2007-04-12: Value Opportunities in Real Estate

by RikaKazak

Here are six specific situations that cause bargain sales or offer opportunities to create value:

1.) Desperate sellers. Finding the seller that is “looking” for a buyer as opposed to the one “waiting” for a buyer is a sure fire way to leverage the deal in your favor. I know this sounds obvious, but this is seriously the #1 reason you get good deals.

2.) You find an unnecessary expense you can cut out. I want to preface this with how a property’s value is determined (rental property that is). Value is calculated as income minus expenses divided by capitalization rate. So the lower expenses are, the higher the value of the property, and the higher the income, the higher the value of the property. One example of how I helped a friend to lower expenses was pointing out an overly expensive way he was dealing with garbage pickup. Now, he invests in a very small town, and in that small town, buildings with 4 to 11 units used a garbage dumpster instead of individual cans (unlike where I invest, it’s cans up to 12+ units usually). We talked about it, and he finally did the math.

It turns out using cans was $78 a month cheaper (1 can = 2 units). Now that doesn’t seem like that big of a deal, but think bigger. And think of other examples. Like replacing inefficient windows (if the landlord pays for heat). Or having a tenant take care of the lawn (they’ll do it a lot cheaper than a company, and usually other tenants don’t care who does it). Another good area to look at is insurance. If you own a lot of properties, you can get way better deals with them all grouped together than a landlord with only 1 rental.

3.) Find a way to increase income. Some ways to do that are to “modify” each unit. I just recently bought a place where I did this. The area where this apartment is located has cold winters (gets 10 below Fahrenheit frequently) and hot summers (breaking 100 is standard). So obviously the previous landlord put in a good/efficient heating system. That was great, but there was no air conditioning. And the tenants wanted it badly (it was standard in the surrounding apartments) Resulting from that, each place was renting for around $410 a month (below the market average). So I simply put in air conditioning units in each unit. Now there was the initial set up cost, paying for the machines, paying someone to put it in, and upkeep on them, but since then, I’ve raised the rent to $550 a month and they’re staying occupied at a pretty low vacancy rate (~3%). I also added a dishwasher to each unit, and bigger/newer fridges, that’s why such the big jump.

The total cost from all add-ons took less than a year to recover from and now I’m swimming in the extra $140 a month per unit. My tenants are happy I installed the upgrades, gladly paying the $140 extra a month, and I’m happy too...It’s a win/win situation.

4.) Have better plans for the place. One example of this is turning an apartment complex into a bunch of condos. Now I’ve never done this, nor do I plan to get into the area, but my friends that do it are doing pretty well. Basically, if a place is worth 1 million, and you intend to buy it for what it’s currently used for, then yes, to make an immediate profit, you need to pay less than what it’s worth. But if you intend to turn it into something else, and for example, doing this makes the total value increase by $100,00, then paying what it’s worth is a way of looking at it as “undervalue” or “having unrealized potential.” Either way of looking at it, it’s +EV to pay a million for a million dollar place if you can turn around and sell it for $1.1 million in a short time (I just made up those numbers, hopefully you get the point I’m trying to make though).

5.) Buy from a rich friend. Now I’m not saying, “abuse” or “take advantage” of this friend...here is what I’m trying to say. Lots of older guys are basically lonely/want someone to tell their stories to, if you’re receptive and nice to them. Attend real estate dinners/banquets and get to know them. As they “retire” and sell off some of their property they’ll contact you first. Usually they’ll give you a bargain and are happy to see their property going to such a “nice” young guy. It’s a win/win situation because money to a lot of the older guys means very little, however having people listen to their stories is priceless.

6.) Look for FSBO (for sale by owner) Some FSBO’s are done by really smart people (ones that don’t need an agent), and the price is right where it should be. Others however are clueless and are simply too cheap to list with an agent; sometimes great bargains can be found by negotiating with the latter.

Overall, the biggest trick to getting undervalued properties is being the first to make the offer (and being well ahead of all other offers). I pride myself on being able to drive to the potential property (I live out of state from where I do most of my investing), walk around, call a couple people, ask for some numbers, and being able to make an offer, with an already pre approved letter from my bank in under 4 hours. Most people take at least 1 day to “think it over.” And others need a good couple of days before they feel comfortable “pulling the trigger.” I’ve pulled the trigger in under an hour multiple times. One day is usually the difference between getting a good deal, and having a story about how you just missed out on that great real estate opportunity.

Luck favors the prepared.