Real Estate Investing Red Flags — Watch Out!

Real estate investing can be very profitable if you’re smart and vigilant. That being said, all investors should be on the lookout for red flags that might signal peril ahead. Steering clear of these dangers along the way can save you time, money, and headaches. Here are a few scenarios you’ll want to look out for:

Red Flag #1:
Price Drops and Extended Time on the Market

Scenario:

You are driving around an up-and-coming neighborhood and see a distressed property. You ask your realtor about it or look it up on a foreclosure site and see that it has been on the market for 400 days with a price-drop of 30% since its original listing. A red flag should be raised.

Your first question should be about what is so wrong with this property that no one will sign on the dotted line? Is it even a problem with the physical property? Have taxes been raised? Has the school district suddenly hired Bernie Madoff as superintendent? Why haven’t other investors taken advantage of this price drop?

As a good investor, you should be thinking about the value you can bring to a property, but should also keep in mind why the opportunity exists in the first place. Some things are too good to be true so be sure to look into every factor that might be affecting the purchase price. If its something out of your control as the property owner, you’re out of luck. Proceed with caution on properties such as the aforementioned.

Red Flag #2:
Changing Markets/Neighborhoods

Scenario:

You are considering a property in what was recently a desirable neighborhood. You created a business plan and finally the neighborhood where you desperately wanted to invest has a foreclosure available. It’s even listed at a price that fits within your project parameters. The surrounding town was once extremely desirable, but just recently, businesses have been shutting down. A red flag should be raised.

Closing businesses are often a sign of declining desirability for a neighborhood. This is just one example of a surrounding circumstance, but there are all kinds of complex situations that can impact your project.

For example, an investor found a property in a college town. The college, a state school, had recently seen an increase in admission due to the economy. Parents didn’t seem to be able to afford the more expensive schools, driving up enrollment at this state school. The investor figured an increase in admission would mean an increase in properties needed to rent. However, unbeknownst to him, the college had plans to build luxury suites and a new policy making it mandatory that students live in on-campus housing until their senior year. You can see how many elements play a part in this scenario legal, economic, and the school system. Just as these factors are ever-changing, so should your mindset in order to stay ahead of the game.

Red Flag #3:

Difficulty Gathering Information from the Seller

Scenario:

You are an investor and looking to purchase a house that has just been put on the market. The seller is pushing the sale and avoiding responding to your questions about the property. You are trying to do the due diligence necessary to invest, but not getting answers to your important questions or the documents you need to close. A red flag should be raised.

Not getting answers can be frustrating, especially since you need to move quickly if this investment is set up to be as profitable as you originally thought. Be wary. It’s very possible the seller is hiding something that would bring the price of the property down considerably. The lack of information could be just be unanswered questions, but it could also be a lack of listing photos or descriptions not matching reality. The seller will highlight the positives of the asset and spin any negatives, so gather what you need to know, not what they think you should know.

Heed these Real Estate Investing Red Flags or Else!

One action trumps all others in real estate investing — doing your due diligence. When you do your research, you set yourself up for success and are ready for any challenge that comes along. If your project raises a red flag and you find something that would have run it aground — be glad you found out earlier rather than later. All of these red flags are challenges you’ll most certainly face, but as long as you’ve planned ahead and know to protect yourself from risky situations, it’ll be smooth sailing.

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