It is human nature to try to get the best deal possible. Whether we are shopping for groceries, insurance or real estate, the allure of getting something at a discount can make any purchase look appealing. As we know, buying loafs of bread and investing in real estate are not the same. When dealing with real estate, sometimes a reduction in price may be a red flag for bigger issues rather than a sign of a good deal. Before you move forward with any purchase, you need to do your homework to see if you are getting a good deal or just someone else’s headache. In other words, you need to discern a bargain from a good deal.
Just because you get a property at a seemingly amazing price does not make it a good deal. There are those who will tell you that if you get anything low enough, you will be able to sell it even for a small profit. Those same people are not looking at the big picture. For one, these are the properties that typically need the most work. Once you start knocking down walls and peeling away the onion you will find more issues than you had originally imagined. What was once a project you were comfortable with will quickly grow to a property that you wish you never got involved with.
If you are thinking about selling just to recoup your losses you may be in for a surprise. Your low-ball purchase just set the market for where the property should be priced. It is highly unlikely that another investor will swoop in and see value in a property that nobody else wanted and you just purchased. In most cases, the only way to add value is to improve the condition of the property and even that may not do the trick. Doing just some of the work will still leave the property unfinished and lacking any real value. All this will do is cost you more money in the long-run. At this point, you will gladly take a small loss and move on, but those offers may be nowhere to be found.
The best way to avoid the bargain trap is to do your due diligence on every deal. Look at the MLS listing, read the assessors records and review the tax deeds. If there is any health department issues or concerns, follow up and see exactly what they are and when they were first noted. You may think that you can make any deal work, but some properties are just not money makers regardless of how inexpensive you can buy them for. The reward is not as great as the risk.
Like most things in business, if you have a doubt, you should probably leave it out. If you are concerned that the issues are too much hassle, you are probably right. By the time you are said and done, you will spend many hours and countless sleepless nights worrying about how you can eek a small profit out of a property you thought would be a windfall. Look at the big picture and do your homework the next time you are presented with a deal. Some of the best “deals” can be your biggest losers.