5 Signs You Shouldn’t Buy That House

by | BiggerPockets.com

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.”

Related: 10 Rental Property Red Flags You Should Never Ignore

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

foundation-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.

Related: How to Exit a Real Estate Deal Gone Bad

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.

Summary

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?

Comment below!

About Author

Sterling White

Sterling White is an investor and business owner on a mission to make the world a better place through principled and efficient real estate investment.

Even before co-founding Holdfolio, Sterling and his partner Jacob Blackett had been involved with the purchasing and selling of over 100 SFRs. Today, Holdfolio is a prominent platform for investing in income producing multifamily apartments. The firm has been featured in national publications such as US News and was ranked as one of the best real estate crowdfunding sites in 2018 by Fit Small Business.

The success of Holdfolio’s technology gave birth to SyndicationPro, a fast growing all in one software solution empowering investors to efficiently and easily raise capital online.

11 Comments

  1. Michael Steven Harris

    I agree with most everything you say in here except one buying in declining areas is exactly what you should do. Think value investing Benjamin Graham style. 2008 almost the whole country was a declining market, regions suff periodically as well. Should an investor violate a financial guidepost just because everyone in there market is doing it? That sounds an awful lot like depending on the greater fool to buy you out to me. Just my two cents. It’s like I say there’s a bear market somewhere where things are selling for pennies on the dollar. There is not an infinite variance rule applying to any asset class. When things are at the worst they’ve been in years if not decades they tend to stabilize giving good bargins on rentals or improve and make it a good value play. Okay now I’m done I promise.

  2. Nancy E.

    Hello Sterling,
    Good article that touched on several items, we have recently seen in the Florida market.

    (1) There is a lot of competition for properties and it is rising the prices; good for sellers but bad for buyers.
    As an investor you should never manipulate your numbers to meet someone else request. That is why a lot of investors in the past have went bankrupt. Do not over leverage yourself.
    (2) Not all properties are created equal; it is always best to double check and inspect because some repair issues are beneath the surface.

    Keep writing…

    From Nancy

  3. Dave Rav

    Grrrreat post!!!

    This article is so very needed for the current climate in many (not all) markets today. Values are going up, inventory is down and folks (non-investors esp) are scurrying to grab deals.

    Your post brings us all back to investor reality. Back to the basics. We should not get caught up. Forget bid wars and the like; stick to the numbers. You said it – they dont lie.

  4. Chris Williams

    Good reminders Sterling. Can’t hear “the numbers must work” too often.

    Forgive my ignorance, but “Chinese drywall?” What’s the hazard here? Is there a sign for which we should watch?

    P.S. – I’m one of those Bay Area-ites who plans to leave soon. The numbers here don’t work whatsoever.

  5. In addition to those areas of concern mentioned WATER deserves its own separate checklist. Why? Because water quality and water pressure can be conditions that lead from minor to major conditions affecting the quality of enjoyment of a home. Example: In many parts of the country properties have private wells or, the whole city is on well water. It was not until after touring a number of properties in a rural area that had dropped in pricing following the crash of 2007/08 that we noted a handful of rural homeowners from age 8 to 60’s who had lived there for 5 to 18/20 years showing serious and nearly identical neurological conditions on well water vs. the newly installed city well water that had been filtered to minimum EPA standards for levels of the naturally occurring high Arsenic in the well water. When we found out the family of one of the homes we were looking at had decided against neighbors advice to install a reverse osmosis filtration system on religious grounds since others had lived there for years prior without issues we did more research via the EPA site and decided that since the water quality was near the bottom of the EPA quality standards AFTER city water treatment we decided against the area since the expense of reverse osmosis filters would be too frequent due to the water quality of the ‘grandfathered in’ homes with wells and water assay would need to be done to determine whether or not the water quality was worsening!
    Another important issue with water:WATER PRESSURE! There is no certified inspection service that has anywhere on their inspection checklist that notes whether or not someone can be taking a shower in the home without interruption of water flow and either extremely hot or cold blasts of water when a toilet is flushed, a spigot is opened to water a lawn or wash hands, or an appliance such as a dishwasher or washing machine can be run at the same time. The only preventives to ensuring there is water pressure adequate to your enjoyment is to write into your purchase agreement that either or both you and the inspector repeatedly test the water pressure to determine whether or not there is interruption of water flow and temperature when one or all areas of the home including flushing of toilets simultaneously while a shower is in use causes it. Some clues there may be problems with less than adequate water pressure: Fire Hydrants colored Red or Orange vs. Blue or Green and, Gravity Fed Water tower.
    But wait, there’s more as the late Billy Mays used to say in his sales pitches: nuisance insects! You need to check for known harmful or nuisance insects: Examples: In many parts of the Southwest and into the high desert there are various types of Scorpions, the worst being Bark Scorpions in places such as Texas and Arizona and nuisance insects such as the acid burning Blister Bug or messy Vinegaroon that you can look up to find out what they are. I’ll make this short, but sometimes you can go into homes where there is a Vinegaroon problem and the homeowner will have towels covering their furniture and bedding or, the furniture and carpet will have suspect spots on it that will look almost as if someone uses chewing tobacco and sprayed it by spitting. When asked, they will likely tell you no, ‘We have ‘Roons’ in the house.’ Note: There is no mechanical trap or legal pesticide as good as those used in the past such as DDT or Chlordane and we have friends who live as far north as Nevada in Carson City and Reno who have Vinegaroons but they are not considered a ‘native species’ and only folks who have lived there for most or all of their lives seem to know about them but on occasion, someone new to the area will post a complaint on Reno craigslist.
    Weather: This is important to consider especially when thinking of moving to a new state. Either extreme of temperatures, humidity, wind and snowfall need to be taken into consideration. If it is an area of high snowfall, will you be equipped to use a snowblower to excavate snow that can reach up to your roofline and will you have a good vehicle with 4WD that will enable you to drive safely during peak snow season? A friend who lived in Alaska shared with me that buying a new truck annually was pretty standard due to the extreme wear from the weather there. I did not know until researching further that in places such as Minnesota it gets so cold that many homes and businesses have heat systems installed under the asphalt of driveways and parking lots to prevent ice and snow build up!
    If moving to a hot area where temperatures are consistently in 3 digits for several months of the year, are you also likewise prepared to consider more frequent replacement of roof and even driveways (and yes, tires and other parts of your vehicle more frequently need replacement-had a steering wheel ‘melt in’ at the 12 O’Clock position so that it had a flat area making it look like a partially eclipsed moon)
    Insulation: Do you know what the ‘R’ rating is for the insulation in the walls, in the attic/roof space and under the home is or if there is any? If you don’t know, ask! If the home does not have insulation in the walls & none in the attic/roof or under the home, guess what? You will be either too hot or too cold in your home and likely the property was built prior to 1979 when gas prices were nowhere near what they are today and heating or air conditioning could be run 24/7 with a much smaller dent to the pocketbook than today.
    I can outline more including drive-bys to inspect the general atmosphere of a neighborhood from best times such as after school (2-4PM) night to see how quiet or noisy (9 to 12) and early morning (5 to 7) but you can find out alot remotely too by using sites such as city-data.com and by searching out local online newspapers, chat boards such as craigslist and actual city websites and direct contact with local Police/Sheriff for crime data.

    • Manon Sheiman

      Deborah, some of the items you list I hadn’t thought of.
      But tell me, on the positive side, can you please list the areas/cities that you DO approve of?
      I really do want to know, in order to take advantage of your good advice and extensive research. Thanks.

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