10 Steps To Buying a Top Performer

Most of us have heard that foreclosures, estate sales, motivated sellers, and nothing down deals are some of the most profitable ways for investors to make big money, right? Well, my experience has shown me that this generalization is actually false. It’s not so much how you buy, rather what and where you buy.

The real value of Real Estate is not price, nor is it getting into a home with nothing down, buying a foreclosure or buying from a motivated seller. Price is one of the lowest priorities you should be thinking about when buying a great investment property.

A motivated seller who is willing to let you buy a property with “nothing down” should be the first sign to double check values in the area. Many motivated sellers are motivated for a reason. Over leveraging a home when prices were higher and then letting you takeover the mortgage with nothing down is common in areas where values have decreased over the past few years. The only value there is that you can get into a home with nothing down. By taking over their debt, should your own situation change for the worse, how are you getting out? You have zero wiggle room. Not much value there.

Motivated sellers can be a good sources or leads. However, just because they are motivated does not mean that they have a valuable property. Nor does it mean you are automatically getting a good price.

Here are 10 steps to ensure that you are buying a valuable property and never overpay again.

1. Look at the big picture. Consider the country you are considering buying in. Does it have a stable national government and how does the rest of the world view it in terms of stability, growth and GDP. Does it have property laws similar to those you are familiar with and that you understand? You are always best to buy what you know and understand.

2. Is the region, area or city you are considering buying in sustainable long term? What keeps people there in terms of industry and jobs? For example, is it a steel town? If so, is steel in demand long term? Is it a one industry town like a gold mine that tends to boom and then bust? You are always best to have diversity in terms of multiple industries that have long term growth sectors such as commodities or healthcare as our population ages.

3. Select the growth areas within the city. The closer your property is to employment, transportation and amenities, the more protected it will be from recessions as people tend to move closer to their work in economic downturn, not further away. In turn this puts more pressure on real estate values and rents in those areas.

4. Look at the individual property. If you want to buy a valuable property, then buy one that can protect you from a downturn in the economy. Buy a property that covers all its costs. If you lost your income and had to rent it out, make sure the market rent would cover all the expenses including the mortgage, property taxes, insurance, repairs and maintenance, property management, utilities and a vacancy allowance. You may be saying, “the only properties that cover themselves are $300K and I don’t want to live in a $300K property.” There are residential properties in Toronto for sale for $900K that cover all their expenses so keep digging.

5. Make sure you know what other properties are selling for so that you don’t pay more than other buyers. Don’t assume the prices on internet sites like MLS.ca, REALTOR.ca or REALTOR’s personal websites reflect prices people actually pay. These websites show the asking price of homes that are currently for sale, not what price those homes actually sold for. Many end up selling for less and several sell for more. A common tactic in more buoyant markets is to list a property below market value to attract multiple bids. Since most buyers do not see the final sales price, this can distort your perception of value if you think the underpriced home sold for its asking price. Before you make an offer, always look at comparable sales in the neighborhood you are considering.

6. Compare apples to apples. The best comparable sales are similar properties in terms of the property type, style, number of bedrooms and bathrooms, and similar square footage within the same neighbourhood, in a similar location, that have sold within the past 30-90 days. Realtors are the fastest and best source for actual sales. Many municipalities also report sales prices on tax assessments which are public in most areas. Simply make sure that you aren’t paying more than someone else has previously paid for a similar property.

7. One of the simplest and most effective ways to determine the price you should pay is by calculating the cost per square foot that other similar properties have sold for. When examining comparable sales, there may be 3 or 4 similar properties that have sold in that same neighborhood. Take the actual selling price and divide it by the total living square footage of the property. A property that has 3,000 square feet of total living area with a selling price of $600,000 has a comparable selling price of $200.00 per square foot. You will often find a range from $20 to $60 per square foot or more. If everything else is equal, properties that have been renovated sell for more per square foot than ones that are in original condition. The mid range includes homes with some updates over the years, but no major renovations. Homes that have sold for the lowest price per square foot tend to be completely original with no updates and often need work. If someone is asking renovated prices for an original or average home, then this is your clue that the asking price is too high. On the other hand, if you see one that has a low cost per square foot compared to recent sales and has been substantially renovated; this is an indication of an underpriced property.

8. Replacement cost is another way to determine if the building itself is worth it. Call your local builders association and ask them what the cost per square foot to build anew home is these days. Of course, they will say it depends what you are building and what level of finishes you want to use. So start with “builder grade.” Builder grade is the simplest and most cost effective. It might be $150 per square foot. Multiply that number by the total square footage you are considering. Then add in land cost and see if you are in the ballpark.

9. Buy neighbourhood value. In addition to using cost per square ft to determine value, the price itself can also be a way of protecting value. In other words, if properties in the neighborhood you are considering are higher priced than the one you are considering– this is often good. By renovating or adding value to your lower priced property, the neighbourhood will automatically support or embrace the additional value as other homes have already sold for higher prices. Alternately, if you buy the highest priced property in that same neighbourhood, you will always be fighting an uphill battle since most neighbourhoods have a cap on the maximum price people are willing to pay in that neighbourhood. Buyers will then consider better neighborhoods. Buying the lower priced homes in the best neighbourhoods is a great way to protect your investment.

10. Finally, look for ways to force the value up immediately, instead of waiting for the market to increase in value. Force the property’s value up through a renovation, addition, adding a carriage or coach house, adding income suites, sub-dividing or even changing the zoning. When a property offers those kinds of opportunities, you are able to force the value up right away, instead of waiting for the market to come to you.

So, where do you find these undervalued properties? Well, whether they are foreclosures, estate sales, For Sale By Owners, a lead from a Realtor or property manager, or a listing son MLS, they are all around you.

As an investor, it’s your job to discover which properties truly are valuable. By following the 10 steps above, you will be able to ensure that you are buying a piece of real estate based on value, not on price. Then negotiate the best price you can, knowing that you will never overpay again.

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