INVESTMENT STRATEGY
DEAL KILLERS
6 Mistakes That Can Kill Potential Real Estate Deals HERE’S HOW TO AVOID THE COSTLY ERRORS THAT TURN YOUR ONCE-PROMISING INVESTMENT INTO A LOSING PROPOSITION.
by Luke Babich
nvesting in real estate can be incredibly lucrative, but
timeline. If you’re going to rent the place out, your monthly mortgage price is going to be a big factor in how much rent you will need to charge. If it’s too high for the market, you’re stuck with a money pit. Overpaying on the front end has killed countless real estate deals, so make sure you crunch the numbers carefully. 2. USING BAD COMPS One of the most common mistakes that cause investors to overpay for properties is to use the wrong comps. Estimating property value is an art, not a science. The market sets the price, so it makes sense to turn to the market to figure out what you should pay. The best way to do that is to find and study comps (i.e., comparable properties that have recently sold). You average the sale prices of those comps, make a few adjustments, and you have your purchase price, or at least a usable estimate. But you have to get the comps right. Many investors are too loose with their comp standards. They look at homes across town that are in a better neighborhood, or they include homes with the same number of bedrooms but more bathrooms or homes that are the same size but on a bigger lot.
If you get your comps wrong, you’ll get your property value wrong—and that’s how you end up overpaying.
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it can also be a lot harder than it looks. Although the past few years of skyrocketing home values have given a lot of novice investors the idea that buying property is a “can’t-miss” investment, the reality isn’t quite so simple.
3. UNDERESTIMATING REPAIR COSTS
This is another pitfall, especially among many novice house flippers. Because it will persuade sellers and lenders, an accurate repair estimate will not only make a purchase easier, but also provide an investor with a roadmap to profit. If your repairs cost more than you bargained for, your whole deal could be in jeopardy. For example, if you buy a property for $150,000, plan to do $50,000 in repairs, and eventually intend to list it for $250,000, that’s a decent profit. But let’s say that once the work is finished, you end up paying $70,000 for repairs—an overage that’s not unheard of. That $50,000 in projected profit is now reduced to $30,000. And if your sale takes longer than you planned for, suddenly your carrying costs are eating into that $30,000. Before you know it, your margins are razor thin. A good general rule is to come up with an estimate for your renovations—and then add 20%. A lot of this is going to depend on your contractor. You want to work with someone you trust, who won’t overrun their estimates too much,
There are endless variables that can eat into your profit
margins—everything from capital gains taxes to unexpectedly high carrying costs to spiking property taxes. These can slowly turn what you thought was a prime investment into a losing proposition. Let’s look at some of the most common mistakes that can kill potential real estate deals—and touch on how you can avoid them. 1. BUYING HIGH One of the cardinal rules of real estate investing is to “buy low, sell high.” On some level, investing really is that simple. If you sell for more than you paid, you’ve made a profit. If you don’t, you’ve lost money. Everything starts with your purchase price. If you’re a house flipper, the gap between the purchase price and the future sale price determines your renovation budget, your list price, how much you can afford in carrying costs, and your
48 | think realty magazine :: january – february 2023
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