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Mitigating Risk: Let Numbers Dictate Deals

Published on Tuesday - September 16, 2014

There is a fine line between success and failure in the real estate business. In most cases, it all boils down to how educated you are and if you are willing to put the work in. However, being realistic with the numbers and what you can do is also a big part of it. You can look at almost any deal through rose colored glasses and like what you see, but you may not be dealing with reality. With every deal, you need to take an honest look at the property, the numbers and what your goals are. If you do not have a grasp on these three areas, you are setting yourself up for disaster. Mitigate as much risk as possible and listen to what the numbers are telling you.

Any good property evaluation starts with looking at the numbers. There are plenty of rules and guidelines that can help you recognize what kind of investment you are looking at. It is also quite easy to play with those numbers to fit your goals. If you are looking at a rental property with a current rent of $1,000, there is not much work you can do to magically increase that number. If you tweak a number here and there you can make any property look profitable. It is when you take ownership and those expectations are not met that it will really sink. With every deal, you need to take emotion out of it and use the numbers as a guide. If you pursue a deal, only to get a transaction under your belt, without looking at the data, you will end up with a deal that you don’t really want.

The same can be said about repair estimates and after repair values. If your goal is to flip houses, you have to understand these two concepts to be successful. Most properties you consider buying will have a minimal amount of work needed and then the rest is up to you. If you omit this work or lowball the repair costs, you will not see the returns you are expecting. If this is the case, you need to get a contractor or someone you trust to help you with your estimates. You can learn something from every deal, but this is one area that you cannot be wrong on. If your budget is off, the rest of the rehab will be off as well. If you don’t know what you are doing with your estimates and don’t seek help, you can lose money on a deal.

The same holds true when estimating after repair value. The Internet has made the investing business much easier, but it has also made some investors think they are smarter than they really are. Between Zillow, Trulia and other real estate sites, it is pretty easy to find information out about any property. This doesn’t mean it is entirely accurate and it certainly doesn’t mean the values should be trusted. Much like a real appraisal, all these sites are providing is an estimate of the value. The best way to determine the after repair value is to look at as many comparable sales and listings in your area as possible. Just because you are doing work doesn’t mean you will get the value you are looking for. You need to see what has sold and what is in those properties that affected the value. You also need to do the right work for your given location. A hot tub may sound nice, but in areas where houses are close together this will hold less appeal. This is where you should utilize your realtor to find the best comparables. Looking online could be a starting point, but if you are taking it word for word, you will find yourself in trouble.

Having an eye on the bottom line is great, but sometimes you need to spend money to make money. With any rehab, you will be judged on the quality of the work that is done. When you have contractors and other laborers submit estimates, the lowest price may not be the best quality. What you save on labor costs you will lose when you sell for a much lower price or the house sits on the market for longer than you anticipate. Even worse; you may think you are handy enough and try to tackle some of the work yourself. Certain things like landscaping and small paint projects are possible, but anything electrical or plumbing related should be done by someone that knows what they are doing. Saving money is always nice, but you also need to have your eye on the big picture.

It is easy to watch one of the many house flipping shows on TV and feel that anyone can do it. In reality, a lot can go wrong. If you don’t know what you are doing, you can lose money. Fortunately, there are plenty of outlets to learn about the business before you get to that point

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