As promised, I’m going to circle back and cover a few pre-contract concerns that have to do with due diligence and determining value. I also want to address the importance of not falling into the trap of what I will Anti-Real Estate Agentism – AREA for short. Not only do first time investors benefit from an extra mind that’s experienced, it’s a benefit to all investors except the ones who have mastered all aspects of investing. I’m not saying this because I’m an agent, but because it’s true. And if you absolutely insist on AREA, then rely on SOMEONE who has the necessary experience to be a guide, a mentor, a sounding board, an extra set of eyes and a mind trained to spot advantages and traps, someone who knows the process in and out. Unless you’re into saving nickels to lose dollars, get help.
When I first got involved with real estate investment, I had only a cursory understanding of how local, state and federal government affect the values of real estate, how it’s important to understand how their actions can determine your best course of action when investing.
Let’s say you’ve eyed a property in what seems an up and coming area in your town, a building that would be perfect for a restaurant. Renovation is happening in this area; you can see a building across the street that’s being rebuilt and you hear it’ll be a coffee shop and the building next to it will be an upscale antique shop. It’s on the periphery of downtown and it seems logical that growth is going that way. All this you can see and discern, so you estimate a price on the property you like and come to find out the owner is asking way more than you estimated, so you pass on it because your friend who has an uncle who invests gave you a formula to estimate fair market value. Perhaps your friend failed to mention something that when you are on the streets, so to speak, actually investing, is vitally important.
Let’s say you’ve done partial due diligence and are pretty sure you have a good idea of the property’s value, however you haven’t gone the extra mile and become involved with community planning, nor or you up on zoning in surrounding areas, and you don’t really have an understanding of transportation plans. The owner knew of land use changes in the neighboring area, therefore priced accordingly; however, the owner didn’t know about recent transportation plans to open a route to the new area because plans were in the works to build a mall. The new route and the upcoming development would put this property in a prime spot for future traffic. Actually the property is worth more than the owner is asking, speculatively speaking.
The point is to think large even if your investment strategy is to start small and focused. And the point is to know what’s going on with community planning, zoning and transportation in the surrounding areas. It’s one thing to calculate value with a formula working with limited information, it’s another to project value based on full context.
The investor, if all turned out as planned, and therein lies the risk of investing, could have bought the property, rented it out for one purpose for two years or so, basically breaking even, then could have sold once the development was complete at a much higher price, making a nice profit. He could have if he had had the information.
Information is valuable. Information is what it’s all about. Hmmm, information, that sounds like a good topic for next week. Later.
Oh, I forgot, AREA. A good, informed agent might have helped this beginner. Something to think about.