When looking at homes, one is tempted to buy the best home in a neighborhood. Should you buy the most expensive home on the block? No.

Think Long-Term

Assume you fall in love with the masterpiece home in a particular neighborhood. It has everything you could dream of: black bottom pool, marble, an incredible kitchen, top of the line windows, stunning brick work and so on. The sellers obviously put a lot of time, effort and money into the home. Accordingly, it stands out as the pearl on the block. Why wouldn’t you want to snap it up immediately?

Before you start signing documents, take a look at the sales prices of comparable homes, “comps”, in the neighborhood. If you compare the comp prices to the dream home, you should notice a pretty significant price difference. This difference should act as a metaphorical slap in the face or pouring of cold water over your head. The dream home is undoubtedly selling for a price range far beyond the comps. Warning lights should be going off at this point.

You are going to have a problem if you give into temptation and purchase the most expensive home on the block. In fact, you are going to have two problems.

The first problem is the appreciation of the value of the home. The appreciation on the best home in a neighborhood is always going to be dragged down by the structures around it. If you take a $900,000 home from a private community and put it on a block of $250,000 track homes, the $900,000 value is going to come down a lot because the neighborhood will not support it. When you eventually sell, buyers are going to look at the comps in the neighborhood and laugh at a $900,000 asking price.

The second problem is “hemming.” Since you own the most expensive house in the neighborhood, your appreciation potential is already limited. This becomes a bigger problem if you want to remodel or add on to the home. Taking such action would typically add to the value of a home. With the most expensive home, not only will it not add value, it may cut into your equity. Why? If you do a $50,000 remodel, you may see a $10,000 gain for your $50,000 cost. You just lost $40,000.

Dream or Nightmare

Unless you can accurately predict an increase in valuations for an entire neighborhood, you shouldn’t buy the most expensive home on the block. If you do, the dream home could quickly turn into a nightmare.

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Should you buy or rent? It depends on your circumstances, and the real estate market where you are going to live. Years ago, I sold a home for a young couple who owed almost as much as the sales price on their house. They needed to take money from savings to pay the closing costs and sales commission. You can bet that they wished they had rented for the couple years they lived there.

This brings up the first thing to consider when comparing buying versus renting: the amount of time you’ll be there. Buying and later selling a home will usually cost about 10% or more of the value of the home. These costs mean that if the home only went up in value 10% or so in the year or two you lived there, you won’t be gaining anything (equity gain from principal pay-down is very little in the first years). You’ll often be better off renting if you’ll be in a town for less than a few years.

What about towns with faster rates of appreciation? Have you done some serious homework? If not, to assume appreciation will be more than the rate of inflation is just gambling. The sellers in the example above sold for the same price they bought the house for two years earlier – and this was in a decent and growing area. You can’t count on fast appreciation.

To Buy Or Rent – Cost Comparison

Looking at buying versus renting, you have to take into account that in many places it cost much more to buy. For example, in Miami a home can cost $200,000. The mortgage payment, taxes, insurance and maintenance will add up to about $1,600 per month, but you can rent the same size home for about $800.

What does that mean? Many real estate fanatics will say you’re at least buying something for your money, and renting is throwing your money away. Of course in this example more than $1,000 of your payment will be going towards interest alone, and that’s not buying you anything.

Suppose you can afford the $1600 per month, but instead you rent for $800 and put the other $800 into a decent safe investment that makes you 5%? In three years you’ll have over $30,000 in this account. If the home appreciated at 6% per year, it would be worth $231,000. The costs of initially buying it and then selling it would be around $13,800 (2% buying and 6% selling), leaving you with a gain of about 19,000 once we include your principal pay-down.

In other words, you would be at least $11,000 better off if you rented and banked the difference. Every market is different, of course, so you have to do the math. Compare the total costs of owning versus renting, and then make safe assumptions about the rate of appreciation for homes.

If you’ll definitely be in one place for a long time to come, it will almost always be better to buy than to rent. In the last example, buying becomes a better bet after about four or five years. Also consider that if you get a fixed rate mortgage, your payment will never change, a benefit landlords won’t offer you that on your rent payment.

To sum up, look at the time you’ll be there, the comparison of total monthly costs, whether rents are going up fast, and whether you have good reason to believe home prices will be going up fast. Then look also at all the personal factors. Do you want to be responsible for the maintenance, yard work and unpredictability of ownership problems?

To buy or to rent? In the end, you have to work this one out by yourself.

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Why would you buy investment property without seeing it? It’s a numbers game. Whether or not you see the property before you make an offer isn’t nearly as important as making sure the numbers make sense.

A man in California used to just send out offers on a hundred MLS listings at a time, offering 25% less than the asking price on each one. Occasionally a few sellers would accept his offers. He never had to look at the homes beforehand. Including an “inspection and approval” clause in the offer meant he could always back out of the deal later when he saw the house. Meanwhile, he efficiently found the truly motivated sellers.

This true story demonstrates that with a good clause or two in the contract, you don’t have to worry about making an offer before you see a property. It’s true when you buy investment property or your next home. When it isn’t everything the seller says it is, you can reject the deal with little or no loss. So why wouldn’t you want to look at the property?

Buy Investment Property By Numbers

The main reason you might skip looking at a property before making an offer is time. This is certainly true if the property is far away. If you don’t get a price that makes sense, why spend your time traveling to look at real estate investments? A price and terms that make sense – this is what is important. Of course you’ll probably want to look at the actual property eventually, but looking at the numbers is how you invest.

Investors value income property according to current cash flow (or should if they want safe and viable investments), so start by verifying income. Get the actual income figures for the past 12 months. Always consider the potential income if rents are raised, vending machines are added, etc., but base your offer on the current income.

Verify all expenses with investment properties. If any expenses listed by the seller seem unusually low, they most likely are. Just substitute your own best guess in place of any suspicious numbers.

After you determine the net operating income, apply the appropriate capitalization rate to arrive at the value. If you’re not sure how to do this, get help. However, you really should understand the principle of how to figure a cap rate. This is a numbers game you’re playing.  
Calculate loan payments (talk to your banker), and see how much cash flow you’ll have. Then you can figure your cash-on-cash return based on how much of your own money you put into the deal. Just divide the cash flow by your investment.

When the numbers work, you can safely make an offer. Inspections will tell you if there are problems that will affect the cash flow. You can always renegotiate if there are such problems (assuming you made your approval of all inspections a contingency of the offer). Of course, you can even go take a look now that you are truly ready to buy that investment property.

Filed Under: Articles Tagged with 12 Months, Asking Price, Best Guess, buy investment property, Cash Flow, Current, Google, Income Figures, Investment Properties, Investment Property, Investors, Lt, Mls Listings, Motivated Sellers, Next Home, Numbers Game, Property Investment, Real Estate, Real Estate Investments, Rents, True Story, Vending Machines

September 10th, 2010

Hello and Welcome to Xima’s Webinar Training Archive for September 10th, 2010. Here are some of the questions our subscribers asked in today’s training. Please watch the video to see the answer to all these questions and more:

• Q: Can you show us a basic comp analysis?
• Q: How does Xima compute “Active” and “Market” values — why are they not similar, not correlated?
• Q: what do different “house” icons mean (colors, F vs F-Sold, etc.)
• Q: how can we save and print the report you’re currently reviewing for the MB property?
• Q: I’ve  been sent report links before. How can I get the link for the report.?
• Q: how frequently is Xima database updated?
• Q: I would like to market to home owners with home values of $750,000 who are not under water, how do I do a search
• Q: when running comparables on a property what are the defaults used for the comparable search and can they be changed to automatically use parameters set by the user?

Filed Under: ReiFax Trainings Archive Tagged with Colors, Comp Analysis, Comparables, Google, Hello, Home Values, Market Values, Parameters, September 3rd, Subscribers, Webinar

The Low Down on Distressed Properties for Sale

By: Joseph B. Smith

Distressed properties for sale can be purchased for up to fifty percent of their market price, and therefore could be monetarily beneficial to real estate investors who buy, modernize and then lease out or resell. These properties can be especially attractive to home buyers with background in building or construction or even those who have ties to the construction industry.

What to Consider

Distressed properties for sale are occasionally known as fixer upper homes, and usually demand purchasers to make comparatively cheap repairs. Consequently, the houses can be bought at significantly reduced rates. One major consideration when it comes to distressed properties are their locations. If the master plan is to purchase these cheap houses and resell them to turn a profit then you have to play on the other strengths the property may have. Location is definitely a big come on for buyers so before committing to buy a distressed property, make sure you have scouted the neighborhood and the general area of the property. Make sure that there are business and employment opportunities as well as schools, hospitals and other social services. The level of livability is a way to strengthen the value of your distressed property and increases its chances to attract buyers.

Distressed properties for sale can either be an apartment complex, a family house or a condo. A buyer needs to be clear on what type of property they wish to purchase and renovate for resale. One can gain a lot of insights on distressed properties from an online foreclosure listings service. This service will have a comprehensive and up to date list of distressed properties across the country. If you subscribe to this service, you can design your search according to what is important to you. These sites will also compute your mortgage and provide the main contact persons you can get in touch with for your purchase. These sites will also provide education on the requirements for purchasing distressed properties for sale.

About the Author

Joseph B. Smith has been educating buyers on the finer points of distressed properties for sale at ForeclosureDeals.com for over ten years. Contact Joseph B. Smith through ForeclosureDeals.com if you need help finding information about distressed properties for sale.

(ArticlesBase SC #3236556)

Article Source: http://www.articlesbase.com/ – The Low Down on Distressed Properties for Sale

Filed Under: Articles , Foreclosures Tagged with Apartment, B Smith, Cheap Houses, Construction Industry, Contact, distressed homes for sale, Distressed Properties, Distressed Properties For Sale, Distressed Property, Employment Opportunities, Foreclosure Listings, Google, Home Buyers, Hospitals, Insights, Livability, Lot, Mortgage, Neighborhood, Real Estate Investors, Social Services, Ties