How to Tell a Good Property from a Bad One

Everyone wants to know how to tell a good property from a bad one. It's harder than you might think sometimes, especially if you’re new to real estate!

Any real estate transaction has potential risks, and everyone wants to know how to tell a good property from a bad one. But is there really a way to know for sure?

In this deal, we'll check out a property that looked great to our Associate but ended up being a hassle and a major risk. It worked out okay in the end, but if he had listened to his mentor he could've avoided a lot of headaches. In this time of chaos, it’s important to be adaptable—and to learn how to be adaptable, it’s important to hang out and learn from those with experience.

Listen to your mentor!

The property we're looking at today was an expired listing that our Associate found through his virtual assistant. We often use virtual assistants to call on expireds and other leads. If the seller is interested in a deal, the assistant then forwards it on to us. That way, we can call on hundreds of leads and only deal with the ones who are serious.

This house was in a good area and the market was doing well at the time, so our Associate felt good about taking it on. But his coach felt differently. Knowing the area and having done hundreds of deals himself, he advised our Associate against this deal. The numbers didn't look great and he didn't feel like they would be able to get a tenant buyer in the door quickly.

His coach warned him that if he took on this property, there was a good chance that it would sit for a while and he would have to make the monthly payments himself. Our Associate was convinced he could find a buyer in just a few months, so he went ahead with the deal anyway.

Let's see what happened.

All 3 Paydays™

Our Associate took the house under contract on a 48-month term with a purchase price of $415,000. And as it turned out, his coach was right—this property sat for an entire year before he was able to secure a tenant buyer.

Is that the end of the world? No! But it does cut into the final profits for our Associate and it causes a lot of headaches that most of us would rather avoid.

When he did finally find a tenant buyer, our Associate was able to agree to a sale price of $460,000.

Payday #1 on this deal was the down payment, totalling $20,000. The tenant buyer reached this amount through a few different payments. There was a $9,000 upfront payment and then two more payments over the next two years of $3,500 and $3,000. Our Associate also added in a $250 monthly payment for 18 months, which is an additional $4,500. In total, those payments add up to the full amount of $20,000.

Structuring Payday #1 over time is a very common technique we use. It improves our cash flow, continues to vest the buyer in the home, and sets them up for stronger qualifying for a mortgage.

Payday #2 is the monthly spread. In this case, it was pretty low. Our Associate owed $2,010 per month to the seller and was getting $2,041 from the tenant buyer. That's only $31 per month, but that's okay! We always stress that you shouldn't focus on individual Paydays, but instead focus on the entire deal. To be clear, that comes out to $1,209 for Payday #2.

Payday #3 is the markup on the property plus the principal paydown. There was a significant markup here—$45,000—and $250 out of that monthly payment was going toward paying down the principal each month. That's a total of $38,377 for Payday #3 when you remove the down payment from Payday #1.

In total, All 3 Paydays™ add up to $59,546.

Was this deal a waste of time? No, absolutely not—no matter how you look at it, $60,000 is still a great Payday. But there were a lot of headaches involved with this deal and our Associate took a major risk by having it vacant for a year.

So, what's the lesson here? And how can you tell a good property from a bad one?

Listen to your mentor! And if you don't have a mentor, get one. Being adaptable pays you well.

It takes years of experience to understand the nuances that occur with these deals and to know which properties will be worth your time and which ones won't. There are no set rules to follow, but when you have hundreds of deals under your belt, you'll have a pretty good idea.

If our Associate had listened to his mentor on this one, he could've avoided this deal and spent his time on one that would've been much more lucrative without all the risk. That being said, our Associate still ended up doing well with this deal and was able to turn a less-than-ideal situation into a great Payday. It just goes to show that even a subpar terms deal can still be well worth your time!

Do you have a mentor? Why or why not? I'd love to hear your thoughts on this in the comment