How can you know whether a property is a good deal? You've probably heard that the three most important things to look for in real estate are location, location, location. Actually there are five things you need to analyze according to Robert G. Allen, author of 'Multiple Streams of Income' and the real estate bestseller 'Nothing Down'.
1. Seller motivation
2. Good location
3. Good financing - including down payment and long-term financing
4. Good condition
5. Good price
All of the above five conditions combine to make a good investment. And below is a simple scoring system from his book 'Multiple Streams of Income' that can help you choose a good property.
Property Points System
Each of the above five conditions are given a score from 1 to 3, where 1 is poor and 3 is excellent. If the property scores less than 12, pass and keep looking.
Guidelines:
- Analyze and assign a point value to each of the five factors of a property
- If in doubt about a point value, always pick the lower number
- Add up the numbers
- The lowest acceptable score is 9, the highest possible is 15
- Greater fools always buy property in the 9, 10, 11 range
- Great investors always buy property in the 12, 13, 14, 15 range
Poor (1 point) - Won't budge on price or terms. "Take it or leave it." Doesn't need to sell. Not anxious at all. In the driver's seat.
Average (2 points) - Might consider a small discount in price. Needs cash for new house or property. Needs cash for bills, etc. May carry small second or contract but leery of unusual deals.
Excellent (3 points) - Needs cash for pressing items, i.e. behind in payments, etc. Or, doesn't need cash at all... has tax, management, transfer, time problems, or divorce, retiree, or investor looking for a solution without major need for cash. Flexible in price or terms.
2. Location
Never (0 point) - No pride of ownership. Junk and debris in streets. High crime. No appealing shopping close by. Declining neighborhoods. Abandoned buildings and boarded up properties. Close to major streets, industrial areas, or commercial zones (across the street). Far from employment centers or commuter accessibility.
Average (2 points) - May be clean older neighborhoods. Close to shopping, churches, schools, etc. but not very appealing. Working class tenants, neat, established. May be poor location on the upswing with pioneer fixer-uppers. Nicer inner-city neighborhoods.
Excellent (3 points) - Easy accessibility to all necessary amenities and transportation. Middle class, suburban neighborhoods. Not on busy streets. Cul-de-sacs ideal. Properties nearby very similar in price. Good foliage and landscaping except in brand new subdivisions. Only high-class inner-city locations.
3. Financing
Poor (1 point) - More than 15% down. Seller needs lots of cash and wants all of his equity. Or, property will have heavy negative cash flows for more than two years. Or there will be a large balloon payment due in less than three years from date of purchase.
Consider only if price is excellent.
Average (2 points) - Financing required from an institution with up to 15% down of buyer's money. Credit checks. Institutional, secured loans for part of the down payment (high interest, high monthly payments). Seller carries small amounts. Cash required from buyer. Balloons due in less than 5 years.
Excellent (3 years) - Less than 5% of buyer cash involved. Seller carries most of the financing at lower than market rates with no balloons in less than 7 years. No negative cash flows projected beyond the first year. Contract sales, no credit checks.
4. Price
Poor (1 point) - 10% or more above the reasonable market price.
Consider only if financing is excellent.
Average (2 points) - Within + or - 5% of market price.
Excellent (3 points) - At least 10% or more below market price.
5. Property Condition
Poor (1 point) - Consider only if price is excellent.
Needs major cosmetic and structural improvements. At least 10% of purchase price will need to be spent immediately to make unit rentable. Improvements do not significantly improve the rent roll because of quality of tenants and location. Improvements not to increase value more than 10% above purchase price. Usually associated with poor locations. Possible to find this property in excellent locations where prices are so high that improvements do not increase value but just make units acceptable to renters. Viewed as making a larger down payment (for improvements) and receiving an averaged priced property.
Average (2 points) - This is the true fixer-upper! Cosmetic improvements would be nice but not immediately necessary. Costs not to exceed 5% of the purchase price. Cosmetic improvements immediately affect the value upwards and make the property more desirable, saleable, and attractive. Not much structural work (if any) is necessary... only paint, landscaping, drapes, and other inexpensive improvements. This type of property should not be bought if the buyer does not have the time or mental capacity to undertake supervision of improvements. This property can prove to be the most profitable in the short run. The worst house in the best neighborhood.
Excellent (3 points) - Newer property or older property with recent renovation. No problems, clean inside and out... good landscaping. New components to replace major items. May have been a recent fixer-upper project which is being sold by a don't wanter at an excellent price. No work necessary before renter moves in. Solid property with a hassle factor of zero. Quick closing, quick rent-up, quick cash flow.
Example (Alta Vista de Boracay)
We've tried this out with the Alta Vista investment and the scores are below.
1. Sellers motivation and flexibility - we give it 2 points as there is a need to sell. No interest if paying within 1 year with in-house financing. Other terms available: 2, 3, 4, 5 and 10 years to pay.
2. Location - easily a 3 on location. Good landscaping, not very busy yet all necessary amenities are easily accessible.
3. Financing - we give it 2 points as 10% downpayment is required but the leaseback program can lessen the monthly amortization
4. Price - we give it 2 points as it costs lesser than that of the neighboring development with a comparable unit. It's as much as PhP650,000.00 to PhP772,000.00 lesser than the neighboring property.
5. Property condition - easily a 3 on property condition as it's new and comes fully furnished. No renovation or interior decorating expenses and effort.
Total Score = 12 points. Definitely a good investment.
Property Evaluation Worksheet
After your initial assessment using the Property Points System, you can use Robert's Property Evaluation Worksheet to do a more detailed assessment.
The Property Evaluation Worksheet is available from the Multiple Streams of Income website (Keyword: BargainFinder) or simply click here.
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