Real Estate Investor 101: Assess the Neighborhood

Are you considering jumping in and investing in foreclosed properties? If so, you had better prepare yourself, because buying a foreclosed house or income property might seem simple, but assessing the value of that property in foreclosure is a tricky process. You need to know the market. As the adage says, real estate is all about the “location, location, location” even for what seems like a bargain basement price on foreclosed real estate.

Assessing and defining the “location” of a single family home, apartment, office building, or retail property is perhaps one of the most difficult tasks that must be accomplished before you try to place a value on the real estate.

Assessing a real estate market is complex task. It requires a significant amount of legwork, quite a bit of homework, and sifting through what could be massive reams of information on the local conditions. Researching and then evaluating the results is arduous, and takes time.

The most important factor to determine before buying a parcel of real estate in foreclosure is the “neighborhood” in which the foreclosed property lies. But, before you can analyze the health of the neighborhood, you need to define what the neighborhood is. In a rural area or a small town, this may not play as big of a factor as in small- to medium-sized, or metropolitan areas.

There are some tricks and tips for figuring out how to define the neighborhood location of a parcel of real estate, depending on its use and/or zoning classification.

The most important step is determining the boundaries of the neighborhood. Typical boundary zones can be topographical features – rivers, lakes, ravines, mountains, etc. But there are man-made boundaries to consider, such as railroad tracks, interstate highways, parks, schools and the like.

Grab a city map, and study it. It will show you the topographical boundary lines, as well as many of the man-made ones. But check yourself – those man-made boundaries may not hold much water without confirmation of some critical components.

Determine the major thoroughfares that serve that specific area, as well as public transportation that serves (or, doesn’t serve) that part of town. This is rather simple for a small town, but for a city any size over 20,000 people, it can get a bit trickier.

Streets shown as being the routes of state or US highways are more than likely some of the busiest in the community. Intersections of major streets create “barriers” in the minds of people, and help define neighborhoods. These streets typically have commercial and or retail developments at their intersections, and long stretches of them will more than likely have office buildings, retail establishments, multi-family apartment buildings, etc. since these streets are designed to carry a high volume of traffic.

One of the best sources for traffic information is the state’s department of transportation, which maintains detailed traffic pattern maps for virtually every public road in your state. The traffic count numbers at key intersections – and where those counts change – give you clues on the origins and destinations for the traffic using those roads.

Now, take a look at one of the online map engines that provide satellite imagery, like Yahoo Maps or Google Earth, and set it to hybrid mode so you can see the street maps along with the overhead pictures. Check your assumptions with the visuals.

Your next step is to actually visit the neighborhood. Look for similar uses located nearby, and look at their overall condition. Ask yourself – Can I improve the value of this parcel; or, is the entire neighborhood declining? Is the location of the foreclosed property going to be a hindrance in improving its value; or, will buying it and sprucing it up result in a long term profit?

Refine your conclusions on how the neighborhood is defined based on these pieces of information.

Now you are prepared to start the next step of actually valuing the real estate, by comparing it to the data on sales, rental rates, etc. for the comparable parcels in that same neighborhood, and the city overall. But until you have figured out the neighborhood of that foreclosed property, your valuation will be flawed.