Investing Strategy & Tips
How to analyze a property's growth potential
By Buyincomeproperties.com
Jan 3, 2006, 04:56

When analyzing a property's growth potential, it is important to find out as much as you can about a community and isolate the factors that contribute to growth. You have to select the right area to start with. If you don't, you're really wasting your time. The only way to do it is to conduct research and find out what the city and regional governments are planning to do and if there are any projects on the drawing boards. If you find something unique, you might be sitting on a mountain of riches!

Another sign of growth is the addition of new area codes by the regional phone companies. The area I live in was recently assigned a new area code because of the increase of business and residential phone use created by the growing number of fax machines, computer modems, and multiple phone lines. This is a concrete sign of growth in progress. It forced me to modify all my stationery, but it's very reassuring.

When contemplating a purchase, the best method of weighting the benefits and drawbacks is to write down everything you like about the property. Draw a line down the center, and write then get a piece of paper, draw property's positive attributes on one side and negative on the other. List everything about the subject property and surrounding area. This will help make your decision as objective as possible. Start with the positive, then write the negative. If you write down everything that is negative first, you won't even get past the first step. Then cross off the things that counterbalance each other. There might be one positive quality that outweighs all the negative  things put together.

The three most important factors in determining growth potential are family income, population growth, and the duration of that growth. Everything else is important, but not as important.

You can draw all kinds of assumptions and situations from data, but it is worthless if you don't know what to do with it. The surest sign that the value of land will rise is if average income levels are on an upward trend. If you can foresee how long these trends are going to last, then you have the key to selecting the right community. All the other factors, the details, come into play when selecting the individual property that represents the best value in the community.

Essentially, our equation looks like this As mentioned before, population on its own does not create wealth. You need population combined with industry--and the industry has to have expansion potential. Where you learn about this is in the pages of the Wall Street Journal, Business Week, Fortune, and the business section of your local newspaper; or you hear it on national radio programs like "Marketplace"; or you watch it on the "Nightly Business Report," "Wall Street Week," or "Adam Smith's Money World." When I first moved to Hermosa Beach, I bought a great big street map of the city to track the local real estate activity and to become as informed as 1 could about the community. I hung this map on the wall and made notations with differently colored pushpins to track different developments. I used red to indicate sales, yellow for listings, blue for assessments and street improvement projects, white for new buildings, and green for other important activity, such as zone changes. I then numbered each mark, wrote a full-page explanation of it, and kept it in a loose leaf binder for easy reference. I also used the multiple listing service and put citations from that on the map as well. If the city was planning to do something, I'd write it down in a reference hook. In this way, I was able to keep very close track of what was going on in the community. I had a visual picture of the local real estate activity. When you see a property coming on the market and you know what the other properties have sold for in the last three years, you can make an informed offer.

Pick an area that you like, of say five city blocks, get a big map, and put it on the wall. Put every bit of information you know about the community on that map. When something comes along that you think you want to buy, you've got all this data to help determine what you think you can afford to pay for it. From this, you can also see what the trend is. If you see a large number of new single family residences in an area with apartment buildings, you can probably conclude that that particular strip's been down zoned to R-I. But you should always check with the city planning department to make sure. The important thing is to look at these factors in the form of a trend. When you see that the trends are going in the right direction, take action; when you see that they're going in the wrong direction, go on to something else.

When you're organized, it's pretty easy to figure out whether and how the community is growing. I find it useful to pencil everything out to better visualize the various pieces of the puzzle. This work is a problem for some people. It's not easy. If it were easy and took little or no effort, all the people lying on the beach in front of my building would be multimillionaires. My mother used to say that luck is 90 percent hard work and only 10 percent serendipity. It's work that makes you successful, not chance. When I started my real estate investment program, I was working full-time as an appraiser for Marshall and Stevens and was taking care of my properties and everything else. With real estate, you have to like it or it's going to be a burden. For people who do this but hate real estate, it's probably not going to work. For me, it was always fun. I looked at it as a hobby and spent most of my spare time in some real-estate-oriented activity or discussion.

Corner Lots

A corner lot isn't worth that much in a normal single family residential area,but when you have a multiple residential situation, a corner lot becomes valuable, especially if the city is planning to change the use and require more parking per apartment unit. A corner lot becomes valuable if it is vacant and you want to build on it, primarily because of easy access. Lot orientation and use of natural lighting can also make the building look better.

Lot Size and Precise Boundaries


I mentioned before that most buyers are not aware of everything going on around a property. A lot of people aren't even informed about the zoning of the subject property--let alone the precise boundaries of the piece of real estate they're thinking about purchasing.

The size of the lot is extremely important and should conform with the neighborhood and the community. You can look for this on the tract map. If you have a larger parcel than the standard-sized lot, that's actually good. But you don't want a smaller one, unless you can buy it cheap, assuming everything is equal, because you can get into a situation where a lot is substandard. With a substandard lot, if you have two units on your property and something happened to the property, you might only be able to put one back; and if it were really small, you might not even be able to put one back.

If you're going to buy a piece of land, you ought to get a metes bounds description of the parcel, which describes the boundary lines, as well as a survey of the land to physically locate points, so that you can go out and see what you're buying. I knew a couple who once bought a restaurant on a two-acre parcel of ground. The broker assured them that the property they were buying was two acres and came with a restaurant, an orchard, a house, and a yard. They bought the property and closed escrow, thinking they had found the deal of the century.

Well, one day the new owners (my friends) went over to the property and started working in the orchard, and the real owner told them to get off what they thought was their property! Only after this incident did they obtain a metes and bounds description, which showed the true extent of their lot, which turned out to be only of an acre. They wound up suing the former owner and the broker. The whole thing was a disaster that could have been avoided if they had simply called and told the escrow company what they thought they were getting and the size of the lot, which they could have found out by having a surveyor physically locate the property lines from the legal, metes and bounds description before the escrow closed. If you buy a property through escrow, the seller has to give the escrow company a proper legal description.

But not all states have escrow laws, so it is frequently incumbent on the buyer to obtain one independently, with real estate, you're buying the property based on the legal description, not on what you are told you're getting. To see the legal description of the lot, simply visit the county recorder's office and make a copy of the deed. If it's too complicated, have a professional read and interpret it for you. If there's any doubt, hire a surveyor while the property's in escrow, and put up some flags so you know where the property's going to be before the deal closes. To estimate lot boundaries, look at the telephone poles. Usually, they're located on the property lines, but not always. Sometimes you can see the pins in the street or in the sidewalk where the surveyors have laid them. 

In California, surveyors put their numbers on their surveying pins so a record of the survey can be kept with the local City Hall.

I once bought a three-unit place and discovered that one of the units encroached on the side yard of somebody else's property. When I made an offer, I wrote on the deposit receipt what I thought the dimensions of the property were. The owners counter offered, saying that the lot was bigger, and that they wanted more. So I said, "Okay, I'll buy it at your price if it is bigger, but I'll buy it at my price if it's smaller." Needless to say, I bought it at my price, which was 20 percent lower than theirs, because they didn't know what they were talking about. They were desperate to sell and couldn't find another buyer. You know, there is no substitute for knowledge. Everybody has an opinion on what to do, but you have to be right on your facts. The sellers of that property were probably told what the size was when they bought the place and assumed that it was the honest truth.