What makes a property challenged? A property might be challenged if it’s been left in disrepair, has a weak or non-conforming tenant or is located in a less-than-desirable area. A property also could be challenged if it’s physically obsolete, making it difficult to lease for a good return or sell. Perhaps a property has sustained fire, wind or water damage.
Among each of these, age and physical obsolescence constitute the primary reasons there are challenged properties in the market.
Many challenged properties still offer a value-added component. That is, they might be available at an attractive price because of the challenges the next owner faces.
Often these challenges are too difficult to overcome for most passive investors, so they opt instead for a property with fewer issues that better fits into their investment scenario. Challenged properties might remain on the market for a long time with no one interested in buying. It’s common to see consistent price reductions on properties with motivated sellers. Time is the friend of a patient investor who knows the right price on a challenged property.
How do buyers of challenged properties approach potential purchases? First, most of these buyers have a good idea of what it will take in dollars and time to turn a white elephant into a productive, income-producing investment. Most buyers have construction experience or have rebuilt properties in the past. Many collect bids on performing the needed work prior to purchase. The only rule of thumb most can rely on is that remodeling will cost from two to three times what they think is reasonable. Don’t forget Murphy’s law when buying rehab real estate.
It might be wise to consider buying only challenged properties in growing areas of the community or those whose negative issues are easily corrected. It’s nearly always better to purchase these properties just as a local economy shows improvement, not when a booming economy begins to ebb. In addition, if a property is leased and the tenant is weak or problematic, buy the property only after the seller has removed the problem tenant. These issues, and more, are negotiable — especially with challenged properties.
Perhaps one of the most important things to consider when dealing with a challenged property is whether it makes more sense to rehab the property or raze the improvements and start over. Many investors have spent thousands of dollars rehabbing an obsolete property only to realize it would have been more cost effective to tear the property down and build new.
One of the best pieces of advice I’ve heard is this: “If you spend a $100,000 remodeling an old property, you still have an old property.” The county assessor still shows the original construction date as the date the improvements were built, even if the property is remodeled 50 years later. Moreover, newer properties appreciate at a faster rate than older ones, and you should find more buyers when it’s time to sell.
Now, go find that next challenge.