10 Tips For Identifying A Bad Property Investment
Everyone loves making a great deal, and this is particularly true for property investors. However, unlike getting a bargain on a pair of shoes, buying property is an expensive investment and you can't exchange it if you find out it doesn't fit when you've completed the deal.
So doing your homework before you commit to the purchase is especially important if you don't want to be left with a property that will drain your savings instead of making you extra income.
To help you understand the pitfalls of what to look for when buying property, we've outlined a few of the areas which may raise a red flag and make you step away from the investment, however tempting it may seem.
A seller who is reluctant to tell you the history of the house should be avoided. Transparency is vital, and if they can't or won't tell you when the roof was repaired, or a new central heating system was put in, it is a definite warning sign that all is not as it seems with the property. Sometimes when dealing with a seller it comes down to a gut instinct – do you trust this person to tell you the truth?
If you do some research on the seller, mainly if it is a company, and you find it difficult to get any information or the website seems incomplete and lacking in detail, be on high alert.
High deposits/reservation fees
If you want to reserve a property, you can do so by paying a reservation fee or deposit. This provides exclusive rights to buy the property and prevents gazumping for 28 days. This fee is generally between £500 and £2000 depending on the value, but if it is much higher, this can be a sign that the deal is not legitimate.
However, if the property is unusual or constitutes a significant development, a higher deposit can be realistic, so you need to look at the situation objectively. A low-value house with a high deposit is definitely a warning sign of something not quite right.
Viewing the property is always a good idea, although there are some legitimate reasons why it is not possible. These include properties that are ‘sold as seen' with a price tag reflective of the deal, as well as some auction properties and tenanted properties.
However, if there is no apparent reason you can not view and you are being denied access, then this is a sign something is not quite right. However convincing the salesperson sounds regarding the reason, be very aware if you feel that a viewing should be available.
If you are considering the property as a rental opportunity, you need to determine the possible income you can expect before taking on the project. If the seller can't provide the statistics you need regarding rental rates and area vacancies, it may be a sign that there is not much call for rented accommodation in the area. Rather than enter negotiations unsure of the income possibilities, look elsewhere and move on.
On the other side of the coin, try not to be blinded by rental guarantees. Some less than scrupulous sellers use guarantees as a way to hike up the property price, while seeming to offer an excellent deal to the vendor.
Pushy sales team
A pushy salesman should always be a warning sign that something is not quite right with the property. If you are being pressured into making a decision quickly without completing your overall costs and timings, as well as time to peruse the paperwork thoroughly, then say no. It is better to lose out on a deal than be lumbered with an unfortunate opportunity.
If the price seems too good to be true, then it probably is. There is usually a reason for meagre asking prices so when viewing be sceptical. It could just be that the seller has cash flow issues and needs to offload the property as quickly as possible, but it can also mean the property has potential problems. These could include major structural works in the roof or foundations that are not noticeable at first glance.
However, be aware of properties that seem overpriced as well, as the seller may be trying to cash in on property investment deals. As a property investor, the aim is to make some money on the property so if the asking price is too high, it can mean there is no profit in it. However, it's worth investigating further if the price is high as if every other box is ticked then it could still be possible to make a return on investment.
Time on market
If a house has been listed for a long time, it's worth asking a few extra questions. It could be that the price is over-inflated or it may be that there are more pressing issues with the property. If nobody else is interested in the property then there is usually a reason why.
When selling a home, it's recommended that you present it to the best of its ability, perhaps including an internal makeover. However, obvious quick fixes could just be an attempt to cover up underlying problems or distract your eye from the real issues.
Be aware of water damage that has been covered up with fresh paint, as this can cause mold long term. You will also need to find the cause of the water damage as well. So any small paint job patches should be investigated carefully.
It’s important not to be too blown away by the cosmetic look of the property, but to seek out the exterior cracks that can't be so easily disguised. Again, fresh paint over cracks on the outside wall should be treated with suspicion.
However much you like a property on the surface, the numbers have to add up if you are looking to make an investment. Make sure you write a business plan with a cash flow forecast and use the asking price as a basis of your figures.
When doing the numbers check if the price is comparable to the recent sales prices in the area. Consider also the loan-to-value price and how much you need to borrow – the less, the better from a profit point of view.
You also need to think about the value of the property after renovations – does the cost of repairs outweigh your return on investment?
When it comes to rental value or selling on, location is high on the list of importance. Do your homework – has the property been built on a flood zone, or have a high crime rate? What about the job situation? Look around the local amenities and see how many are either empty or look uncared for. It's also worth casting an eye at surrounding properties to see the standard of care invested into them.
If the location is less than desirable, this is usually reflected in the asking price, and it may be tempting to go for the deal. Remember, though, that you will have the same issues selling it as the current owner, or you may not be able to get high rents. The exception to this is if you are aware of regeneration plans for the area and expect the location to improve within the next five years drastically. This is a risk as no one has a crystal ball to predict the future, but depending on your intel this is a decision only you can consider.
A final word
For newcomers to the world of property investment, it can be challenging to ascertain what is a good or bad investment, particularly if you are excited to get your business going. The best advice we can give you is research, research, research and don't rush into anything. If it feels wrong, it probably is, so listen to your inner instinct. There are many property opportunities available so don't feel too disappointed if some don't come to fruition. The wait will be worthwhile in the long run.