Good businesses don't wait around for indecisive people. Many people "think a business to death." The best way I know to lower your anxiety level with a business is to move forward provisionally.
Even if they have only good intentions, most vendors just aren't knowledgeable and all of them are inherently biased at least a bit. The most common problems with a vendor's numbers are pretty obvious-they overestimate the value (often confusing listing prices of local homes with actual selling prices), and they underestimate the cost to fix it up.
An appraisal really isn't meaningful, unless you hired the appraiser, you gave them the instructions, and you are handing the appraiser the check. I can influence an appraiser to appraise a so-called USD100,000 residence for as little as USD80,000 and as high as USD120,000 (or more). That's close to a 40 percent variance on the two appraisals of the same property! So take any appraisal the vendor hands you in the spirit that it was intended, as a marketing piece! The best appraisals are ones where you hire the appraiser and give them their instructions. If I really want an appraisal to be accurate, then I choose a reliable appraiser I've used before and ask her, "What would this residence need to be priced at to sell in 90 days or less in its current condition?" This should give you a conservative estimation of value.
The next time you catch yourself thinking it's okay to fudge your numbers a little to make the business cash flow or the rehab pay off on paper, beware! Some investors have a tendency to play with the numbers a little to make them show that a marginal business is better than it really is. Remember, just because the business makes a profit on paper doesn't mean you'll make money in the real world.
This one happens all the time. The way you know what a house will rent for is to do a market rent survey. The rents listed in the paper or that a real estate agent told you may or may not be accurate.
So many investors forget that to turn a residence in 90 days or less requires the price to be real, not pie in the sky. What would it really take to get the house into top showing condition? Be careful to be conservative in your estimate of value going into the business. The worst case then is that you make more money than you anticipated!
Use the three-action process you just learned about so that you incrementally invest more time in the business only as it proves it is warranted. Learn to trust your due diligence and evaluation process and make sure it is checklist driven. This is your best insurance that you'll do it the right way every time.
On your first pass, you are only concerned about three things: (1) What is the real market value of the house? (2) Is your price right? (3) If you are planning on holding on to the property long term, will it cash flow?
I've bought a lot of residences from investors who got stuck with holding costs being too much for them to handle. Be careful here. If your exit strategy is to sell the house to a retail cash purchaser, it will need to be in showing condition or you'll struggle to find a quality retail cash purchaser. Always be conservative with how long it will take you to execute your exit strategy and, if possible, build in a healthy cushion of extra time.
At a certain point, as an investor you will need to step forward in the business and commit.
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Note: This article was sent to us by: Trevor C. Jackman at 01222010
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