How to Evaluating Properties: Potential Risks and Deal Breakers

One of the most important elements of the fix-and-flip process is to evaluate homes properly. Far too many new investors perform their own evaluation and run numbers they believe to be accurate. Then, once they compare these numbers with the results obtained by hard money lenders, realtors and independent evaluators, they can find a huge discrepancy. It turns out they have a deal not as profitable as initially believed, or worse, DOA: dead on arrival.

Fortunately, you have a friend and essential resource in Do Hard Money. Not only do we use the greatest tool in our arsenal (the Advanced Deal Analyzer) to calculate your potential profit, but we also hire two-to-three independent evaluators to run comps on and determine repairs for your property. These help eliminate bias and ensure your deal will be profitable in the long run.

But before you can take advantage of the ADA and independent evaluations, you have to find a property first. 

And believe us, you will save yourself a ton of time and energy by taking into account potential risk factors and deal breakers as you start your search. If you think like an evaluator as you look for an investment property, you will have much more success in finding a profitable deal.

Potential Risk Factors

The following items to keep in mind are factors which will not necessarily kill a deal, but will add to their overall risk. When you find a property and evaluate it as a potential deal, ask yourself the following questions:

Is the property in a high crime area? – In addition to researching the history of crime incidents for the area, visit the neighborhood yourself. Would you be comfortable walking alone there at night?

Is the property in a high rental neighborhood? – If renters occupy more than 65% of the homes in the area, the potential buyer pool for your property will most likely be composed of other investors looking to pay less, rather than home buyers willing to pay your listing price or higher.

Has the property been vandalized? – Note we’re not talking about a random bit of spray paint on the sidewalk or the home. Vandalizing refers to portions of the home completely gutted or essential wires and other property components stolen or missing.

Is the property near active railroad tracks or commercial buildings? – Most buyers don’t want to purchase a property close to noisy railroad tracks or the busy activity surrounding commercial buildings.

Is the property on or near a major street? – A major street constitutes anything with 4 lanes or more, and can also include a very busy two-lane street.

Is the average days on the market for the area 120 days or longer? – If the history of homes for that area indicates slow sales, you’ll most likely have problems reselling your property quickly.

Is the property in an area where there is more than one boarded-up home? – Potential home buyers are less-inclined to live in these types of neighborhoods.

Potential Deal Breakers

These items will absolutely kill a real estate deal outright. You want to keep a close eye on these factors as you evaluate your properties. These factors could change depending on your hard money lender, but for the most part they’re universally seen as deal killers. Before you bring your property to a hard money lender for funding, ask yourself the following questions:

Is this property ANYTHING other than a non-occupied, single family residential property? – Most lenders only lend on non-owner-occupied, single family properties. They will not lend on mobile, manufactured or recreational properties.

Does the property have any history of methamphetamine use or manufacture? – Many lenders will not touch properties with meth presence/damage. However, if you can professionally remediate the property, your deal might still qualify for funding.

Does the property have extensive mold or fire damage? – If the damage exceeds a remediation cost of $5,000, a lender will not fund the deal. However, if smaller amounts of mold or fire damage affected the property, most lenders can still fund the deal.

Is the property less than 900 square feet? – Smaller homes significantly decrease your potential buyer pool. Therefore, these deals typically don’t receive funding.

Does the property have any foundation or roof truss problems? – These repair issues make up for a larger rehab bill and a longer time required to solve the problems. Since hard money loans are designed to be repaid quickly, these types of problems are deal killers.

Are you planning on adding new exterior walls or to the building foot print? – Similar to foundation and roof truss issues, adding to the building foot print can take extensive time and cost beyond what a hard money loan can cover.

Do Hard Money is here to help save your money and sanity as you search for a potential deal. Use these risk factors as a best friend and be as strict as possible when you evaluate your properties. You definitely don’t want to risk your money on a terrible deal, and we don’t want you to either.

That’s why Do Hard Money provides the Advanced Deal Analyzer and refuses to lend on properties gaining less than $10k in profit. We’re here to protect your investment and ensure success. And all of that starts with a good, solid property.

To learn more, feel free to click on this link to get started. We can help walk you through the steps of your next fix-and-flip deal and answer any questions you may have.

You can also give us a call at 801-692-7703. Investment associates are standing by, ready to help you open the door to financial freedom. We look forward to helping you with your next profitable real estate investment deal.

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