For some properties, there is simply no price that makes it worth purchasing. Ignoring this premise is how nightmare real estate stories start! I get it: It can be tempting to pick up a property simply because the price seems amazing, or you’ve spent a lot of time on the deal, or your just excited to get moving. However, I have happily walked away from some properties knowing I wouldn’t take them even if they were free. The location, the layout, deferred maintenance, structural issues, or any combination of issues all are contributing factors. So how do you know when something crosses from being a good value to flat out being the wrong property? It all comes back around to your research and your comfort level.
KNOW YOUR COMFORT LEVEL
Everyone’s comfort level is different. I’m comfortable doing major, gut renovation projects where others may not be. One of the best deals I’ve done was a building that was on the threshold of being the wrong property. It was a three story, hundred-year-old, six-unit apartment building that was a dirty mess. I opened the door to one unit and roaches just scattered. Another unit had been home to a hoarder. Another unit had a basketball sized hole in the floor in the bathroom. (Not the flooring, the ACTUAL floor! You could drop things on the ceiling below.) I had to call the police about another unit that had become home to drugged out squatters. The rehab cost more than twice as much as the purchase price. This is where your personal experience comes into play. For me, this was a viable option as I had managed renovations on other buildings and was confident in my ability to keep a project of this size on schedule and budget. However, this wouldn’t be the case for an investor without rehab experience.
KNOW YOUR NUMBERS
Even if you are comfortable doing a huge project, it can still be the wrong property. I once passed on a house that a bank offered to me for a just a couple thousand dollars. Thanks to my research, my knowledge of rehab costs, and knowledge of the going rents in that particular area, I knew I wouldn’t be able to get the right returns. I also once passed on a very large deal that would have required no input of cash from me. The due diligence showed a lot of hidden problems and I walked away. It was disappointing to have to do that, but not near as disappointing as it would be to buy the wrong property and end up with a loser.
So when is something flat out just the wrong property? There’s no hardline to say it is or isn’t. It’s something that you learn over time through research and experience. In the beginning you should play it a more cautious and trust your numbers. If you are really questioning whether something is flat out the wrong property, it probably is.