Sometimes, it doesn’t matter how precise you were with your research data on whether or not the property would be a good deal. Sometimes, all findings point to the conclusion that a certain property will be a fantastic deal. Yet, when you go to either rent or sell the property, something unforeseen can come up. The smart investor won’t make the mistake of lowering the price drastically, desperate for someone to buy or rent it. You’re about to learn how to take that negative unforeseen problem that the property has, and turn it into an opportunity; use it as something that can actually make the property desirable.
You’re going to have to get creative if you’ve got this type of property on your hands. Creativity is essential in real estate investing.When you’ve got a property on your hands with some undesirable traits, the general buyer or renter is going to be tempted to shy away from the house. Here’s how you can learn to get creative when you’ve got a lemon.
The first thing you must do is learn to embrace the problem in your advertising. Make the negative appear as a positive. In your ads, describe how the current issues with the house can become benefits. Many people see an issue with a house and don’t know what they would do about it, so they decide they don’t want to fool with it. But, in your listing, you’re going to give them ideas and show they why that property can be of an advantage to them.
For example, a property located directly next to a bus line may be considered a negative trait of the property. Many buyers don’t like the idea of living directly in front of a bus stop, listening to the bus every 15 minutes. And, if the neighborhood is also already kind of a shady one, the type of people getting on and off the bus at 4 am outside of their potential house may make them nervous. But…what you would do is turn this negative into an advantage; market the house to people that work for the bus line company. In your advertisements, you’ll talk about how close the house is to the bus stop.
Owing more than the house is worth
If a seller purchases a home directly from the builder, and decide to sell it a few years later, they can still be in a tough situation even if they haw a low interest rate, and have made some need renovations and repairs to the house. Reason being that by the time they pay the closing costs and commission, they can’t sell the property because it wouldn’t turn a profit. In this case, you would want to find someone who this house could be beneficial to. This would likely be a real estate investor who prefers that the home is pretty much brand new, rather than containing a lot of equity. Therefore, you could market this house as a “rent-to-own.”
Figure out a way to overcome the issues
Yet another way to handle a lemon property is to find other creative ways to make the property desirable. For example, if the home is located near an airport, you could make the walls sound-proof. However you choose the solve the undesirable trait, make sure that you really utilize your creativity skills so that you can turn the most profit on the house without spending too much cash.
This may come as a surprise, but data has shown that terrible mobile service is actually one of the biggest reasons a home will have trouble selling. If there is horrible reception in the home you’re trying to sell, you’ll want to order a product that will increase that reception at the house.
Other ways to deal:
Face the Reality and Accept the Situation
There’s no point putting your head in the sand agonizing about your current situation for ages. Come out and face the reality. Yes, you’re a victim of the financial recession, and that’s devastating. But it’s also true that the worst is over. It’s done and you’ve got nothing more to lose. From that point on, any positive achievement will be a step in the right direction. Now is the time to conserve your energy and hit the nail hard because success is, after all, “how high you bounce when you hit the bottom.”
You’ve faced a setback. Get over it as fast as you can because that’s the best way you can help yourself. By wallowing over your loss, you’re wasting your energy, which otherwise you’d have put to focus and strategize in the right direction. When you lose something big, you get into a desperate state of mind.
That’s not a great state to be in. You don’t want to be in that position, and so the only way to go is to move forward. Desperate times call for desperate measure, so quit being a crybaby, get up, and make it happen.
After you’ve calmed down, do a thorough analysis of the situation that led to your crisis. What happened? Why did it happen? What didn’t work for you? Take a note of all the facts and figures. Doing a postmortem of the situation will help you to build a foolproof plan this time. It’ll be a good idea to ask your friends and your colleagues to give you feedback about the whole situation. Getting a different perspective will help you in analyzing the situation from a different angle altogether. What are you going to do with that harsh reality you met with? And do you have plans that’ll help you bounce back?
Now, after taking a stock of the situation, put them into writing. Write down a SWOT (strength, weakness, opportunity and threat) for your business. Take a note of your current financial situation including your debts, your lost assets, your liabilities and everything in between that’ll help you to form a holistic picture of your situation. You have to know where you are right now before you can develop a realistic plan to get where you want to go in the future. It’s no different from a road map where you’re trying to figure out your destination route. In order to locate your route, you should first know where you’re standing now.
Some of the questions that’ll help you in analyzing your current status are:
How much money do you owe?
Is there going to be any additional outflow of money?
How much is going to be your monthly cash flow?
How much are you going to spend each month?
Here’s how to spot a bad real estate investment:
Nobody wants to be described as “easy prey,” but too many new real estate investors are. Bad deals and advice abound, carefully calculated to part novices and veterans from their money. Investors of all stripes must be alert to red flags on each and every investment opportunity. It’s all too easy to be snared by opaque metrics, shady dealings and not-as-advertised properties. Look for these four red flags on your next deal.
1. Real Estate Investment Metrics That Don’t Add Up
When the numbers don’t add up, it’s usually not because of bad math. It’s because one or more parties are hiding or misrepresenting data.
Make judgments based on numbers from actual documents like tax returns and owner records, rather than estimates or projections. Tangible metrics, which include net income, cash flow, cash-on-cash returns and ROI, should make sense. If they don’t, and parties to the real estate investment can’t explain why they don’t, move on to a more transparent deal.
2. Credibility Warning Signs
Trust is the cornerstone of any real estate deal. And it’s a significant factor no matter where your deal takes place, even if that location is a crowdfunding platform online.
As real estate crowdfunding grows in popularity, investors should look for the same red flags they would in traditional investments, namely fraud, relaxed credit standards and lack of investor protection. If a crowdfunding platform doesn’t show you how it protects investors or isn’t well-capitalized, pass it up the same as you would any untrustworthy deal on paper.
3. Poorly Located Property
Real estate’s all about location, but too many investors forget that a great property in a poor location could be a red flag rather than an investment opportunity. Optimistic upside projections are based on one big “if”: if anybody actually wants to live or work in a given area.
That “if” is based on dozens of factors, from crime levels and prevalence of vandalism to school quality and local economy health. If a location isn’t somewhere you’d live or work yourself, proceed with caution—no matter how the numbers look on paper.
4. Short, High-Level Investment Memos
It’s easy to think an investment’s cost is the amount of money you put into the pot. But what about all the hidden costs, like local demand for specific types of properties, the experience of the investment party or the actual (versus the projected) costs of renovation?
These hidden costs of ownership really shouldn’t be hidden. They should be detailed in a thorough investment memo. Unfortunately, these costs are often obscured by fanciful, high-level memos that fail to list out market overviews, downside scenarios and other important investment details.
How to exit a bad investment:
The best way to evade a bad investment situation is to have a plan in place from the beginning. This plan will also include a system for deal making, helping to ensure every deal (and offer) you make is up to par. As an up-and-coming investor, you’ll want a safety net in place while making multiple offers. A proven evaluation system will enable investors to overlook the physical allure of an investment property and concentrate on the numbers. This approach will not only increase the rate of real estate deals under your belt, but more importantly, the quality and profitability of each one.
That said, sometimes the unexpected can happen. Whether caught up in the excitement of buying a home or sudden change of heart in the eleventh hour, there are still options for investors. Here are four ways to back out of a bad real estate deal:
Contingency #1: Mortgage Approval
The inability to qualify for a real estate loan is one of the ways investors can back out of a bad deal. Traditional real estate contracts will have contingencies based on mortgage approval, including a specific date in which you’ll be required to obtain financing, as well as terms defined in the contract. The loan contingency states the buyer is not bound to the contract if they fail to secure financing by a certain date. If conditions are not satisfied and you are unable to secure mortgage approval, you can more than likely back out of the deal, allowing you to receive your earnest money deposit back.
The one thing to consider when utilizing this strategy is the wording of the mortgage contingency. While all contracts are different, this contingency will generally include a deadline by which financing and mortgage terms are to be met. Investors are allowed to cancel the contract if they are unable to get a loan within the parameters set forth in the contract. It’s important to review how the loan contingency is written in your contract, with specific details on how it’s expected to be satisfied or released.
Contingency #2: Failed Home Inspection
Another contingency available for investors is the home inspection clause. The details will differ across the United States, but this particular contingency gives buyers the right to have a home inspection within a certain period, which will consist of someone examining the property and producing a report.
The home inspection contingency allows homebuyers to either approve the report and move forward with the deal or cancel the contract based on the results of the inspection. If the report is not satisfactory and repairs are recommended, a buyer can cancel if the seller either refuses to fix the issues or takes longer than the requested time period. Again, these factors can all change depending on the state, the contract language, as well as the stage of contract negotiations you’re in.
Contingency #3: Appraisal
A good way to keep out of a bad situation is an appraisal contingency. As part of the home buying process, a licensed appraiser will be required to visit the property and estimate its value. In return, this value will determine the maximum amount of money that can be loaned by the mortgage company. Because the lender may not agree to a loan over the appraisal price, there is typically an appraisal contingency in traditional real estate contracts that allows buyers to exit a deal in the event a home appraisal comes in low.
Contingency #4: Talk To The Seller
Sometimes the best way to end a bad real estate deal is to simply talk to the seller and request permission to exit. Although it’s not the ideal way to end a contract, this last ditch effort can provoke even the hardest of sellers to accept your cancellation. In many cases, it comes down to being honest with the seller and explaining your situation. They may empathize and tear up the contract or decide to renegotiate with you, depending on your reasoning for wanting out. Every situation, contract and seller is different, but honesty and integrity can go a long way in terms of helping you wiggle out of a bad real estate deal.
Leaving Behind A Bad Real Estate Deal
The ability to exit from a bad real estate deal will depend on a variety of factors, but there are two more important than any others: the exact point you’re “in contract” to buy and what the contract language says about terminating the transaction. Additionally, the ability to withdraw from a real estate deal, including the options available, will differ from state to state. Therefore, it’s important to follow up with a real estate attorney to better understand your options.