Buy-Change-Sell: A Real Estate Strategy

Here's a proven real estate strategy: Buy a property, change the use, and sell it for a profit.Big profits are possible if you find its most profitable use. The disadvantages of this strategy? There is a lot of homework required, and many possible dealings with zoning authorities and others.

Years ago there was a row of old homes on a main street in the Northern Michigan town where I used to live. Many of them were rentals. None of them were very well taken care of. Then one day they were gone.

What had happened? That part of the street had been zoned commercial for many years, but there wasn't a reason to tear down perfectly good homes to put up stores. That is, there wasn't a reason until the land could be sold for commercial purposes at a price that exceeded the value of the homes plus the cost of removing them.

As the town grew, at some point an investor realized that he could buy those rental homes, tear them down, and sell the land for a nice profit. This is not uncommon. A particular piece of real estate is not always used for its "highest purpose." When this is the case, it may sell for much less money than it otherwise should. It is just waiting for someone to recognize what its highest purpose is, and then buy it and convert it.

Sometimes an office that had once been a home is converted back into a home, because the property is worth more as a home. Homes sometimes become professional offices for attorneys and doctors. The more common examples of a change of use is when farmland is developed for homes, or when apartment buildings are made into condominiums. Many of these ideas will be covered as their own topics.

The bottom line is that if there is a higher use for a property, there may be a profit opportunity. How can you tell? First you have to identify the highest use, meaning the use that makes the property most valuable. One way to do this is to simply look around and see what is happening with other properties around the one you are looking at.

Once you determine what the property should or could be used for, you have to determine how much it will sell for when it is ready. Then you determine how much it will cost to get it ready, plus the holding costs until it sells, and the costs associated with buying it and selling it. Subtract all of these costs from the projected sale's price.

Then subtract the profit you want for your work from that figure. This gives you the maximum price you can pay to make the deal work. Offer less, of course. That helps with this and any other real estate investing strategy.