I’ve often thought of real estate investing as looking for buried treasure except that in this case, it’s treasure that everyone can see, if they only had the eyes for it.
So how do you develop a house-buying eagle eye?
The first thing you need to do is to identify your “sweet spot,” that is, the part of town where you want to do most of your business. This is the part of town where you can have the most consistent and repeated success.
In this section, we’ll walk you through how we identify our rehabbing sweet spot.
You need to identify your sweet spot and stick to it. Time is money, and by chasing leads in unfamiliar parts of town, you’ll be decreasing your chances for a successful outcome and may be losing out on opportunities closer to home.
Your Sweet Spot
In defining your sweet spot, first you need to know what you’re looking for:
- A house that needs repairs, looks tired and possibly distressed
- A house in a part of town that is desirable
- Good school systems
- Close to good jobs
- An area where houses re-sell within 60 days
- A house that has a motivated seller
This is HUGE. You need someone who is willing to sell the house for less than what it’s actually worth. It could be a private seller, a bank-owned property, or a HUD home.
The first thing you want to do is get a map of your region that you can put up in your office. Take a good look at it.
By limiting where you do business, you will be developing an expertise in that area that will save you time and money. Make sure to identify those areas you think present the greatest potential. Then do some research.
When I look for a sweet spot, this is what I look for:
- Geographically desirable
- Good schools
- Steady sales
- Pride of ownership
- Lowest possible “days on market”
- Close to freeways
- Close to shopping
- Price range where just about anyone can afford
To simplify your life and improve your chances for success, limit your choices to available properties near your work and home when starting out.
Rehabbing a house is generally a 3-4 month process, and you’ll be spending plenty of time at the property checking on the work being done (if you’re not doing the work yourself).
The more time you spend in a car, the less you will get done, no matter how efficient you think you are on your mobile phone.
Finding a community that is both affordable and has good schools is the Holy Grail of real estate investing.
Communities with good schools have the jobs, the income and the pride to keep their schools accountable for their children. As a result, they tend to be places where people want to live. This directly relates to how quickly you will sell the house–and that correlates to how much money you’ll make.
There’s a natural tendency to aim big and go for the occasional high-end home. Yes, the expense is greater (it takes more money to buy, hold, and repair), but isn’t the payoff worthwhile?
Maybe yes, maybe no. Only a certain percentage of people can afford the costs of a high-priced home.
Successful real estate investing has a lot to do with limiting your risks. Your best bet is to find a price range that encompasses the most potential buyers.
For instance, in the Greater Cleveland Area that range for me is from $110,000-$150,000 while in Los Angeles maybe it’s from $250,000-$400,000. Again, I’m trying to find the spread attractive to the greatest number of buyers.
Consider this: If you’re stuck with a house that isn’t selling, can you sell it with owner financing or on lease option, and will it cash flow? I know that if I have a property that will re-sell for $110,000-$150,000, I can sell it on a lease with an option to buy all day, and it will cash flow. So that becomes my second exit plan if I can’t sell the property.
Avoid the inner city.
While some people prefer working in rough parts of town, I’d recommend this only if you’re experienced and have an experienced team in place ready to contend with the challenges they ‘ll face on a three-month rehab project.
While the inner-city offers cheap prices and large cash flow opportunities, the costs associated with repairs and hold times can easily eat into any potential profit. You have to be really good to make it work.
Inner-city homes often require properties to sell with owner financing or lease options. If you don’t intend on keeping the property, move your sweet spot to the suburbs where properties sell for retail to buyers who can qualify for loans.
You’ll need to have a good relationship with a real estate agent who can provide access to the Multiple Listing Service (MLS), or you can use a company like RealQuest (www.realquest.com) or Haines Criss-Cross Directory (www.haines.com).
You are looking for areas where properties come on the market and are sold regularly. You don’t want to invest in an area where properties don’t sell or only rent out.
Lowest Number of Days on the Market
You want to learn the number of houses on the market, the number of sales and number of pending sales for the past year. It’s important to know the number of days on market (DOM) before a house sold. This tells you, on average, how long properties take to sell. It will help guide your exit strategy, so you’ll know approximately how long it could take to cash out of the house.
Check on the range of prices for houses sold. You want to see comparable properties that have sold within a range – at the high end and the low end. The high end sales will tell you what you might be able to sell the house for after the repairs are made.
Finally, look for areas that are trending up or down. Again, how many sales are being made in this neighborhood? If the number is low, you know you need to be conservative on offers for any leads your marketing generates in this area.
Pride of Ownership
You want to buy houses in areas where people like to live and work hard to maintain their own properties. Good schools are a reflection of this, but so is home maintenance.
How attractive is the neighborhood? Do homeowners cut the grass, landscape and mulch, trim trees and shrubs? When profiling neighborhoods, you’ll see streets with sections of well-maintained houses followed by sections with houses that seem tired and neglected.
The more amenities that are nearby, the better. A simple tool to evaluate the walkability of a neighborhood, thus its livability, is www.walkscore.com. This site shows you adjoining locations for public transit, groceries, restaurants, schools, libraries, shopping, parks, etc.
Another useful tool for checking out factors that determine a neighborhood’s desirability is www.bestplaces.net. You’ll learn a specific zip code’s crime rate, median income, unemployment, number of leased properties versus owned, and more.
Over time, your sweet spot will change as you take on larger projects. One of my consulting clients recently started a 10,000 sq. ft. rehab. He fully intends to make $200,000. But he didn’t start there. He worked his way up over time.
By focusing on a key area to farm, you’ll get to know it and understand what makes property move in that area. You’ll become an expert in what houses sell for in that area and what it will cost to make the repairs that will generate a fast sale.
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