Things You'll Need:
- Credit report
- Local newspaper
- Real estate agent
- Mortgage financing
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Step 1
Stabilize your finances prior to considering buying real estate. Low debt levels, alongside strong cash flow and reserves enable you to secure lower interest rates, or even buy property as cash, outright. You will be able to negotiate quickly and with flexibility, which is ideal for buying undervalued real estate. Prospective landlords should consider building an additional reserve fund, in case the investment needs work before it can be rented out.
Order your credit report from Equifax, Experian or TransUnion to verify the information. You are entitled to one free credit report per year through AnnualCreditReport.com as part of the Fair Credit Reporting Act. -
Step 2
Study local and national news to determine the factors that influence real estate prices within your area. Housing prices fall during a recession, and the Federal Reserve Board (Fed) usually responds with lower interest rates to manage the economy. Low interest rates support the housing market in the long run by making cheaper mortgage financing more readily available. Follow employment reports released by the U.S. Bureau of Labor Statistics related to your state to track labor. Property values fall when jobs are lost.
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Step 3
Drive and walk through area neighborhoods while taking note of large employers, new developments, highway infrastructure, shuttered buildings and criminal elements--to differentiate between established, up-and-coming and distressed neighborhoods. Doing so enables you to anticipate fluctuations in price and formulate a real estate strategy that matches your goals and personality. Buying undervalued real estate that is located within already established neighborhoods carries the least amount of risk.
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Step 4
Contact a real estate agent to help you search for undervalued real estate. Explain your financial position and strategy to the agent, so that she may recommend adjustments and search the multiple listing service (MLS) with a narrower focus.
Experienced investors may sift through foreclosure data online, or at the local courthouse, where tax lien sales and real estate auctions are announced. Auctions offer deep discounts, but are risky transactions because you are forced to commit to the investment without an inspection. Real estate auctions do require you to arrive with a cashier's check for a portion of the purchase in-hand to bid upon the home. Anticipate markdowns ranging from 5 to 25 percent off the market price when buying foreclosed homes. -
Step 5
Secure financing for the target property, prior to closing the deal. The loan application calls for W-2's, investment positions, bank statements and federal tax returns. Compare interest rate offers between three to five banks before making a decision. Thirty-year fixed rate mortgages are the most conventional loan packages; they reduce interest rate risk. Adjustable rate mortgages feature significantly higher payments in the future when interest rates increase.
