So, Why Take Your Time To Critically and Carefully Analyze a Piece of Real Property Before You Cash In?
Well, the answer is obvious: to make sure that the property you are considering to buy or invest in is a perfect one and that it doesn't have any problems or encumbrances of any kind whatsoever. And also to make sure that the property isn't overly priced but priced within the market average price range.
Therefore, what are the governing focal points when it comes to critical and careful real property analysis that can help anyone make a quick, proper and informed decision regarding one's choice of buying and/or investing in a piece of real property without any regrets whatsoever afterwards?
Well, here they are:
1. Time of Year
To help drive this whole point home, allow me to illustrate this property analysis governing focal point with a real life example:
In Lusaka City in the Republic of Zambia, I know of a certain seller who had built a very beautiful and luxurious mansion in a location that was always water logged in the rainy season. The situation always became so terrible when it was time for the rainy season. The rain water would find its way into the whole house and the house would then get submerged and as a consequence damage personal property in the said house each and every year. This home owner eventually got fed up with all this and decided to sell his beautiful and luxurious mansion at a good price during the dry season to make sure he didn't arouse any suspicions of water logging. And the buyer happily bought the said mansion thinking and believing that he had invested in a neat piece of real property. But then later on learn't the hard way that the beautiful and luxurious house he bought wasn't actually what he thought it was. Why was this so? Because he wasn't informed in matters of critical and careful property analysis. Period!
So, dear real estate investor, be smart and intelligent when buying and/or investing in real property during certain times of the year. You may live to regret later on if you don't act diligently.
The neighborhood in which a piece of real property is located in should be very, very appealing, with very easy access to all the amenities such as schools, hospitals, good roads, shopping malls, work places, bus stations, banks, etc.
However, if the location of the property is a very busy business intersection with a lot of people, traffic, bars and a highly noisy environment, then this may not be an ideal place for residential purposes. Such a place would be ideal for commercial or industrial purposes. What therefore may be an ideal location for a certain line of real estate investment such as dense population, high traffic etc., may turn out to be a nuisance of a location for other types of real property investments? It all therefore depends on what kind of investment property you wish to buy or invest in. Is it for commercial / industrial purposes or for residential purposes only? Or is it for other kindred real property investment purposes such as a filling station, lodge, hotel, fee paying public car park, colleges or universities, private hospitals, etc. The purpose of the investment will determine the location of property!
Otherwise, a Good and Promising Location is the hallmark of wise real estate investing!
3. Architectural Design or Style
5. Number of Bedrooms or Office Units
Another real property analysis factor closely related to price is what is known as the “Rent-To-Value Ratio”. The Rent-To-Value ratio provides a quick, cost effective and no brainer way of assessing an investment property's income potential - whether residential, commercial or industrial property before you do any further research and/or due diligence on it?
Moreover, the Rent-to-Value (R/V) ratio also provides an excellent and/or quick measure / way of assessing a particular income generating property's cash-flow and/or income potential regardless of the property's location. The Rent-to-Value ratio is similar to the Price-to-Earnings (P/E) ratio used on the stock market to help determine whether some common company stock such as shares of a particular company are overly priced or underly priced before an investor decides to invest in such a company's stock. My honest opinion is that an R/V ratio of say between 0.7% and 0.8% should be the barest minimum with an ideal number closer to 1.0%. Obviously, the higher the percentage rate of the Rent-to-Value Ratio, the better for you as an investor!
SO, HOW DO YOU CALCULATE THE RENT-TO-VALUE RATIO?
Simple. The R/V ratio is calculated by dividing the gross monthly rental income into the current open market value of the particular income generating property.
For instance, an income generating property that's worth say K1 Million (approximately $100,000) today and rents for say K10, 000 (approximately $1000) per month, would have an R/V ratio of 1.0%. This percentage number obviously represents a very good cash-flow / income potential of such a property. And if you are considering out-rightly buying or investing in such an income property, then this will be a very good investment regardless of its location!
Therefore, using the R/V ratio helps you to quickly assess or evaluate every single income generating property you are currently looking at or are currently considering investing in before you do any further research and/or due diligence on it. It is actually one of the many real estate investment "rules of thumb" to quickly screen or assess good and potential income generating investment properties.
So, the next time you go out looking for an investment property you wish to out-rightly purchase, why not use and apply this tool to quickly help you assess whether a particular income generating property is worth considering or not before you do anything else!
7. Flexibility of Seller
The flexibility of the seller is another pivotal governing focal point when analyzing properties on sale.
The question you might be asking yourself is "What constitutes seller flexibility?"
Well, in a nutshell, Seller Flexibility involves sellers who want to sell their real estate holdings so badly that they will be very flexible in terms of both price and/or terms and conditions of the sale. In other words, a flexible seller is a person who is so anxious and in a hurry to sell fast due to one reason or another. The reasons for wanting to sell fast might be personal problems such as ill-health, property concerns such as obsolescence of the structure concerned and/or economic problems such as local economic changes or impending law changes.
SO, WHY TARGET FLEXIBLE SELLERS FIRST AND NOT ANY OTHER KIND OF SELLERS?
The reason is simple: flexible sellers are much easier and fun to deal with compared to the other types of sellers. Moreover, flexible sellers make it possible for you to negotiate the terms and conditions of your deals according to your specific plans and goals!
So, never waste your precious time dealing with inflexible sellers who wouldn't mind not selling their properties as quickly as possible even if it took them ten (10) years in the process. Dealing with such sellers is a sheer waste of your precious time and effort. Learn to target flexible sellers always. The secret is to be patient and persistent in your real property search efforts!
I discuss who Flexible Sellers are in greater detail -> HERE including clues that can help you identify them properly. So, click HERE for details of Flexible Sellers and how to identify them!
9. Listed By Estate Agent or Owner Sale
10. Population of Community
So, do your homework properly when it comes to this factor of real property analysis!
11. How Long It Has Been on Sale
12. Age of Structure
13. Financing Required
Questions such as, "How does the seller want me to finance the deal?" Does he want ready cash? Or maybe he is willing to accept a reasonable down payment and then carry-back the remaining equity? Is he flexible enough to allow you to fund the whole deal and purchase price using a bank mortgage? Can he allow you to buy his piece of real property using what is known in real estate circles as "OPTIONS"? [Don't know what "OPTIONS" are? Then get to know about them by clicking HERE for FREE].
And in conclusion, ALL of the above governing focal points of critical and careful real property analysis (and many others not listed) are IMPORTANT and may have a bearing on one's Decision Making Process when it comes to Selecting a certain Piece of Real Property BUT Only FIVE (5) are VERY, VERY IMPORTANT and These are:
1. Location of the Property
2. Condition of the Property i.e. is it a New Construction, Renovated or a Distressed Property,
4. Flexibility of the Seller
5. Financing Required
Therefore, if you can hastily zero in on these five (5) very, very important governing focal points and make a decision about each one of them, then you can put together a fairly objective profile of the target property you’re interested in, in the form of an aggregate score that will eventually enable you to make a prompt decision regarding the property you’ve declared interest in!
So, consider using this very approach of property analysis in your own real property investment endeavors. If for instance, a particular seller of real property is not flexible with his or her terms, conditions and/or selling price, then you may find it practically impossible to swing the deal in your favor according to your own plans and goals - no matter how favorable the other governing focal points might appear to you. On the other hand, if the seller finally turns out to be flexible with his terms, conditions and/or selling price but there is a high possibility that you’re going to end up with a terrible piece of real property in a bad location, then you need to stop in your tracks. Similarly, if every one of the most important governing focal points of property analysis stated above falls into place but you then discover that the seller needs an all upfront cash payment only right away, then this also becomes a serious challenge to you unless you decide to locate and incorporate a very wealthy real estate investment partner to help you out in such a deal or you happen to have plenty cash in your possession.
So, the above five (5) main governing focal points of property analysis form an interlocking grid of decision points that you can put together into a final score for a given property of your particular choice.
FINALLY, what if you happened to have a Tool ready to use at hand for each and every property – whether residential, commercial or industrial property - you were considering or currently looking at? And what if the scoring process was relatively so simple and fast for you to use? Would this not provide you with the ability to compare and contrast scores for distinct properties you’re interested in and thus reach a more objective determination of such properties thereby enabling you to settle for the right and best one?
Well, surprise, surprise, surprise, my dear real estate investor, I’m here to introduce you to a very powerful tool you can use in your own real estate property investment analysis endeavors. This tool is known as the “Property Selection Matrix Tool”. This tool is a very powerful way to help an investor keep score during the analysis phase. It enables you to come up with estimate figures that you add up and then get an aggregate score. This aggregate score eventually allows you to make an informed decision regarding the particular piece of real property you’re currently considering or looking at now. And if this aggregate score falls in a certain range, then it helps you decide right their and then whether to go for such a piece of real property or not.
So, “How Does This Property Selection Matrix Tool Work Exactly?”, You Might Ask.
Well, the way it works is this: You assign a potential of five (5) points for each of the five (5) main governing focal points earlier on mentioned above. Thus a perfect property selection score will be twenty -five (25) points.
Therefore, experience has shown that real properties scoring nineteen (19) points or less should very likely be passed over, while properties scoring twenty-two (22) points or higher should be seriously looked at and/or scrutinized with a more positive eye. Those scoring near perfect will deserve your closest attention and serious consideration.
And The Next Logical Question You Might Be Asking Is, “How Do I Apply This Property Selection Matrix Tool In My Own Real Estate Endeavors and/or Deals?”
Well, the best way to answer this question is to illustrate it with a real life example of a piece of real property listed for sale by a seller.
For instance, the sellers (husband and wife) of a single-family rental property are getting a divorce and need to liquid fast so they can share the money and go separate ways as quickly as possible because they cannot stand the negative pressure of being together anymore. The property needs a bit of structural work before it can be rented out to other people. The sellers need urgent cash because of their situation – at least a 10% down payment. However, the selling price is seriously discounted – perhaps 20% below the fair market price. The neighborhood in which the property is located is very appealing, with very easy access to all the amenities such as schools, hospitals, good roads, shopping malls, work places, bus stations, banks, etc.
Find the aggregate score for this property and assess whether it is a good bargain or not?
First and foremost, the main governing focal points of property analysis are: location of property, condition of property, asking selling price, flexibility of the seller and financing required. And we’ve been told that we assign a potential of five (5) points for each of the five (5) main governing focal points earlier on mentioned above. Thus a perfect property selection score will have twenty -five (25) points. And that experience has shown that real properties scoring nineteen (19) points or less should very likely be passed over, while properties scoring twenty-two (22) points or higher should be seriously looked at and/or scrutinized with a more positive eye. Those scoring near perfect will deserve our closest attention and serious consideration.
So, looking at the facts and scenario given in the example property above, starting in chronological order, the property is located in a very appealing area which is closer to social amenities such as schools, hospitals, shopping malls etc, so this scores a total of five (5) points. The next in line is the condition of the property. We are given in the example property that the property needs a bit of structural work before it can be rented out to other people. So, this is a minus when it comes to investing in such a piece of property and therefore the property gets three points (3) or so for this. Next is the selling price of the property. We are told further in the example property information above that the sellers need urgent cash because of their situation – at least a 10% down payment and also that the selling price is seriously discounted – perhaps 20% below the fair market price and this means that the price is very good for an investor and so this governing focal point gets a full five (5) points. The last but not the least of these five main governing focal points is flexibility of the sellers. We are told again in the example property information above that the sellers who happen to be husband and wife are getting divorced and need to liquid fast so they can share the money and go separate ways as quickly as possible because they cannot stand the negative pressure of being together anymore. This is a very good clue of seller flexibility as discussed in greater detail HERE regarding how to identify flexible sellers and take advantage of that information because such sellers badly need to liquid in order to go separate ways. And this therefore gets a full five (5) points for that. And the last main governing focal point of property analysis is the financing required by the seller. Information regarding how the sellers want the property to be financed is again provided in the example property above. The sellers want at least a 10% down payment for the time being and the remaining equity to be paid later on either through a bank mortgage or whatever means the buyer will be comfortable with as long as the buyer can guarantee full payment of the remaining amount within a previously agreed upon time-frame. This governing focal point therefore also gets a full five (5) points for that.
Now, when we add up all the figures assigned to each of these five (5) important governing focal points that is to say 5+3+5+5+5, we get a total of 23 points. And according to the “Property Selection Matrix Tool”, real properties scoring twenty-two (22) points or higher should be seriously looked at and/or scrutinized with a more positive eye while those scoring near perfect will deserve your closest attention and serious consideration. And this particular property seems to be a very good bargain. Why? Because it scored above 22 points and it must be seriously looked at and be considered for investment!
Analyzing real properties on sale using the above discussed governing focal points before you cash in will go a long way in saving you money and prevent you from experiencing uncalled for headaches in the long run as a real estate investor. Real property analysis governing focal points such as: time of year, location, price of the property including usage of the rent-to-value ratio, architectural design, condition of the property, number of bedrooms/office units/shops, flexibility of the seller, zoning, listed by estate agent/owner-seller, the population of the community where you wish to invest in, how long the property has been on sale on the market, how old the property is, the financing required by the seller and finally usage of the property selection matrix tool etc., all are important to help you as a real estate investor to make up a proper and informed buying or investment decision. Of all these, only five are crucially important, that is to say, condition of the property, location, price, flexibility of the seller and the financing required! However, this is not to say that the other real property analysis governing focal points are not important. No. No. They are all equally important. Only that the five supersede the others but all the listed governing focal points of real property analysis have their place in the real property investment analysis equation!
So, wise up and apply these real property analysis governing focal points in your future real estate investment endeavors!
It’s therefore my prayer and hope that this blog article has been very, very educative and helpful to you indeed.
So, until next time, go well in your own real estate investment efforts!
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ABOUT DAVID KAPALU – THE AUTHOR
Therefore, Call/Sms him right now on +260 955 168754 and contract him for one on one real estate investment advice! He also stands ready to be booked for speaking engagements as well as offer free and paid radio and television interviews with any individual or organization interested in him sharing his deep insight and understanding of real estate matters as well as offer legal advice pertaining to land rights and ownership in the Zambian market!
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