4 Main Reasons Why A House Underperforms

By on December 11, 2014

When you are a real estate investor, especially one leaning more towards flipping, you would want to have an eye for houses that clearly needs some rehabilitation. The logic behind that is clear. When you are able to identify depressing aspects of a home that can be easily reversed while others are not able to see it, you put yourself in a very good position to buy low and sell high.

Some people wonder why property owners would sell their property when they can go about their rehab activities themselves and sell higher. Well the lack of know-how or experience could be what had put their properties into a condition that gravely needs some help. Here are common reasons why homes end up being a prime candidate for your scavenging.

Inexperienced owners

The number one reason why landlords fail in their real estate investments is not because the market is bad. It is because they do not know how to run a smooth operation that keeps everything in optimal condition. Negligence to small issues slowly snowball into circumstances that just look too dire to even attempt to overcome. It then reaches the point where owners feel that the costs to refurbish the place heavily outstrips the potential gains from a rehab project.

Inexperienced owners also make themselves a prime target of services providers who charge premium fees for insignificant jobs. For example, the cost of a simple air-conditioner wash could be inflated multiple times when the servicemen insist that a thorough chemical wash is absolutely required. These are things you will not know until you have more experience under your belt.

Poor market

If the market is doing badly, even the shrewdest of investors might be forced to exit. At the same time, even good deals can be profitable in bad markets. Jobs start to decrease, resulting a lower demand for rental apartments. When that happens, quick moving investors slash prices to sign up tenants over the long term. Those who wait will be left to bleed negative cash flow or simply have to sell as their holdings are no longer self-sustainable. These sellers are the best people to negotiate with for a good deal.

Obsolete

Yes real estate can become obsolete. This could be due to the physical appearance of the house which is no longer desirable to the up and coming generation. You can’t live in the 1970s forever. The younger generation these days are louder and have higher self-esteem which they are not embarrassed to declare.

A house can also be functionally past it. For example, if a house is located in a tropical climate, it is no longer acceptable not to have an air-conditioner. It is an absolute requirement. Why would tenants want to live in place where they have to sweat it out the whole day when there are so many available listing the provide air-conditioners at the same rental price.

Limited financial options

It is a fact that more and more people are living a day at a time financially with no long term plans. Part of the reason is the rising cost of living that plagues many a developed nation. Some might be in situations which they have to restructure or refinance their mortgages in order to keep themselves financially afloat. The thing with credit and financing is that when times are good, you can get what you want easily. But when times are challenging and you need credit most, it is also the time when you can never get a financier to pick up your call. When the curtain rises and an owner is unable to get off the stage gracefully, he might have to jump off. This is where you will lend a helping hand.

Bad deals

You could be in a situation where you can profit just because the existing owner of a house made a really bad deal. Keep that evil smile off your face as it can happen to anyone. Sometimes, we just fail to see things and make deals so bad that you make a loss the moment you sign up. A quick exit is often the best choice with limited options.

When faced with such deals, take more time than usual to work out what your are up against. Surely you don’t want to be the receiver of a bad deal being passed around. Only move forward if you are able to structure a deal that you can profit from.



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