Deal or No Deal?

With the current housing crisis going strong, home prices not letting up, and interest rates still close to historical lows, I’ve been scavenging through the real estate listings that my agent emails me whenever a new listing pops up in my interested locations (this unsurprisingly happens daily).

Unfortunately, most of the new listings are still overpriced… I mean seriously, you’re trying to sell a condo for $300,000 when another one down the street from yours is listed at $210,000?? That person’s agent is obviously asleep on the job.

And of course I’m staying away from short sales that can take anywhere from three to six months to complete. And I’m also staying away from auctions that might have other hidden liens or structural issues I am not capable of dealing with. So that just leaves me with either bank owned or real estate owned properties.

So obviously I get excited when I find one that looks like a gem. But there’s still a lot of steps you need to do before you can figure out if it really is a diamond or a cubic zirconia. I’m gonna try to delineate the usual suspects I go through everytime I see a potential buy:

1. Hit up Google Maps to see where the property is really located. Check out the street view of the property. Make sure it looks like the selling agent’s picture. Many of these properties have been on the market for months at a time and sometimes the agent’s pictures don’t truly reflect the property’s actual condition.
2. Next, look at the Google Map’s overview of the property’s neighborhood. Is it right next to a freeway or train? If so then discount the property cause most likely it is noisy to live there. Is it close to bus stops, subways, freeway exits, parks, shopping, libraries, schools? If so then that ups the value.
3. Then hit up Zillow.com to look up the technical aspects of this property. Check the specifications of the property’s number of bedrooms/bathrooms and square footage. Make sure that matches the selling agent’s listing. Check what this property sold for in the past to give you a good feel of how much it might actually be worth. Also look at similar houses around your property and what they sold for. The neighborhood’s house values can affect your property’s value significantly.
4. Now look up the county property tax assessor’s public records to see how much this property was assessed for. This factors into how much property tax you will be paying if you bought this place. But more importantly, it can give you a more accurate view of how much this property really is worth. If the agent is listing the selling price at $400,000 but the county assesses its value around $350,000 then most likely the house is overpriced and the seller is trying to make a quick buck. Definitely a warning signal.
5. Go to Movoto.com to find out the more esoteric parts of the property. The website lists the school district and specific dining/shopping areas around the property. That information is very useful to both parents and the elderly that might want to rent your property in the future.
6. After this comes the important part… remember I am assuming this is an investment property not homeowner occupied… how much loan can you actually take on? Yes, you will need to determine how much you can put down and how much of a mortgage you will need to get. If you put down less than 20%, don’t forget to factor in PMI (private mortgage insurance) which can cost around $100/month. Now look at current interest rates from Bankrate.com and calculate a rough estimate of your monthly mortgage payment.
7. Also don’t forget to calculate your monthly property insurance, property taxes (get rates from the assessor’s website), HOA (if you are buying in a gated community/condo), and estimated repairs/maintenance costs.
8. Add up points 5 and 6 to get to your monthly investment property expenses.
9. Finally the good part and the reason why you are actually buying an investment property: look up websites such as craiglist, rents.com, rentometer.com, etc… to see what you can actually make in rental income per month from leasing the property out.
10. If your income from 8 can’t beat or breakeven your expenses in 7 then this might not be a good deal. If so then you need to really look hard and explain why you want to buy the property so badly.

Note: In my case, House #3 is currently generating a negative inflow per month mainly due to two reasons:

1. I’m renting to Bae at a very below-market price.
2. I’m on a 15 yr loan payback period instead of a 30 yr payback period.

Related posts:

• What Goes Up Must Come Down
• House #3
• Big Versus Small
• Real Estate Rate of Return
• Playing with Mortgage Numbers