controlled by gangs and where bullets REGULARLY fly.  It is an area that is too dangerous to walk through during the day, even if you are armed.  Anything less, I would consider an acceptable area for buying rentals.  In fact, I specialize in taking over properties that are infested with drug dealers; kicking them out; and rehabbing the buildings.  That often involves buying several properties on a given street.

For example, about 2 years ago, there was a street in our city that was known for being a wild, drug infested area.  Two of the houses on the street were involved in a big drug bust and had sustained damage from the concussion grenades; kicked in doors, etc (swat damage).  I took over 6 of the buildings on the street; evicted all the drug dealers and other riff-raff; rehabbed the buildings; and found good tenants for the buildings.  That entire neighborhood has now turned around.

I am currently doing the same thing with another neighborhood.  It has been a dangerous, drug infested cesspool.  I took over one apartment building about 3 years ago; cleaned it up; and rehabbed it.  I just recently took over another apartment building that was absolutely infested with crackers (on the same block).  I have now evicted all the drug dealers and other scum and will soon be rehabbing the building.  This building was quite a challenge, with multiple police calls to the building EVERY day.  There were constant fights, guns pulled, drug deals on the street corner in plain sight, etc.  This battle is coming to a close.  The drug dealers are out and I'm at the building every day or night (at least for a few minutes) to show that I'm a hands-on landlord and that I will not tolerate any nonsense.  There could still be another eviction or two, but I think the rest of the tenants got the message when we setout the first evictee and threw out all his belongings into the snow and then hauled to the dump the next day!

This was a long post to ask the question "what is a bad area".

Mike

Ken Bateman · Answer

Agreed with Many of the posts - but it's like anything else - the more risk the more POTENTIAL reward....Ex - A company in Harrisburg is started buying block and blocks of condemned props in a pretty crappy neighborhood...& REALLY making them nice (ceramic tile, security systems, etc) - It was kinda funny to look at first - shitty house, gorgeous house, crappy house, gorgeous house - till the Mayor announced they were expanding the local college just down the block & bringing in a decent size corporation around the corner - now these nice houses are selling for quite a penny - and other investors are trying to vie for the scraps....nothing like jumping in after the rise....

But these guys could have totally lost their shirts....

Pam Grim · Answer

I am a newbie, but I worked for an investor trying to gain experience a while back.

We had one house in particular that was in a really bad area. The investor had cleaned it up and put some cheap appliances in it, made it look pretty nice. While it was vacant waiting for a tenant, the stove, washer & dryer & some other fixers were stolen. They just kept coming back every couple days taking something else.

Finally the investor stopped buying stuff for it, and told perspective tenants the appliances would be installed upon her moving in.

When we finally found a tenant right off the bat she had problems paying. She came up with some pretty bizarre stories!

Peter Kandra · Answer

A bad area doesn't necessarily equate to the buyer needing a sub-prime mortgage.  If your investment strategy is buy and hold, the current mortgage market problems won't last forever.  If your exit plan is more short-term, there's seller-financing, lease options, etc.  Plus these houses are generally less expensive to begin with, so buyers coming up with 20% may be possible.  In New Jersey, there's also state and local programs to assist first time homebuyers, there's FHA loans, etc.

Joshua D. · Answer

Bad areas have nothing to do with the need for subprime.  Many wealthy people invest in bad areas.  Again, the difference with investing in bad areas and good ones is the level of tenant you're going to attract.  Lets continue to explore that angle of things.

Timothy W. · Answer

After adjusting about half a million dollars in claims of Chicago investors who bought in the bad areas of Chicago - I never determined to invest in a "bad" area again.  Now there are plenty of lower income areas that aren't "bad".  I hit those all day long.

Mike Sales · Answer

I've always seen bad areas as a cash cow if you can deal with the tenant relations. It's way easier to find cash flowing properties.  The cons are obvious as you may have a liquidity problem as well as hard time managing tenant relations. I like the idea of investing in low income areas, becuase of the guaranteed. With my strategy, I'm going to use them as passive income.