The question I get most often is how do you find the right property at the right price. The following article from Jack Miller’s Dollars and Sense book provides the answer. Many would be investors have been “burned” by buying the wrong property at the wrong price. Don’t let it happen to you!
A good example is James… who was a successful investor in southern California. He was lured in to buying el cheapo houses in Mississippi because the thought they would cash flow much better. James could buy 20+ houses in Mississippi for what it cost for one small house in California. So he did. But these Mississippi houses were in ‘not so good areas’ where the only tenants who would live there were Section 8 tenants. After about 6 months they would move out leaving the house trashed so James was constantly spending more money to get the house rentable again. Air conditioner compressors disappeared. Copper pipes disappeared. Toilets disappeared. Finally James just boarded up the houses because it was cheaper to leave them empty than to constantly spend more money on repairs.
Learn how to buy the right houses at the right price…..
What comprises the ‘right’ property and ‘right’ price? It depends upon what you have in mind for the property. In the context of this booklet, ‘right’ property usually refers to houses that are being bought for their long term income potential rather than merely for short term sale profits.
There’s nothing wrong with short term profit if it will enable you to quit a job you don’t like, or get the startup money you need to fund your investment portfolio. Everyone has to make a transition from being a ‘wage slave’ to becoming an entrepreneur, and buy/sell profits are one of the best ways to do it. In this regard, what are some of the alternatives if you’re trying to find your sea legs with single family houses?
First of all, don’t confuse ‘houses’ with condominiums, town houses, zero lot line cluster homes or duplexes. They just aren’t the same. They don’t perform the same. They are financed differently. They occupy a tiny market share. They’re less liquid and more troublesome. Let’s stick to single family houses. My acid test is that I’m must be able to walk completely around the structure which stands on its own separate plot of ground. If I can’t do that, it’s not a house in my terms. It’s something less desirable to me.
With ‘Keepers’, Payments and Interest is Critical.
Let’s talk about houses you intend to keep. Here again is an example from my sordid past. These should be selected first of all on the basis of the long term potential for the NEIGHBORHOODS they’re located in. Good schools, parks, libraries, churches, shopping and recreational facilities, access to major arterial streets, low crime, political sensitivity such as a voting precinct, etc.
From time to time you’ll come across other types of property that you’ll want to buy because the particular deal is too good to pass up. Let’s take as an example, a small apartment house. I once bought an apartment property by first, paying for a lease option it, the terms upon exercise of the Option were for 6$ on a fully amortized note.
The price was set at 7 times the NET operating income, and the payments were set at 80% of the net monthly cash flow. During the Lease year, we caught up all the deferred maintenance and got the property up to code specifications to avoid future problems. Naturally, this depressed the net operating income, somewhat. About $10,000 or so. Thus, the ultimate price was reduced by 7 times the $10,000 reduction, or $70, 000.
So much for capturing appreciation through a lower price. The interest rate was fixed at 6$, which gave a fairly high rate of equity build-up through loan amortization. The payments were set at 80$ of net monthly cash flow, which included loan payments. This guaranteed that I’d always have income. Note that I was able to capture all the IDEAL benefits this way.
There’s yet another reason to buy property rather than to ‘flip’ for gain or hold for income and appreciation. It’s primarily for the owner’s own USE. After all, a house is still a home. There’s no reason why it couldn’t be used by the buyer as a personal residence. Its general appeal, size and location are probably more important to a user than the price, payment and interest rate so long as he can afford it.
None the less, there’s also no reason why a home bought for personal use shouldn’t be selected as carefully and negotiated for as adroitly as an investment house. In the final analysis, the owner is going to have to sell it someday, and should expect to make a profit on it then.
The great danger is that emotions will rule the negotiation. Regardless how much the house appealed to you personally, you should always try to negotiate the best possible deal at the time you buy. The acid test is whether you’d be prepared to give up your personal use of the property if you couldn’t get the price and terms you wanted. Here’s one example from my own experience.
The house I’ve lived in for the past 11 years or so was originally offered for sale at a price $113,000 more than I paid for it. I liked the house, but not enough to pay the asking price. My wife and I made it a point not to become emotionally committed to the house because of its price. Still, I decided to see what I could accomplish through negotiation.
In the process of give and take, I had to make offers over a period of 5 weeks using every negotiating tactic and financing ploy that I had in my arsenal. Eventually, we wound up paying over half the value in cash to motivate the owner to sell to us at a price we thought affordable. But, truthfully, by the time we made the deal, we were hooked and would have paid more if it had been evident that continued negotiation would have imperiled the transaction.
How Can You Tell What a House is Really Worth?
For the neophyte buyer, valuation can be a daunting task. You’ll hear all sorts of talk about the three approaches to property appraisal, The Income Approach, The Replacement Cost Approach, and The Market Value Approach. Of these, only the market value approach to value is valid for houses.
Learn more in the Dollars and Sense book by Jack Miller