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How to find homes with hidden potential

Homes with hidden potential yield the best return on your investment, whether you are buying your first home, an investment property or a house you want to improve and flip.

Homes with hidden potential offer the highest return on your investment.Homes with hidden potential yield the best return on your investment, whether you are buying your first home, an investment property or a house you want to improve and flip. A traditional house hunting approach may not result in homes with the best value or potential profit. You need to train your eye to spot homes with hidden value as well as get help from real estate professionals.

Often, the properties with the most hidden potential are fixer-uppers – diamonds in the rough that are upgradable for you to live in or sell for much more than they cost. You need vision and imagination. Here are a few techniques and tips to help you see hidden potential in real estate listings.

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Know how you will extract value

What you want to do with the home helps define the hidden financial potential to some extent. You should evaluate the monthly costs of ownership and the personal benefits of living in one neighborhood over another if you plan to live in the house. However, you need to assess the value of a real estate investment by the rent you will get or the resale value after repairs.

Land with high value may have great potential for new construction.

It is possible that the value of the land itself has hidden potential. Real estate investors are buying homes in some cities just to raze them and build new construction. Real estate agents who specialize in investment properties and builders who work in the area will both provide valuable insights on homes (and lots) with hidden potential. You may also consider demolishing a house that needs extensive repairs and building your dream home if the location is ideal.

Buying houses in areas with high land value is ideal if you want to flip homes. However, you want inexpensive land and a structurally sound building in a popular area if you want to own a rental property. So, hidden potential in a home really depends on your goals.

Search for undervalued homes

Most underpriced homes are either difficult to find or several people are competing to purchase them. The value will be obvious if the homes are in areas that investors and families already know are upcoming neighborhoods. The trick is to identify factors that predict the next hot real estate market before everyone else does.

You may be able to spot a good place to buy real estate investment property by researching area schools, amenities, safety, and access to recreational areas and public transportation, according to a rental service provider. 

Additionally, you may find neighborhoods or districts that have tax incentives for home rehabilitation or historic preservation. Houses in these areas may have lower property taxes or “frozen” property taxes. as well as Grants for your rehab or preservation project are often available as well, whether you plan to live in the home or rent it.

It is also worth your time to talk to a U.S. Department of Housing and Urban Development (HUD) specialist about revitalization areas and the Good Neighbor Next Door Project (GNND) if you are a firefighter, teacher, police officer or emergency medical technician. If you qualify for GNND, you will get a house for half price provided you live there for three years. You may sell the house or rent it after three years.

Hidden gems vs. poor investments

Not all ugly homes are good fixer-uppers. Serious structural problems may equate to expensive and difficult repairs. Initial repairs may expose lead or asbestos issues, remodeling that was done without permits, faulty wiring or plumbing, mold problems and many other issues.

Undervalued homes may simply need updating.You may not be able to distinguish a hidden gem from a poor investment yourself, even if you own other properties. It’s wise to have a real estate agent, a contractor, a home inspector and a home appraiser on your team whether you are buying a primary residence or a rental. If you are flipping houses, you will likely have a much bigger team and connections for discounted supplies.

Outdated and overly customized homes

Homes that are outdated or overly customized may also have hidden value. Personal details and features turn off many homebuyers who do not want to invest money in cosmetic changes. A bright blue exterior or country-cottage inspired wallpaper is enough to keep other buyers from making an offer, if they even come in the door. But, you may find that the home is structurally sound and well maintained.

Tally the cost of updates and cosmetic changes and make an offer that covers those costs. This method works for making reduced home offers on real estate-owned (REO) homes and HUD homes too. After your home inspections, get estimates for needed repairs or cosmetic improvements and include them with the offer. 

Underutilized spaces and land

Homes with underutilized spaces or properties that allow for an Accessory Dwelling Unit (ADU), which are commonly called “mother-in-law suites,” also have great potential. You can add significant square footage by finishing an unfinished basement or building over a garage. Building an ADU as a full-time rental or a vacation Airbnb is a booming trend in some cities. Find a real estate agent who specializes in properties with this potential and he or she will likely know a contractor already building ADUs in your area.

Properties with space for an accessory dwelling unit have great hidden value.

Consider buying in other locations

You have a better chance at identifying hidden value if you consider more regions. National news publications periodically release lists of the most overvalued and undervalued housing markets nationwide. Markets with good growth potential make great real estate investment targets, as do areas with many foreclosures, HUD homes and REOs. You'll need to research each area to make sure the reports are accurate. Connect with real estate agents in those areas; they will have the scoop.

Homes that have been on the market for a long time despite being priced similarly to comparable houses may be undervalued homes and good options for purchase. You can often negotiate a significant price decrease on these homes. The lack of interest may indicate a cosmetic problem that you can correct and get a good return on your investment.

Your goals and priorities are key when you’re hunting for homes with hidden potential. It’s only hidden potential if you have a plan to get a return on your investment via rent or resale.

Photo credits: (top) Jeremy Levine Design, (middle right) shanti, (middle left) acn1485 and (bottom) radworld all via CompfightCC.

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