Buying a Cheap Property?How to Protect Yourself from Acquiring a Lemon

Full disclosure: buying super cheap real estate is not something I recommend to investors - especially those who are just starting out. I’m talking about properties with crazy low price tags of just a few thousand dollars, or even those that go for a little bit more. On the surface, it sounds like a great deal. I mean, it’s a piece of real estate for next to nothing, right? The truth is, though, that these properties often end up costing far more than they’re worth, resulting in a depressing loss that you’ll feel for years to come.

Okay, now that the PSA portion is out of the way, let’s discuss how you can protect yourself if you do find yourself facing a cheap deal that you just can’t pass up.

Make sure the property will increase in value. Value add is one of the most important aspects of any real estate purchase, and especially so with a cheap-o property. If no value is going to be added within a few months, then what’s the point? You want a return on your investment, don’t you?

To get a better understanding of value potential, you need to examine a couple different aspects. First, location. What’s going on in the area? This is an important question, because if there’s not any apparent potential for growth in the area, then your cashflow and appreciation may take a hit. If you’re not planning to buy and hold and are flipping the property instead, you still need to consider the location. Specifically, what are the comps in the area? How much do you stand to make after you rehab the property?

This brings me to my next point on value add, which is running the numbers. This is the most accurate science you’ll get when considering a new property, and even then, it’s not 100% guaranteed. Gather up all the information you can about the property (projected income and expenses), and then use those figures to determine your ROI.

Use an inspector who knows what they’re doing. Wait! Before you can run the figures, you need to have the property inspected, and inspected very thoroughly. There’s a reason this home is priced at $4,000, and it’s your job to uncover it. Renovations are expensive, and you need to know exactly what needs your attention so you can factor those costs in when determining overall expenses.

Get title insurance. Purchasing title insurance will really come in handy if there are any issues with the title to the property...which, oddly enough, seems to happen much more with super cheap real estate. It’s a small price to pay to ensure you are covered in the event something goes bad.

Your property management choice matters….a lot. If you’re planning on renting the property out, you’ll likely want to hire a property management group to oversee it. This includes marketing the property, screening/selecting tenants (this part is very important), collecting rent and handling other tenant interactions, and performing maintenance/upkeep tasks. Poor management can cost you thousands, so choose a property manager who specializes in the type of property you’re planning to acquire.

Buying crazy cheap investment property is risky business. As I stated, I don’t usually recommend it. However, if this is an area you’re interested in exploring, or if you see a deal that seems enticing, then by all means, pursue it. Just make sure you’re protecting yourself by performing your due diligence and taking the actions described above.