Investing in property can be a risky situation if you aren’t prepared to do your homework. Hidden legal holdings, bad pricing, and a bad neighborhood can make an investment property seem great on paper, while providing no real value once purchased. And, as is often the case, no amount of renovating and flipping can help some of these properties.
Here are some things to look into when you are investing in property to determine if you are getting a good deal.
The Property Doesn’t Have any Zoning Issues or Liens
Just because a property is available for sale doesn’t mean that there aren’t any underlying issues. Many sellers will fail to mention (or may not even know) that there could be zoning issues or liens on the property that could impact its value.
First off, a lien is a settlement against a property that protects a lender against failure to repay debt. Banks can place a lien on a home as part of a mortgage, so that the home and the property are used as leverage for the borrower to pay back their debt. A lien held by a specific entity gives that entity the right to seize the property if debt isn’t paid off. Now, typically these aren’t an issue as recent liens will be easy to track down.
A zombie lien is a particular situation where a bank has told a homeowner that they will foreclose (complete with auction). The homeowner moves out and leaves the property behind, thinking that the bank is taking the property in lieu of their debt. But then the bank does not hold the auction or follow through with the foreclosure, meaning that the original homeowner owes any money for taxes or upkeep. Often, the original homeowner doesn’t even know they still own the home or owe money.
Furthermore, make sure you know what you are building or buying and what the property is zoned for. Investing in residential areas near industrial zones can lower home value in a way that you can’t recover from.
Do some extensive background checking. If there isn’t a clear path of ownership from the original owner of a house to the current seller (especially if you are buying a foreclosure house) or a clear map of nearby zones, you can’t be sure if you are getting a good deal.
Check Out the Cap Rate for Commercial Properties
If you are investing in commercial or office space, then the capitalization rate (or “cap” rate) is a critical number for you.
The cap rate is a percentage based on the ratio of the Net Operating Income against the purchase price, with NOI being the cost of operating the property per month. This number tells you how much you can expect to pay on the property over time against the purchase price.
If you are investing in a commercial property, you want a higher cap rate, because this signals that the property probably has a lower buying price against its operating costs, meaning you could be getting a great deal.
Compare the Selling Price Versus the Appraisal Value
For any property, you should be checking out the appraisal value against what it is actually being sold for.
County assessors and private lenders will assess property values and make those assessments public for real estate purchasing purposes. A few factors go into that assessment, like surrounding property values, school locations, business locations, the state of the property and buildings on the property, and others.
The appraisal value is not the set-in-stone value of the house, but it can signal to you that the property is worth a certain amount on the market. Selling prices that far exceed the appraisal value meant that the seller either put the price too high without understanding the value of the home, or that they improved the home and think that they can set the price higher than surrounding properties. In either case, if there is a huge discrepancy between the prices then consider why that would be, and if you are getting a good deal.