InternationalLiving.com

I Don't Care if They Are Giving it Away--Where's My Profit?

It's been awhile since I looked at real estate in the U.S., but since I've been here for a few weeks straight, I couldn't help

but look at the listings and go view a property.

At first blush, there is a fire sale going on…at least in the parts of the East Coast at which I've looked. One house was reduced by $100,000 a couple of days before I walked through it…its second $100,000 reduction. So, the original list price of $499,000 was down to $299,000, and you might have been able to buy it for $250,000.

That may sound like a no-brainer investment on paper, but after viewing the property, I passed on the opportunity. The house was very nice and needed only minor updating in the kitchen and bathroom. The problem was location and the size of the property--a 5,200-square-foot, nine-bedroom house in downtown York.

Unless you want to run a bed-and-breakfast (and with only three bathrooms, you'd need to do some renovating) the property is too big for most families; and even if you have eight kids, the location is wrong. Several nearby buildings had been converted to offices; you could do that with this property, but it wouldn't be easy.

There are three things I look for when I evaluate real estate, no matter where I am in the world:

1. The path of progress. A property in the way of new infrastructure or positioned to take advantage of new trends is a good property. But the path of progress long passed this house. Even an urban renewal plan wouldn't likely make this property worth considerably more in the short term.

2. Adding value. Converting this property to offices would be the best way to add value, but the layout and size of the house doesn't allow for that to be done easily. A condo conversion is also out of the question.

3. A distress sale. Also known as "crisis investing." While the owner of this property had dropped the asking price by 40%, I can't see getting even a leveraged double on my investment in three years. The house is simply too unique to have broad enough appeal to resell easily.

The house itself was a beautiful old house with plenty of charm. If you wanted to live in it, you'd be getting a good deal. However, for investment purposes there wasn't any compelling reason to think that any investment, leveraged or not, would be worth more in the future. Even at $600 a square meter ($55 per square foot)--which, on a global scale, is extremely cheap--the property didn't make sense as an investment.

Just because property is cheap doesn't mean it makes sense as an investment. The corollary is that just because the price of a property is high in absolute terms--say, a $2 million house--doesn't mean it isn't a good investment opportunity.

You first have to consider what will make the property increase in value. If there is no compelling reason for appreciation (such as the three reasons I look for), then all you have is the price you pay and the general appeal of the property. In that case, make sure you buy something for which the resell market is big…and that you are paying well below the going rate.

Lief Simon
For International Living