Everyone knows how expensive real estate is in New York City. So when you find a property that’s priced shockingly low, your first reaction might be to think you’ve found the holy grail! But while good deals do exist, there’s a fine line between a barg1’ain and a lemon. There’s always a reason behind why a property might be priced super low, and if you want to avoid ending up with a bad deal, you need to find out what that reason is. As you continue your search for a home, keep an eye out for these warning signs. Finding one or more of them should be enough to tell you that a deal is too good to be true.
Table of Contents
It Came from a Questionable SourceIt Came from a Questionable Source
If you’re an investor, then you’re probably used to keeping your ears to the ground for any good deals. But if you’ve been in the real estate game long enough, you’ll also know the importance of evaluating every deal before buying. Starting with who you first heard it from. Did someone other than your real estate agent bring it to your attention? If so, are they a credible source? Do they have a reputation for identifying promising opportunities that turn out well? Or are they more known for picking bad ones that crumble upon further inspection?
You have to be sure your source is credible before getting too far into a deal. Ask yourself what their motives are and what they stand to get out of the deal for themselves. This should be the first place you start with when evaluating any opportunity that doesn’t come directly from your agent.
The Listing Price is Far too LowThe Listing Price is Far too Low
A property’s listing price depends on the market, the seller, and its perceived value. If you find a property that’s priced well below the market price for a similar property, then there’s probably something impacting its value. No seller in their right mind would ever let a property go for less than it’s worth unless they had an excellent reason. Now, it does happen that a property can be priced below market rate if the seller is in a hurry to sell. For instance, they could be relocating to a different city or going through a divorce. But that usually only happens after some heavy negotiating, and the price reduction is rarely more than 1-5%.
If you find a property that’s priced super low at 10-20% below market value, then it almost certainly has some major quality issues. It may be in need of extensive renovations and repairs. There could be zoning issues, or higher property tax bills and common charges or maintenance costs dues that the seller is trying to run from. It’s a rule of real estate that you should always get a home inspection before buying; this becomes doubly, so if a property is priced far lower than it should be. If you’re looking for a fixer-upper, then make sure you factor in all the costs for labor, materials, and time before considering the offer further.
The Property Has a Questionable HistoryThe Property Has a Questionable History
If the home inspector finds issues, but not enough to justify the price the sellers are asking for, it’s time to start looking into the property’s history. Numbers don’t lie, and you can typically find the problem in a property that’s priced too low after reviewing all documentation to do with the property’s financial and ownership history. If the sellers don’t provide this information, then have your buyer’s agent and real estate attorney do some digging. A long history of expensive repairs is a clear red flag that the property has issues. It’s also worth collecting information on a property’s former inhabitants. Few people will want to live in a building where a crime was committed. Even if that’s something you don’t mind, there are still a lot of people who would mean, which can make it hard to resell in the future.
If you feel concerned about a property’s ownership or any possible liens, then have your attorney do a title search. A standard practice as part of the due diligence period before a contract is signed. The bottom line is that you need to find out why the property is priced the way it is. A property with a high ownership turnover and has spent too many days on the market probably has a skeleton or two in the closet.
The Seller or Agent is Acting SketchyThe Seller or Agent is Acting Sketchy
Whether it’s a lack of paperwork from the sellers or undue pressure from the agent, any sketchy activity should be considered a red flag. You’ll often see this with fixer-uppers where inexperienced investors feel a lot of pressure to sign without conducting proper due diligence. Be wary of any attempt by the seller to offer an incentive in exchange for wavering the home inspection contingency. There is absolutely no reason for this unless they have something to hide. Always keep your inspection contingency. It’s your only leverage for getting out of the deal or negotiating a lower price if you later discover defects.
If there’s ever been major structural or electrical work, ask to see the building permits. If they’re not provided, or areas of it are missing, it probably wasn’t done to code and might be unsafe. Goes for all paperwork to do with the property. If something is missing or doesn’t add up, then the seller may be trying to hide something.
There are Problems with the NeighborhoodThere are Problems with the Neighborhood
So, the property is in a fair condition, and all the paperwork is in order. Thus why the low price? At this point, it might be a good idea to take a closer look at the neighborhood and surrounding area. A low listing price on an otherwise fine property is usually a compensation for certain problems in the neighborhood. It could be minor inconveniences like a lack of services and public transport. Or it could be more troubling issues like a high crime rate or being located in a high-risk flood zone. The latter will mean high insurance costs and difficulty reselling. All of which should be factored into the final costs when deciding if whether or not a deal is worth it.
Do what research you can on the neighborhood online. If you’re looking for an investment property, then a not so great neighborhood could mean subpar appreciation. If you need more intel, take a drive around the neighborhood at different times of the day and week. Some areas that seem fine in the day can change dramatically for the worse once night falls. If it’s not a place you could see yourself wanting to live, then it’s doubtful you’ll find anyone else that would. Unless there are major redevelopment plans for the area that would give it a positive impact; probably not a good deal.
A Bad Feeling in Your GutA Bad Feeling in Your Gut
Every real estate deal involves two factors, emotions, and facts. While many successful investors will tell you that there’s no room for emotions in real estate; others will argue that they do have a place. You just have to be wary of how much power you give them. The best way to look at it is like this. Never buy a property based on a gut feeling that it’s a good investment. But you can say no to deal when your gut is telling you that something’s not right. The numbers could all add up, and the due diligence reports come back glowing. But if you still can’t shake an uneasy feeling, then it’s probably better to let it go. Play the real estate game for long enough, and you’ll eventually develop an intuition for this.