Before moving through this post, I recommend you read the initial post on buying your first investment property. It will give you some practical tips to helping you get rolling in finding that perfect starter property. This post assumes you have read that article, and have a list of properties that you are now ready to narrow down to just a few that you will actually bid on. So let’s get started getting that list of properties down to a manageable size:
Narrow the List Down by Price:
To reiterate, when you are buying your first real estate deal, keep it small. Test the water before you buying yourself into a mess. Look for a 2/1 or small 3/2 in a middle class, average income neighborhood that you can easily market. It may be tough to find a good deal, because of that very fact. Many people are looking for the same home you are looking for, but they are looking for something to live in, and will pay a higher price. You are wanting to find a deal, and then market to those people. That is why farming out markets, and getting deals through your backend network is so important. These methods can put you on to a good deal before it is even on the market.
So set a number. For example, if the house you are living is worth about $150,000, definitely don’t go over that price tag. You need to be sure that if you end up having to hold the property for several months, that you can afford to hold it. With your first deal, you don’t want to take on the risk of losing a bunch of money and thereby going into bankruptcy. So set that high number that you cannot go over, and scratch off houses that are well over that number. You might keep a few that are close to the number, as you might be able to negotiate down to a number that is at or below your high number.
Narrow the List by Proximity
Again, you don’t want to have to drive very far to take care of the needs of this property. Very likely, you are still working a full time job, and you won’t have much time to stay on top of the property. So keep it close, anything that is more than a 15 or 20 minute drive, consider scratching it off the list. There is nothing worse than having to drive 20, 30, 40+ minutes to a property that is not performing. Especially with gas prices at $4+ per gallon.
Narrow the List by Condition
You may be thinking that you want to scratch off properties that need a lot of work, but it is just the opposite. Ideally, you want to find houses in relatively good shape, but that do need work. These are the ones that most retail buyers are going to pass over, but that you will be looking for, to catch a great buy. Don’t take on any properties that have structural damage when you are just starting out though, as these can really kill your budget. For now, just trust me on this one. Focus on house that just need some TLC (tender loving care) ie. houses that just need paint, flooring, maybe a few new plumbing or electrical fixtures, but no structural problems.
Narrow the List by Owner Motivation
This is the key step in acquiring a great deal. If you call on the properties, and discover that the owner is retired, has a pile of money, and wants $200,000, there isn’t much negotiating that he/she will do. They don’t have to sell, so they will just wait until someone offers what they want. But, if you run across someone who is recently divorced, lost their job, etc. these are the people that will be willing to look at a low ball offer. And don’t think that being labeled a “low-baller” is a bad way to be know in the field of real estate investing: all successful investors are low-ballers. I have been called by this term many times in the past, so don’t get offended when it happens. You just can’t make money often when you are bidding at market price.
So focus on extracting the motivation when talking to sellers. Ask them questions like “Why would anyone want to sell a great home like this one?” or “Why would you let go of such a great property?” or “Why would you want to move from such a good neighborhood?”. Any of these questions or similar questions should give you insight to why the seller is motivated to sell.