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6. Spend money improving the house, but only where it matters. Paint. Put up inexpensive shutters and awnings. Replace cabinet doors and carpeting. Put ceramic tile on countertops. And landscape the entryway. Those are the main upgrade opportunities. Everything else you might do—including plumbing and electrical work—will probably not be good investments.
7. If possible, have a renter for your house before you buy it. If you get the word out sufficiently often, your friends and colleagues will think of you when they meet someone who is looking for a place to live.
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That said, there is still much that is nebulous about determining value.
For example, is that two-bedroom ranch house that you saw on 13th Street and Olive Avenue worth the $150,000 being asked for it? What about that three-bedroom colonial a few blocks away? Is it overpriced at $120,000?
You can’t answer those kinds of questions unless you have a very good feel for the neighborhood. And as I said, you can’t have a very good feel for a neighborhood unless you limit your investing to a particular area, preferably in your own hometown—and unless you are willing to drive around that neighborhood and ask questions.
If you can do those two things, real estate can work for you. Think about it. And start looking.
When Buying Real Estate, Always Insist on an Inspection
Never buy a house or commercial property without an inspection—a good inspection from someone with a long-term reputation for fairness and honesty. If you don’t know a good inspector, get referrals from other real estate investors you might know and from reputable contractors. Do not seek recommendations for inspectors from the realtors.
Never go to contract without inserting a clause that gives you back your deposit if the inspection identifies something unanticipated and unwanted.
A case in point: JJ signed a deal on a four-bedroom, two-bath $100,000 house in a marginal neighborhood. According to the seller, the monthly rental income was $1,200. That would make the deal look fantastic. But when he had it inspected (by someone he has used in the past and trusts), he found out that it was a double-wide trailer. It had been put up on a permanent foundation and covered in clapboard, so it was not apparent. But to the professional who inspected it, and to the bank that told JJ it didn’t finance such structures, there was a world of difference.
1. The home-alone technique. Whenever you see a vacant home in your target area, stop and jot down the address. Look up the owners in the county property records and call or write to ask if they’d be interested in selling the property. If the house is in desperate need of a paint job or has a severely overgrown lawn,
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you may have found motivated sellers before they’ve actually put the property on the market. If they want to sell, you may have found a property at a very good price.
2. The garage sale. Sometimes, before owners put their property up for sale, they’ll hold a garage sale to clear the house of all clutter and get it into showing shape. So keep an eye on your local paper for garage sales and moving sales in your target areas. Don’t waste time attending the sales. Just call to find out what they’re selling. During the conversation, explain that you’re looking for a home in the area—and ask if they know of any that are coming up for sale. Occasionally, you may find that you can buy not only what’s in the garage, but the house itself.
3. Out-of-state owners. Whenever you’re researching local property values, be sure to make note of all out-of-state property owners. The property rolls should list the mailing address of the owners—in addition to the details of the property itself. When the owners’ address is out of state, send them a letter or look them up in the phone directory and call to find out whether they might be interested in selling.
4. Code violations. A property with a number of code violations can be a signal that the owners cannot afford to keep the property up or may no longer be interested in taking care of it. Some towns will physically tag a property that has code violations. Learn to recognize that tag and keep an eye out for it as you drive through your target areas.
Buying and Selling Fixer-Uppers
The skill needed here is an eye for what could be—the ability to see a house in shambles and imagine how much better it would look with some paint, a little gardening, and new carpet.
The secret to making fixer-uppers work is to keep your improvement expenses in line with your budget. If, for example, the two-bedroom mess you are looking at is $40,000 under the market, your fix-up budget should be significantly less than that—$10,000 to $15,000 would be a good bet. Creating a realistic budget and then sticking to it are the two essential skills needed to make this sort of income-producing venture work for you. There are three rules to buying and selling fixer-uppers: