5 warning signs a real-estate deal is too good to be true
- Good real-estate deals do exist, but if a home is listed at a shockingly low price, it may be too good to be true.
- If the listing price is questionable or the seller or agent is acting a little fishy, especially when it comes to paperwork, do more research.
- If the house has a suspicious history, too many cosmetic fixes, or is located in a not-so-great neighborhood, you may not have a deal on your hands.
But while good deals do exist in real estate, keep in mind that you often get what you pay for. If a home is listed at a shockingly low price, there's usually a reason why.
If you spot any of these red flags, it may be too good to be true.
1. The seller or agent is being sketchy
Whether it's paperwork from the seller or pressure from the agent, any off-putting actions should be a red flag.
When it comes to fixer uppers, "One thing we've seen is that less-experienced investors often get pressured into making a quick decision without fully calculating holding, repair, and sales costs," Jeremy Brandt of WeBuyHouses.com told Forbes. "Take the time to get the offer amount right - the profit in fixer uppers is made in the purchase."
It's also bad sign if the seller is providing an incentive to waive inspection - Sam Dogen, blogger of Financial Samurai who has built wealth through real estate investing, said there's no reason for this unless there's something big to hide. "Always have an inspection contingency because it is your leverage to get out of a deal or negotiate your price lower," he wrote in a post.
There should also be permits for major structural or electrical work. Ask to see the Report of Residential Building Record (3R Report) - if it's missing major additions or renovations, it may mean they weren't done to code and could be unsafe, Dogen said.
Titles should also be clean; look for any oddities and gaps in sellers, who's listed as an owner, and recorded quitclaim deeds, Sterling White wrote on real-estate investing blog BiggerPockets.
"Sometimes the title is so uncertain that you can't get title insurance," he wrote. "Your next buyer may not be able to either, and that puts your entire investment at risk."
2. The listing price is either too high or too low
If the house seems too cheap, it probably is.
While deals aren't unheard of depending on the market or a motivated seller, it's often not the case, White said.
"Prices tend to reflect value oftentimes," he wrote. "It could be that there are expensive structural repair issues under the surface, often including roofs or foundations. Or there could be zoning challenges or large past due property tax bills and association dues that the seller is expecting you to take on."
But if you're buying a fixer upper, a higher price could mean the listing price is just overinflated. Angela Yaun of Day Realty Group told Forbes that you find out by looking at the county appraisal district website.
"Its listed value is usually 10 to 20% under fair market value," Yaun said. "If you purchase a home below that value, you most likely have a quality flip property on your hands. Be sure to factor in repairs your inspector finds to be safe."
Read more: The only right way to save money for a house
3. The house has a questionable history
Leslie Piper, a consumer housing specialist for Realtor.com, told Carolyn O'Hara of LearnVest that a history of bad repairs can be a warning sign, as they can be expensive if they need to be fixed later. If the disclosure packet your seller provides doesn't give enough detail on the subject, she recommends asking your real estate agent for more information.
"You may also want to know about former inhabitants and the surrounding area - some buyers may be less likely to make an offer if a dream home was the site of a crime," O'Hara wrote.
And don't forget the house's market history - if it's been sitting on the market for a long time, that could be a red flag, wrote White. There's a reason why it hasn't been purchased yet - find out what it is.
Dogen also warns against buying a home with a history of high homeownership turnover, which you can check online.
4. There are cosmetic fixes
Quick fixes to make things look better than they seem could be a sign that you're not getting what you pay for.
Dogen highlighted two cosmetic fixes that you should watch out for: Water damage covered up with paint, which can cause mold to fester by trapping moisture in the walls, and spray-painted hedges, which he once saw a realtor do.
"Curb appeal is very important. But it must be done right," he wrote. "If they are taking this shortcut, what other shortcuts could they be taking?"
A beautiful, fixed-up interior can also distract from a problematic exterior. Dogen cited an example of an owner who purchased a $1.45 million San Francisco home - when he went to remove some decayed siding and a rotted door, he found serious foundation issues. It's important to look for exterior cracks and tilts, Dogen said.
"Bring a leveler, preferably with a laser pointer," he wrote. "Make sure the cracks aren't much more than 1/4 inch wide. If they are, you should get a structural engineer to inspect. A lot of sellers will attempt to mud over and paint the cracks, so look out for a paint or surface mismatch as well."
Hire out your own trusted inspector for a second opinion.
5. There are downsides to the neighborhood
The listing price is fair and there seems to be nothing amiss about the house - but what about the neighborhood or surrounding area?
The listing price for a house could be cheaper to compensate for certain downsides that come with living in the area.
"Buying a home in a high-risk flood zone can mean a dramatic increase in insurance costs, as well as more difficulty selling the home in the future," O'Hara wrote.
If you'll have a hard time selling it, so will the current buyer - meaning they're more likely to list the house at a lower price, which may not be much of a deal if you're making up the savings in higher insurance payments.
"Sometimes it's not the property itself, but the local area that is a bad investment," White wrote. This includes not just obvious warning signs like high crime rates or many store vacancies and boarded up buildings, but high unemployment rates, one main employer or industry in the location, and declining populations, he said.
And if other home properties are boarded up or in disrepair, think twice before buying.
"Even if you fix up the property, would someone else buy or rent in that specific area or neighborhood? If the answer is no, it's too good to be true," Ali Jamal of Stablegold Hospitality told Forbes.
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