Before you and your real estate agent hit the bricks and start looking at properties, you need to have a good idea of what your target property looks like and where it is likely to be located. In pursuing the real estate rehab investment opportunity, it really doesn't matter where you live in the big city, the suburbs, or the country-you can make money in any of these areas if you adhere to a couple of basic business principles. 

In particular, you must produce a house that appeals to a large number of people (sell what people want to buy), and it must be located in an area or neighborhood that people who can qualify for a loan want to live (location, location, location). Of course, the implementation of these concepts can become a little tricky without further details. You can learn about two elements of the search strategy in this article:

Where to focus your attention and efforts in terms of neighborhood selection.

By REALTOR.com, 41 percent of all buyers nationwide said they used a buyer's agent when purchasing their last home. To locate a buyer's agent in your area, contact the Real Estate Buyer's Agent Council at (800) 648-6224. They can provide you with a nationwide directory of member agents or they can provide you a referral over the phone. Alternatively, look at agent listings in your local yellow pages-buyer's agents usually identify themselves as such in their advertisements.

Buyer's agents come in two basic varieties-either a nonexclusive or exclusive buyer's agent. Nonexclusive agents work at a full service realty office, in some cases representing buyers and in others representing sellers who've listed their properties with the firm. An exclusive buyer's agent doesn't take any seller listing and doesn't work for a real estate office that does take listings-they work solely for buyers. In either case, you and the real estate agent sign a buyer's agency agreement, the result of which is that the agent works exclusively on your behalf in any deal presented to you. 

Is there any big advantage of one over the other? Probably not, but just beware of any in-house listings presented to you in a nonexclusive agent situation-this could be a conflict of interest, in which you may not get the best possible deal. On the other hand, working with an exclusive buyer's agent will eliminate virtually all potential conflicts. It's really a matter of personal preference.

There is one important aspect of the buyer's agency agreement you need to be aware of-you, the buyer, are responsible for paying your agent's commission (typically 3 percent of purchase price). You can tackle this issue in one of two ways. You can just lower your offer price by 3 percent and pay your agent the money at closing, or you can specify in the purchase agreement that the seller is to pay the fee. Because listing agents usually split commissions with selling agents anyway, there's no extra cost to the seller, and the listing agent usually will accept this split commission arrangement.

In my experience and in that of many others in the business, real estate agents can account for a large percentage of the properties you end up buying. They have access to critical information that you need and they provide the expert services you cannot function without. Start building long-term business relationships with several of them. Don't forget to take them out to lunch every once in a while and send them a thank-you card when appropriate. If you get the chance to refer a client to them, do it! This is how good business relationships are built.

The Number-One Criterion for Selecting Profitable Neighborhoods 

In any city large or small, there are neighborhoods that will produce profitable investments and neighborhoods that are unprofitable using the quick-turnaround, rehab-and-sell technique described in this article. Because tremendous variety in neighborhood characteristics can be found throughout the country, it is difficult to definitively describe the good versus the bad neighborhoods from an investment perspective.

But let me offer some general guidance, because this is an important investment consideration.

Profitable neighborhoods always have this characteristic: People who have saved enough money for a down payment and can qualify for conventional bank financing want to live in this neighborhood. This, above all else, is the best indicator of a potentially profitable neighborhood.

The question is, "How can I tell if a particular neighborhood meets this criterion?" The only way to do this is to take a look at the sales statistics over the past couple of years. And the best way to do this is through your real estate agent, who has access to this information through the local MLS database. In general, here's what you are looking for:

* An active real estate market, that is, many closed-sale transactions, coupled with a number of pending sales and current listings.

* A high percentage of the sales (more than 75 percent) are to owner-occupants, not to investors buying rental units.

* The majority of buyers purchase the homes with conventional financing, not with real estate or land contracts from the sellers.

Your real estate agent can easily and quickly pull up this information on any neighborhood by simply running what's known as a "comparative market analysis," or CMA, on the MLS computer system. With this step completed, let's take a look at some of the other desirable characteristics of an ideal, target neighborhood.

Older Neighborhoods

This is where you want to be: the solid, clean, older neighborhood where pride of ownership is evident everywhere you look-neat and clean lawns; few junk cars in the streets; no garbage lying around; schools, shopping, and churches are nearby; and a low-to-moderate crime rate. Most of the homes are owner-occupied, a few are rentals, and the occupants are hard-working, law-abiding, moderate-income people who care about their neighborhood. The houses are at minimum 20 to 30 or more years old and are showing signs of age.

Keep in mind though, this neighborhood is not perfect-it has some warts. There is some crime and families have their problems, just like everywhere else. Lifestyle changes can occur suddenly as a result of retirement, job loss, illness, or death. These sudden changes can result in homes that become poorly maintained or that need to be sold quickly if the owner does not have the financial resources to deal with the changes. Foreclosures are not uncommon in these neighborhoods. Many of the homes are showing signs of age and a few may be vacant or even boarded up. But 15 percent to 20 percent of them have or are currently undergoing renovation. Younger, first-time homebuyers who have down payment money and credit are attracted to the area because of the affordability factor. These young families are slowly fixing up their new homes, often with "sweat equity." Housing prices are in the lower to middle end of range for the community, and values are steady or increasing moderately. 

As discussed earlier, the real estate market in the neighborhood is active, based on current, pending, and sold listings during the past 12 months. Every city, town, village, suburb, or rural community has at least one, if not many, areas that fit this description of the ideal older neighborhood. Your agent will be able to help you identify several of these "pockets of opportunity" in your community. This is where you want to focus your attention, because it is in these areas that you will consistently find the fixer-uppers that will meet our investment criteria. 

Just Say No to Expensive Neighborhoods

As a general rule of thumb, just say no to more expensive neighborhoods. On occasion, you can find opportunities here, but I would suggest that your time is better spent elsewhere. Let's take a look at the downsides associated with these areas:

* Very few houses ever become fixer-uppers in these neighborhoods, therefore your time and effort versus potential reward ratio is not attractive.

* Costs to purchase and renovate can be huge. You are better off spreading your risk capital out over two or three smaller deals rather than one big deal.

* The pool of potential buyers is very small compared to the lower priced homes. The marketing period can be much longer, resulting in significantly higher holding costs (loan payments, utilities, insurance, etc.).

* Higher-priced homes are subject to very volatile price fluctuations in both directions. Your risk is in a down trending market where these homes will typically decrease in value at a much higher rate than the lower-end houses.

The bottom line is that low-risk business opportunities are just not found in these neighborhoods. If you happen to stumble on to a potential candidate here and you happen to have a good source of money at your disposal, you might consider a more expensive house in an upscale neighborhood. Just make sure the external economic factors are on your side-strong housing demand, growing economy, and down trending interest rates. Otherwise, you are just shaking the dice!

 

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