Are you tired of staring at a potential real estate rehab and guessing whether or not it’s worth looking into? Do you suffer from what can only be described as analysis paralysis? Are you scared of moving forward on a deal for fear of what comes next?
If you answered yes to any of these questions, you are not alone. A lot of investors are nervous to move forward with a deal because they lack the confidence in their own skill set. And make no mistake about it, determining whether a property is worth investing in is a skill — not unlike negotiating with sellers or marketing. The key is to identify a strategy and adopt it as your own. Only once you can evaluate a deal’s viability with confidence can I recommend acquiring a deal.
Luckily, there is no need to reinvent the wheel. There is a way to determine whether or not a deal is worth pursuing; today’s best investors are using it, and there is no reason you shouldn’t be. If you have found yourself staring at a property with cold feet and an inherent fear of the unknown, rest assured; there is a remedy. Take solace in the fact that there is a step-by-step system to help you determine whether or not a real estate rehab deal is worth pursuing.
One thing is for certain: a real estate investor shouldn’t buy a property simply because they think it represents a great opportunity, but rather because the numbers say so. Evaluating a prospective real estate deal has more to do with the scientific method or a mathematical equation than it does with a good feeling in that there is a process. At the very least, analyzing a property’s profit potential is overtly objective. The average deal is simply too expensive to base its outcome on an assumption alone; you have to be sure the numbers work in your favor. That said, you had better know how to analyze a real estate rehab if you ever hope to realize your true potential.
The next time you find yourself questioning whether or not to pursue a deal that is practically in your lap, don’t jump the gun a let your emotions dictate your actions. Instead, mind due diligence and evaluate the data; it’s all you need to place the odds in your favor. A good real estate rehab business plan should be all you need to get going. And for what it’s worth, there is already a system dedicated solely to analyzing the profitability of a deal; all you have to do is follow the steps I outline below:
Step 1: The Phone Analysis
The first step in evaluating a potential real estate rehab, not unlike a fix and flip investor, begins with a simple phone call; one that will have you inquire about a myriad of topics pertaining to the seller and the property. Your approach should be, at the very least, deliberate. Few sellers have the patience for real estate rehab investors that are vague and suspicious. It’s in your best interest to cut to the chase, while still leaving room for a personable conversation. Remember to be transparent about your intentions, but don’t forget to exercise empathy.
The purpose of your first phone call with the seller is not necessarily to make up your mind on a deal, but rather to determine if the home is worth inquiring about further. In order to do so, be sure to gather the following information:
The moment you get off the phone with a prospective seller, you should have a better idea of the situation. Perhaps even more importantly, you should know the homeowner’s situation, and whether or not they are what you might call a “hot” lead. In gaining insight to their particular situation, you should be able to identify whether or not they actually intend to sell, which is typically more valuable than the information pertaining to the property itself. Pay special considerations to the state of the seller, and gauge whether or not the property is worth moving forward on.
Remember, you shouldn’t know whether or not you want to buy the home yet, but you should have an idea of whether or not it will be worth your time to inquire further. If the road appears promising, proceed on to step two. In the event you didn’t get the answers you were hoping to find, perhaps it’s time to move on.
Step 2: The Desktop Analysis
Provided everything checks out and you believe the property holds potential, you may proceed to conduct a desktop analysis. Following the initial phone call with the seller, conduct your own research with the tools available to you online. The information you uncover will determine whether or not it’s worth your time physically visiting the property.
There are five critical financial areas to cover over the course of your desktop analysis, not the least of which will help you uncover a deal’s true potential. Jump online and find the following information:
1. Property Values & Pricing
2. Financing Costs
3. Holding Costs
4. Buying Transaction Costs
5. Selling Transaction Costs
Identifying each and every cost associated with a real estate rehab is essential in determining whether or not to move forward on a deal. If for nothing else, you can’t know how much you stand to make (or lose) if you are otherwise oblivious to the costs you will incur over the course of a deal. Only once you know how much you expect to spend can you even begin to assume you will make a profit on the backend. Instead of exposing yourself to unnecessary risk, mind due diligence; be sure to familiarize yourself with all of these financial aspects before moving forward.
Step 3: In Person Analysis
At this point, you should have a pretty good idea of what it will cost you to acquire the property, fix it up, and even sell it. It’s worth noting, however, your real estate rehab deal analysis is far from complete. If for nothing else, you still have to mind due diligence and confirm every bit of information you have gathered up to this point. In other words, take everything you have learned with a grain of salt. And while there is no reason to believe you have been misled in any way, there is nothing wrong with giving context to the data you have collected. Instead of blindly trusting the numbers you have been given, schedule an appointment to view the property in person.
I strongly advise those that make it to this stage of the real estate rehab deal evaluation process to visit the property. The in person analysis should start somewhere in the neighborhood of 30 to 45 minutes before your meeting. En route to the property, feel free to drive the neighborhood and give it the “eye test.” Does the area match the description you were told? Is it close to anything that could be of value to buyers down the road? At this point, feel free to drive by the comparables you identified in the previous steps and, again, confirm anything you may have read about them online.
Once you are confident you have a good feel for the neighborhood, make your way to the subject property. Prior to talking business, however, make a point out of establishing a genuine rapport. You will find yourself dead in the water faster than you can imagine if you start off on the wrong foot. So, before you start talking numbers, take a minute and get to know the seller.
Only once you have the foundation of a working rapport in place can I recommend walking the property and talking numbers. Do your best to confirm everything you have been told up to this point by walking every foot of the property. In doing so, you will begin to formulate a more accurate value of the subject property. You may be pleasantly surprised, or you could determine the people you spoke with previously were less than honest. Whatever the case may be, now is the time to see for yourself.
Adhering to a system that analyzes each and every real estate rehab opportunity that comes your way will help you sift through the myriad of deals currently on the market. Better yet, it will help you become decisive and calculated. Only those that know exactly what they are getting into can expect to realize success. You would be wise to remember that.