The Best Types Of Properties To Buy Real Estate Options On by Thomas Lucier
From my experiences and observations, small, vacant commercial properties with obsolescent flaws that are economically feasible to cure, are potentially the most profitable type of properties to buy real estate options on. That's because many small, vacant, obsolescent commercial properties:
Can often be bought at purchase prices that are below their replacement cost.
Have owners who are more willing to sell low-cost real estate options.
Are generally off the radar screens of corporate and institutional real estate investors.
Scare-off most traditional real estate investors.
Offer more opportunities to realize immediate resale profits.
The Three Types Of Obsolescent Flaws That Cause Properties To Lose Value
The three types of obsolescent flaws that cause properties to lose value are:
Functional Obsolescence: Functional obsolescence occurs when a property losses value due to its architectural design, building style, size, outdated amenities, local economic conditions and changing technology. Look for properties with design features that would be relatively easy to upgrade or replace. For example, some buildings have facades that include outdated awning type overhangs that can be removed to give the building a more modern appearance.
Economic Obsolescence: Economic obsolescence occurs when a property losses value because of external factors such as local traffic pattern changes or the construction of public nuisance type properties and utilities such as county jails and sewer treatment plants on adjoining property. Seek out vacant, but structurally sound properties that adjoin less desirable nuisance type properties. As an example, a vacant warehouse located next to a sewage treatment plant that could be used by a manufacturer to store non-hazardous materials in.
Physical obsolescence: Physical obsolescence occurs when a property losses value due to gross mismanagement and physical neglect resulting in deferred maintenance that's usually too costly to repair. Search for properties with only minor structural problems that can be corrected at a cost that's below the property's replacement cost. In other words, don't buy a real estate option on a property that is deemed to be physically obsolescent, if it can be rebuilt from scratch for less than it would cost to repair it.
Four Classes of Commercial Buildings
If you don't already know, commercial buildings are classified by the commercial real estate industry into four classes based on their location, age, monthly rental rate, amount of amenities and type of tenants. The four classes of commercial buildings are:
Class "A" Buildings: Large, relatively newer buildings with modern amenities such as state-of-the-art telecommunications capability which are located in desirable areas.
Class "B" Buildings: Buildings over ten years old with many amenities that are located in desirable areas.
Class "C" Buildings: Older, well-maintained buildings with smaller size units and fewer amenities that are located in stable areas.
Class "D" Buildings: Older buildings with high vacancy rates, deferred maintenance and very few amenities that are located in marginal areas.
What's An Undervalued Property With Immediate Resale Profit Potential?
For the purpose of buying a real estate option, I define an undervalued property with immediate resale profit potential as any property that can be purchased for at least twenty percent below book value, or the sale prices of comparable properties in similar condition, that have sold in the past six months within a two-mile radius of the property under consideration for purchase. However, the scenario that I've just described is under ideal market conditions that hardly ever exist. Depending upon the size of your local real estate market, the amount of sales activity, and the type of property, you may have a very hard time finding any recent comparable sales within the vicinity of the property that you're interested in buying. In most situations, you'll have to really search your local property tax rolls to find recent sales data.
Look For Properties With Problems That Scare-Off Most Investors
Look for problem properties that scare-off most traditional real estate investors. These are properties with correctable problems that appear to be complicated and usually require some sort of specialized knowledge in order to be solved. However, in most cases, it's the common misperception of how difficult the problem is to solve, than the actual problem that scares-off most conventional real estate investors. For example, I specialize in buying straight real estate options on small, vacant, condemned commercial properties that are structurally sound, but in dire need of an industrial-strength cleaning. Most conventional investors are instantly turned-off by this type of property simply because of their outward appearance which generally looks far worse than their actual physical condition. They can't see beyond the filth and grime that can be easily washed off with a pressure-washer, and the smelly garbage and accumulation of junk that can be inexpensively hauled away. However, what scares most conventional investors more than the sight and smell of a condemned property, is the very thought of having to deal with the local governmental bureaucracy in order to bring the property into compliance so that a certificate of occupancy can be issued to the property owner. Fact is, I've never had a problem with any government agency regarding the turnaround of a condemned property! That's because, before I ever buy a real estate option on a condemned property, I first meet with the local code enforcement inspection supervisor who's responsible for the area where the property is located. I do this to go over the code violation inspection citations to find out the bare minimum that needs to be done in order to bring the property into compliance. This way, I know exactly what needs to be done, and have a ballpark idea of the cost to do it. And, I never try and bullspit code enforcement inspectors; I always do what I promise to do when I promise to do it!
Four Types Of Problem Properties That Scare-Off Most Investors
The four types of problem properties that scare-off most traditional real estate investors are:
Brownfield properties: These are properties that are defined by the United States Environmental Protection Agency as: "abandoned, idled, or under-used industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination.”
Stigmatized properties: These are properties that have a stigma attached to them because of some traumatic or horrific act such as a chemical spill or mass murder that occurred on the premises, and has resulted in the public perceiving the property as being undesirable.
Contaminated properties: These are properties that are contaminated by mold, nauseating odors, toxic bird droppings or infested with rodents, insects, or birds.
Condemned properties: These are properties that have been condemned by government agencies for building, health, safety or fire code violations.
One of my favorite types of undervalued properties to buy straight real estate options on is small, vacant, dirty, neglected, run-down physically obsolescent commercial properties that can quickly and inexpensively be cleaned-up. I've found my own little niche in what I call dirty deals. Dirty deals are small, vacant commercial buildings that are structurally sound, but have a filthy, neglected, run-down appearance that's an instant turn-off to most people who can't see beyond the filth and grime. The reason why I love these dirty deals so much is that they're strictly cleaner-upper properties. This means that all I have to do to spruce them up is give them an old-fashioned industrial strength cleaning. This way, I don't have any of my own money tied up in fix-up costs. My out-of-pocket expenses are limited to the cost of cleaning up the property. The main reason I like this particular type of undervalued property so much is because I can usually buy real estate options on them at bargain basement prices, and then quickly resell the options for a hefty profit once the property has been given an industrial strength cleaning.
Condemned Single Family Houses That Can Be Rezoned For Commercial Use
In most markets, it just doesn't make any financial sense to buy straight real estate options on single-family houses. I say this because most single-family houses usually don't have enough immediate resale profit potential to justify the amount of time and effort it takes to complete a real estate option transaction. It took me a while to come to this conclusion, but I finally wised-up and realized that it was taking me just as long to locate, research, negotiate and buy a real estate option on a single-family house as it did to buy one on a small commercial property. As far as I'm concerned, the only time you should ever consider buying a straight real estate option on a single-family house is when you can easily, quickly and inexpensively have the property's zoning designation changed in order to convert it to a more profitable commercial use such as professional office space for doctors, attorneys, accountants and dentists. However, you need to know that the zoning application approval process can become very political when civic, neighborhood and homeowners” associations become involved. That's why it's best to avoid buying real estate options on single-family houses located in established neighborhoods when you intend to have the property rezoned for commercial use.
Develop Your Own Real Estate Option Property Selection Criteria
Lastly, now that you know about the most potentially profitable types of problem properties to buy straight real estate options on, you need to develop your own real estate option property selection criteria. This way, you can focus on a specific type of property, and not waste your time, money and energy pursuing properties in a willy-nilly fashion. Your real estate option property selection criteria should include the:
Exact type or types of property that you want to buy real estate options on.
Property price range that you can afford to invest in.
Percentage of the purchase price that you can afford to pay for a real estate option.
Geographical area or areas you feel comfortable investing in.
Thomas J. Lucier has been a real estate investor in Tampa, Florida since 1980. Mr. Lucier is the author of six books on real estate investing and managing Florida residential rental property. He is also a Florida licensed mortgage broker, and an active member of the National Association of Real Estate Editors, and the Real Estate Educators Association.
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