Finding Hidden Value In An Investment Property

February 15, 2022

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By Sam Liebman. Originally published at ValueWalk.

Intense competition in the current real estate marketplace translates to great news for those who own properties but a tremendous obstacle for prospective purchasers. Hypergrowth in the multifamily property market, which continues to perform exceptionally well even in these challenging economic times, has created a feeding frenzy among investors.

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Frankly, for every worthwhile property available, a waiting list of prospective purchasers are ready and willing to take on more risk for less reward than ever before.

Yet when the fundamentals of real estate investing are compromised or no longer apply, then purchasing real estate becomes more akin to gambling than investing.

Hidden Value In A Potential Investment Property

Regardless of the intense competition, it’s critical to carry out an on-the-ground inquiry to avoid making a reckless decision. Now more than ever, you must find a way to uncover hidden value in a potential investment property that others pass by.

Take the time to find out what’s really behind the seller’s motivation to sell, use street knowledge to discover whether it’s a sound investment, and think outside of the box about where to find hidden value. To do so, prospective purchasers must ask, answer and analyze the following three questions:

What Is It?

If you were the acquisition manager for a real estate company, would you tell your boss that you believe a certain property is a good investment because it’s in a great location, it looks like it’s in great shape, rents are at below-market rates and it’s selling for only $50,000 per unit? If the answer is yes, you won’t last long at your job. Understanding what you’re actually purchasing requires extensive research, from performing diagnostic tests through third-party experts, to undertaking several on-the-ground investigative inquiries. Elect to have a property condition report prepared for you. Such reports generally render an opinion on the condition of various building components and systems. Never take the seller’s or the broker’s word for the property’s condition.

What Was It?

Put on your detective hat and start interviewing. Try to identify and interview past owners and occupants of the property to identify historic property uses. Even interviewing adjacent property owners and business operators can be a good source of information. Historical information about the interior upgrades and/or renovations can provide you with an opportunity to uncover untapped hidden value. If a restaurant and/or bar occupied the property, there may be hidden value to salvage. For example, if a bar once operated on the property, it might prove useful in pursuing a liquor license that could be grandfathered in.

What Can It Be?

First, learn about any potential constraints by examining the certificate of occupancy and the title report. These can reveal if there is any use or other restrictions on the property. Then ask yourself, where do you believe the property’s finances and value will be in five years? Consider different factors, including the potential to significantly increase the rent roll and decrease the operating expenses, or to increase the amount of rentable square feet. In most circumstances, the largest increase in value can be achieved when the existing zoning permits more density or additional construction on the property. Or, if a municipality makes a change to allow more density on a site, they effectively give the owner a winning “concrete lotto ticket.”

Nowadays, we want success right away with the least effort possible. But before making any real estate investment decision, make sure to answer the three critical questions that allow you understand how and why a property can substantially increase in value — or not.

About the Author

Sam Liebman is founder and CEO of WealthWay Equity Group LLC, a New York-based private equity and real estate development company. He has owned substantial interests in over 70 properties during the past 30 years, ranging from multifamily communities, office buildings and shopping centers, to the ground up construction of a luxury 21-story condominium development in Manhattan. He is also CEO of Rolling Cash Realty, Inc., a real estate management company, as well as a partner in Tepper & Co., a certified public accounting firm. His new book is Harvard Can’t Teach What You Learn from the Streets: The Street Success Guide to Building Wealth through Multi-Family Real Estate (Made for Success Publishing, Jan. 11, 2022). Learn more at samliebman.com.