Scoping Out a Fertile Neighborhood

Pinpointing House Flipping Hot Spots

Whether you’re an average home buyer or a seasoned real estate investor, every search for the right home begins with a search for the right neighborhood. After all, location is everything. In the following sections, I help you zone in on a neighborhood. First, I introduce you to a few basic traits that help you choose a range of neighborhoods. Then, I help you narrow the search to the top neighborhoods on your list. And finally, I help you scratch a few neighborhoods off your list that aren’t quite in your price range. By the end of the process, you should have one to three top candidates.

Tagging promising neighborhoods

You can make money in any real estate market, but some markets are more profitable than others. Trying to target properties in an area where all the homes are immaculate and people tend to stay put is tough. Stable areas that have their fair share of ugly or unkempt homes provide enhanced opportunities. Look for areas with the following qualities:

Steady or rising real estate values
Great school systems
Low crime rates
Multiple offers on recently sold homes and homes currently for sale
An influx of homeowners moving in from other areas
A decrease in the number of homes for rent
An increasing number of homeowners moving up rather than moving out
Older homes generally requiring more rehab
Areas with aging homeowners, who may be downsizing or retiring
Neighborhoods where you see plenty of renovation projects in the works
City improvements, such as street repaving or new street lights
Amenities such as pools, parks, libraries, and community centers

Talk with several agents who work in different areas you’re considering before selecting an agent so you have a better feel for which areas are most conducive for flipping houses. Then, pick one of the top agents who knows the area inside and out (see Chapter 4 for more about finding an agent).

Don’t dismiss a neighborhood simply because it has few homes for sale. Every neighborhood has property for sale and people who need to sell it. In a tight market, you may just have to look a little longer.

I once bought a house for $17,000 in an area I normally wouldn’t buy in. (We rarely look in neighborhoods with only a few houses for sale, because such neighborhoods are usually rental areas.) My agent said we could flip it for $55,000 after spending $15,000 to spruce up the home. It flipped for $50,000 cash. That’s about a 50 percent return on investment.

Finding your focus

As you explore various neighborhoods in your town or city and evaluate their potential for flipping, you can save time by narrowing your focus to particular types of property or a specific area:

New construction: When an area is growing rapidly, purchasing a newly built home where property values are rising provides an excellent opportunity to flip, especially if you can get a great deal on the property. (The people who stand to make the most money are the first 20 percent to buy into the area.)
Depressed area that’s on the rebound: An older neighborhood where homeowners are currently renovating their properties provides ample opportunities to buy, fix, and sell homes at a profit.
Farm area: Pick a limited geographical area, often referred to as a farm area. This area can be your zip code, a school system, your town or city, four major intersections that define your perimeter, or whatever else you want to use to set your boundary. Agents commonly use this technique to become experts in a particular area. As an expert, you know the property values in your farm area and can spot a deal instantly.

In the following sections, I give you a few additional pointers on keeping your search focused and manageable.

Dissecting your city or town

Given about 30 seconds to mull it over, most residents of a town or city can name the upscale areas — neighborhoods where everyone would live if they could afford it. The selection of homes for sale may be slim pickings, but when you put the house back on the market, you have little trouble finding eager buyers.

Grab a map of your town or city and highlight the hot spots — areas where the rich people live, the artists hang out, or people gather for activities and entertainment. These are the happenin’ places. Here you see a lot of new construction or older, well-kept homes. People walk or ride their bikes through the neighborhood and keep an eye out for any riffraff.

Run-down neighborhoods where the community center is the corner liquor store or a triple-X movie theater don’t draw families and first-time home buyers.

Sticking close to home … or not

Pinpointing the hottest real estate market across town doesn’t mean that’s where you should farm. Farming an area closer to home offers several advantages:

You have a vested interest in the community.
Getting up to speed on property values is less of a chore.
Your neighbors can turn you on to great deals.
Commuting distances are shorter.
Neighborhood news and gossip are within earshot.

Farm your own neighborhood only if it makes financial sense to do so. If property values are falling without the hope of recovery, investing in your neighborhood can lead to your own financial demise and further deterioration of the neighborhood. If the neighborhood housing market is less than promising, you may need or want to cultivate more fertile areas, but try to stay within an hour’s drive of your house.

Identifying areas in your price range

Your financing dictates where you can shop and how much house you can afford. Anyone who’s played Monopoly knows that you need a wad of cash to build hotels on Boardwalk and Park Place. To score that kind of money, you may need to start out earning some investment capital on Tennessee Avenue.

When you spot an attractive area — a neighborhood you would consider farming — check real estate values in the area to make sure they’re in your price range. Don’t worry if you’re eliminating neighborhoods that you thought were your best prospects. The process of elimination is necessary to establish a realistic focus.

Check the fringes of areas where homes are outside your price bracket. Adjacent areas often ride the coattails of their pricier neighbors. If you can time your purchase just right, you stand to earn a profit as the neighboring areas become more popular.

Sizing Up the Local Real Estate Market

You’ve identified two or three housing markets that look promising, but now you have to pick the area in which you want to buy a house. Your choice boils down to two questions:

Which of the few areas I’ve selected has the best deals?
Where can I resell the home for the highest profit?

The ideal real estate market is an area with rising property values, a few homes available at below-market prices, and a strong market or desire for homes in the area. With the help of your real estate agent — who can provide you with exact numbers on prices, homes for sale, and average time on the market — you can research various areas to identify signs of a healthy real estate market or warning signs of a market turning sour.

Research not only neighborhoods but also specific areas in those neighborhoods. Just because two homes are within 100 yards of each other doesn’t place them in the same market.

Tracking the appreciation rate

One key indicator of the health of any real estate market is the rate of appreciation — the percentage that properties increase in value from one year to the next. To determine the appreciation percentage, look at the prices of two comparable homes — one that sold recently and one that sold approximately one year ago. Use the following formula to determine the appreciation percentage:

(P2 minus P1) divided by P1

In this equation, P2 (property 2) is the sale price of the home that recently sold and P1 (property 1) is the price of a comparable home that sold one year ago. For example, if a home recently sold for $175,000, and a comparable home sold for $160,000 one year ago, the annual appreciation percentage would be:

($175,000 minus $160,000) divided by $160,000
$15,000 divided by $160,000
0.09375
9.375%

So, what’s considered good? Anything in a range of 3 percent to 5 percent is good. Lower percentages may indicate a stagnant market or a market that’s taking a downturn. Appreciation in the 15 percent to 20 percent range is bubble burst material — buying into this market is highly speculative.

Don’t get too excited about a 10 percent appreciation rate. Check the sale prices of several comparables and examine other statistics, as I explain in the following sections, to determine the overall health of the market.

Noting how many homes are currently for sale

The number of homes for sale can often help you size up a real estate market. Of course, the number is relative, so I can’t give you a specific number of homes that indicate a healthy or unhealthy market. You have to define the geographical location of your market (for example, a zip code or an area that sits inside four major intersections) and then compare the number of homes currently for sale to past numbers. A change in the number of listings from one year to the next indicates a shift in the market. If, for instance, you see a 20 percent increase in homes for sale over the course of one year, the numbers indicate a shift from a seller’s market to a buyer’s market. You may be able to buy a house for less, but reselling the house in the near future may be more challenging.

By including sales volume in your calculations, you can determine whether a market is slowing, remaining steady, or growing in popularity. If plenty of houses are listed and plenty are selling, you have another sign that the market is shifting. Combine this data with the data you have on appreciation percentages (see the previous section), and you can determine whether the shift is positive or negative. If lots of homes are selling and prices are declining, you can readily see a flight pattern. If homes are selling briskly and property values are increasing, the neighborhood may be ripe for flipping.

Discovering how long houses stay on the market

The time it takes to sell a house varies according to several factors, including the location and condition of the house, the asking price, and market conditions. A good house in a healthy market with the right asking price should sell within 30 days; 60 days is fine; and 90 days may be a sign that the market is slowing (or you’ve overpriced the home). Price range also affects time on the market — higher-end properties typically take longer to sell.

Markets often appear slower than they really are. When the market begins to cool, agents and sellers take a while to pick up on the shift, and they continue to set asking prices that are higher than what the market can bear. Because the houses are overpriced for the current conditions, they remain on the market for much longer. When agents and sellers begin adjusting their list prices down, the market begins to pick up, and houses sell more quickly (assuming other factors, such as mortgage interest rates, remain steady).

Adjust your strategy as needed for the current market conditions, as I explain in Chapter 12. In a slow market, housing values can decrease while your holding costs increase (because your house may be on the market longer). To reduce your risk in a flat or declining market, you need to purchase homes for less than you’d pay in a strong market.

Comparing Neighborhoods

The housing market in a particular area may look good on paper — property values are rising, demand is high, and home sales are brisk — but you should compare these indicators with what you observe on the ground. Is the neighborhood on the upswing or the downswing? Is the entire neighborhood turning into a dontwanner? (You want to buy dontwanners in good neighborhoods. You don’t want to buy into entire neighborhoods that are dontwanners.)

The following sections help you distinguish a neighborhood that’s an excellent target for flipping properties from a neighborhood that’s not.

Spotting the signs of a good neighborhood

Good neighborhoods look nice. Residents mow their lawns, trim their trees, fix any cracks in the sidewalks, and keep their roofs and gutters in good repair. You can see the neighbors out working in their yards when the weather’s nice. After work, you see neighbors strolling, jogging, and riding bikes. At sunset, the neighborhood quiets down, and by 10 p.m. or so, it slips into its knapsack and settles in for the night.

If you’re driving down a street at dusk and neighbors are sitting on their front porches with guns across their laps, that’s not a neighborhood you should consider flipping in.

To spot the signs of a good neighborhood, don’t just drive around the area after work. Take a walking tour. Visit the neighborhood in the morning, afternoon, and evening. Check it out on weekends. If you happen to bump into a resident or two, introduce yourself and ask them why they moved to this neighborhood, how long they’ve lived here, and what they like and dislike about the area. The attitude of the residents often determines the future course of the neighborhood.

The perfect neighborhood is one in which almost all the homes are in excellent condition, you see few or no For Sale signs, and the block has one dontwanner — a run-down property that nobody wants. This is the grand slam of opportunities.

Telling when a neighborhood is in decline

Broken windows; dangling gutters; weedy, overgrown lawns; and wandering gangs of pimple-faced hoodlums are all signs of a neighborhood in decline. The residents gave up long ago. Maybe the major employer in the area moved out, leaving its workforce to deal with unpaid mortgages, or perhaps declining schools and increasing crime triggered a mass exodus. Here are some additional warning signs:

A large number of For Sale or For Rent signs
Eviction notices on doors with belongings and debris piled along the curb
Broken-down cars in the streets or alleys or on lawns
Security bars on many doors and windows
Large animals chewing on the fence next door
Vacant and burnt-out properties

Whatever the reason for the decline, don’t buy into a declining market unless you have the scoop on some imminent change that promises to turn the neighborhood around. Perhaps a new company is planning on moving in or a state-of-the-art medical center is in the works.

Even if you do hear of a neighborhood improvement, approach with caution. Good news can take many years to impact an area, so if you’re considering buying in, be prepared to hold onto the property for several years or wait until you see early signs that the neighborhood is on the rebound.

Considering Other Neighborhood Factors

Local politicians obsess about three things — schools, crime, and business. If the schools are top notch, the crime is low, and the business climate is healthy, people like to live in the area, property values rise, the tax base grows, the town or city can afford to pay for improvements, and the citizens reelect the politicians or promote them to higher offices.

When you’re scoping out an area to flip, you should obsess about these same three factors because they strongly influence the resale value of the property. The following sections show you how to research and evaluate school performance, crime rates, and the business climate. I also show you how to find the scoop on upcoming neighborhood improvements.

Grading local schools

Great schools boost more than just test scores — they increase property values, sometimes by as much as 20 percent. Real estate agents have known this for years, but studies prove a direct correlation between student performance on standardized tests and the percentage that homes in the area appreciate. So when you’re comparing housing prices, be aware of the dividing lines between school districts. The following sections show you how to research area schools.

Don’t rely on the name of a housing addition to determine which school district it’s in. Sly builders and developers sometimes use catchy names that could confuse you into buying into their crapshoots.

Researching school systems online

Quantifying the quality of education is difficult, if not impossible, so standardized test scores, low student-to-teacher ratios, and other statistics are the only measures available to compare schools. Fortunately, most state departments of education publish current and historic data on test scores, graduation rates, and so on for every school in the state. Contact your state department of education or visit its website to see what you can dig up.

If you hit a dead end with your state department of education, you may be able to find the information you’re looking for on the web. Check out the following websites, where you can search for schools by name or location:

GreatSchools at www.greatschools.net
SchoolDigger at www.schooldigger.com
SchoolMatch at www.schoolmatch.com

You may also find the information you need posted on school websites, especially if the students did particularly well; administrators love to boast about student success. Word of mouth is another great way to find out about neighborhood schools. If you’re flipping in your own backyard, you probably know a lot of what you need to know already.

In areas that support school choice, the school or even the school district has less influence over property values. People can buy a home in a more affordable neighborhood and send their kids to the higher-ranking schools. Don’t assume that every school district supports choice; contact the school system in each area in which you plan to flip houses to determine the options available to parents.

Picking the brains of teachers and school administrators

Visiting local schools in person is often a better way to evaluate schools than researching online. In person, you can get a feel for the atmosphere of the school — how orderly and how well organized it is. Be sure to schedule your visit in advance and inform the secretary or principal about the purpose of your visit. Meet with the principal and find out how long she’s been in the system. Ask for the name and phone number of her predecessor, and then call him and find out whether he liked the school and why he left.

When you meet with the principal, be prepared to ask some probing questions, such as the following:

What’s the student-to-teacher ratio? A ratio of 30 to 1 is a little high; 25 to 1 is more in the average range, and 20 to 1 and lower ratios are great.
How long does the average teacher remain on the job? If teachers stay five years or more, the system is fairly stable. If most of them move on after a year or two, you should be concerned.
How do students perform overall on the standardized tests compared with students in nearby school systems? Are scores on the upswing or downswing?

Strike up a conversation with a teacher or one of the school’s secretaries. Administrators are often optimistic PR people. Teachers and secretaries are typically more willing to offer an unbiased analysis, assuming they know you, of course. If you’re a stranger to the area, they may be a little tight-lipped.

Gabbing with parents and students

Before you buy a home in a particular neighborhood, talk with parents and students, if their parents allow it. They usually know which elementary school in the area is considered the best, whether discipline is getting out of hand at the junior high or middle school, and how well the high school students fare after graduation.

Insider information from teachers, administrators, secretaries, parents, and students is often much more valuable and timely than the statistics you can obtain online. Don’t expect your agent to provide this information — an agent can quote facts and statistics, but if he offers opinions, he may just get slapped with a “steering” lawsuit for steering you toward or away from a particular school system.

Digging up crime statistics

In addition to dragging down property values, high crime rates can directly slash your bottom line. If you’re rehabbing a home, theft of tools and materials can significantly increase your expenses and cut into your profits. (Tools and building materials may disappear from houses in any area, so avoid leaving anything of value in or outside the property overnight.) To be safe, research crime statistics before you buy, using the resources I describe in the following sections.

Checking crime statistics online

Online research into crime statistics is somewhat limited. You can visit the following websites to compare crime rates in major cities, but the sites don’t break the numbers down by neighborhood:

Crime Comparison at www.bestplaces.net/crime
NeighborhoodScout at www.neighborhoodscout.com
Relocation Crime Lab at www.homefair.com/real-estate/city-profile

Some areas have 911 call maps that indicate the location of the calls and the type of emergency (for example, a shooting or a heart attack). These maps provide snapshots of crime in different neighborhoods. To track down a 911 call map (or to find out if such a map exists for your town), search the web for your town or city and state followed by “911 call map.”

You may also want to search the National Sex Offender Registry (www.nsopw.gov). Prospective home buyers often perform the search and may not purchase a home near the residence of a registered sex offender. You can also download an app called Sex Offender for your smartphone, and local newspapers may also occasionally publish crime maps.

Grilling local law enforcement

Local law-enforcement officials can provide much more detailed information on crime than you can get online, and they’re usually pretty willing to talk with concerned citizens. Call or visit the law-enforcement department that serves your farm area and ask the following questions:

Is crime a problem in this area?
What types of crimes are most prevalent — violent crimes, theft, vandalism?
Are crime rates rising, falling, or remaining about the same?
Does the community have active crime-watch programs?

If your farm area has a crime-watch program, contact one or more of the organizers and ask the same questions. Find out what the community is doing to fight crime and how successful they’ve been. Community activism can significantly lower crime rates.

Exploring the business climate

Just as the health of the national economy drives new home construction and development, local businesses drive local economies and influence population growth and real estate values. Local employers provide income-producing jobs that draw families to the area, increasing the demand for housing.

When a large employer moves out of an area and nobody moves in to fill the gap, real estate values commonly plummet. By exploring the business climate and talking with business owners in the area, you can get a good feel for the health of the local economy and become aware of any impending developments — positive or negative. I give you a few helpful pointers on researching a neighborhood’s business climate in the following sections.

Contacting the local chamber of commerce

The local chamber of commerce can fill you in on the business environment and local resources available to residents. Don’t go in expecting to hear anything negative, however; one of the organization’s primary goals is to promote development in the area. Ask the following probing questions:

How many new businesses have moved into the area in the past year?
How many businesses have moved out of the area in the past year?
How many new jobs have come to the area in the past year?
How many jobs have disappeared over the past year?

Talking to business owners

When you want to know about the business climate, call around and talk to the business owners. To get the ball rolling, try opening with one or more of the following questions:

How long have you owned a business in this area?
Does business seem to be picking up or tapering off?
What do you think of the mayor and other elected officials? Are they bumps on a log, or are they moving legislation along trying to make their community better?

Getting the lowdown on planned neighborhood improvements

Community centers, shopping malls, new schools, and other neighborhood improvements can boost property values, so if you’re planning to flip houses in a particular neighborhood, keep abreast of the latest developments by using the following tips. If you know that the town is planning on building a new health and fitness center near the park, you’re more prepared than other investors to capitalize on the plan.

Read the local newspaper from front to back. If your neighborhood doesn’t have a newspaper, look for a neighborhood blog or other online resource for information about the neighborhood. Some homeowners associations may maintain websites, as well.
Attend town meetings. Town meetings and homeowner association meetings are great places to tune into the community buzz and great forums for networking and finding leads on property for sale. Some towns even broadcast their town hall meetings on a local cable channel.
Chat with the locals. To discover what’s really going on in the community and establish a feel for the local sentiment, talk with local residents and business owners. Are people pretty positive about where they live, or are they getting fed up with the conditions? Who’s died recently? Who’s moving out and why? Who’s been laid off?