For a piece of property to fall into the category of “distressed,” it often ends up being more than just a straightforward “fixer-upper.” This type of real estate usually has significant challenges associated with it, so most people might not see a distressed house or apartment complex as much of an investment.
Of course, not all situations are created in quite the same way. Any seasoned investor will tell you that there are nuances involved in not only identifying the lucrative opportunities that often exist in the world of distressed real estate but capitalizing on them as well. Provided that you are willing to put the work in now, the chances are high that you’ll see that effort pay off before you know it.
Why Thorough Market Analysis Matters
As is true with any type of real estate transaction, you always want to begin by conducting a thorough market analysis. This is especially important in investment niches like wholesale real estate because sometimes, the market is all you have.
To truly uncover as much profit potential as possible, you need to target neighborhoods poised for growth. That growth might not happen for five years or more, but it needs to be there. Consider how long urban development projects take and try to visualize all the benefits an area might receive. Will new major employers be coming in? Is the city about to break ground on a new sports stadium? These will attract new residents, meaning the property you’re examining may be much more viable than it appears on the surface.
Putting Those Negotiation Skills to Good Use
Because of the nature of wholesale real estate, you’ll also have to lean quite a bit on your negotiation skills to secure the most favorable deal possible.
Don’t forget that you’re actually negotiating twice here. First, you need to get an owner to agree to a price. Then, you need to get a buyer to agree to one that makes sense within the context of the contract you’ve already entered into. It takes some finesse to wind up with a situation that benefits everyone involved, but it can be done.
However, your progress can also be stopped before it even has a chance to start if you’re not aggressive enough with that current property owner. Sometimes, the profit potential may not be as big as you’d like – at least not immediately. But it is there and just waiting to be taken advantage of. The trick is that you’ll need to hone your negotiation skills from two different points of view in order to do it.
Exploring Diverse Financing Options
One of the major benefits of wholesale real estate is that you’re really not financing anything. You’re simply negotiating a contract for which you get someone else to assume responsibility. As the person in the middle, there’s no money for you to actually put forth like there would be in a traditional real estate transaction. It’s just like if a property is destined to be a “flipper,” that’s not something you have to worry about regarding logistics. Someone else will be doing the flipping, not you.
Having said that, if you are engaged in a traditional real estate transaction, sometimes the situation will call for more diverse financing options than you may have experimented with in the past. For example, you may have to take advantage of seller financing if it is available. Lease options or even crowdfunding are also quite common in the modern climate. No matter what, you need to be willing to think outside the box – particularly if an opportunity is too good to pass up.
The Complexities of Renovation Costs
If you’re looking at a distressed property with an eye towards eventually renovating and flipping it for a higher price, you also need to get better at estimating what those renovation costs will actually be.
In no uncertain terms, you must be able to calculate these costs accurately because they should absolutely factor into the purchase price. You may think you got a great deal on a distressed property… until you realize how much money you have to sink into it in order to make it attractive to virtually anyone who would want to live there. Underestimating these costs is a great way to eliminate any profits you thought you were making before you realized it.
The Significance of Due Diligence
Finally, always conduct significant due diligence to make sure you understand the exact situation you’re getting into before you sign on the dotted line.
This goes beyond simply assessing a property’s condition, although that is an important element. You also need to be able to estimate the scope for value appreciation once any renovations have taken place. If you’re poised to break even in the short term but will make a hefty profit in the long term, you need to know upfront just how “long” you’re realistically looking at. You can’t get to that point without conducting due diligence now.
But more than anything, understand that every scenario is unique, especially in the world of wholesale real estate. Once you’ve settled on a strategy that helps you unlock the full potential of one distressed property, it’s not a guarantee that you can easily do it again.
That is to say, there’s no “one size fits all” approach to uncovering profit potential in this context. You’ll want to use a combination of these tips, taking into consideration all that makes a property unique. Sometimes, the potential (or lack thereof) of the surrounding area will be immediately obvious and it will be the true selling point of a property. Other times, a home could appear to have absolutely nothing going for it until you discover that the area is up-and-coming. But you’ll never know unless you’re willing to put the work in now.
Putting it All Together
The tips outlined above can help savvy investors unveil the profit potential of just about any property. This can ultimately set them on a path for strategic and rewarding real estate investments, which should always be among your top priorities regardless of how long you’ve been in the field.
