There’s a common question throughout the world of real estate that we all ask when starting out. Whether you are buying residential, commercial or looking to make an investment, we have all asked the same thing, “Is this a good investment or not?” This simple question can hold you back from making offers because you worry it’s not a good deal or you may not be able to rent it if your hold onto it. We can help you calm those fears by helping you understand how to find out what the property is really worth. You will be able to find out what a property is worth as well as what someone is willing to pay for it. Armed with this information you will be able to make confident decisions when buying and selling real estate. Remember, it’s all in the details.
To save some time you will need to find a good real estate agent to help you. When we say “good” real estate agent, we mean that your agent should bend over backwards to help you find information on properties you are interested in. Most agents rely on “word of mouth” advertising as well as repeat business to sustain their career, so they should be willing to go above and beyond to help you. With access to the MLS (Multiple Listing Service) your agent can obtain a CMA (Comparative Market Analysis) for you. This will show you “comparable” properties that have sold in the last 6 months, preferably within the last 30-90 days in the same area as the property you are interested in. You will also need to ask your agent for a copy of all “active” listings to help you stay on top of the market trends. This helps to know if the housing prices are going up or trending down. When comparing properties you will need to know how long each property has been on the market (DOM) too. If it has been there too long, it is most likely priced to high to sell. No one wants that. These COMPS should be within one mile of the property in residential areas or within 10 miles of rural areas. Make sure you compare “apples to apples” meaning you want a similar exterior, same number of Bedrooms/Bathrooms, same square footage, and close to the same lot size as possible. Most likely any home a real estate agent pulls comparisons on will be in good condition, which is what you want. This is the “good” condition value. Take the list of comparable properties and average them together, and this is a good estimate of what your property is worth when it is repaired. You may also be interested in
driving around the property to see if there are any “For Sale By Owner” properties close by. Try to find out how long the property has been FSBO as well as the list price. You will use this information along with the COMPS from your agent to get an accurate value on the property.
There are two types of properties that you will be dealing with in the business of real estate. There are properties that do not need repair (as previously discussed) and properties that do require repair. Remember before you can make an offer, you need to know the actual value of the property in question. Repair costs can be very costly so it is VERY important to have a grasp on the repairs that are needed. If you cannot estimate repairs yourself, we suggest contacting a contractor or handyman that you trust. Keeping costs low is important, but doing the work correctly is also of great importance, so hiring a professional may be a good idea. You can ask for bids from multiple contractors to ensure you are getting a fair price. Walk through the property with the contractors so that you can begin to understand what repair costs are in the future. Knowing this information yourself will cut down on the time it takes you to estimate the value of a property in the future.
Once you have your estimate, you will want to check your estimate by giving it a rating of bad, really bad, and awful. Bad meaning, small cosmetic repairs throughout the property, Awful would mean large or extensive repairs like electrical, plumbing, foundation or structure with really bad being somewhere in between. Once you give it a rating, you will multiply that rating by the square footage of the property. A bad rating equals $10, a really bad rating equals $15 and an awful rating equals $20. For example if you gave it a bad rating, you would multiply $10 X the Square footage. You will be shocked at how close your estimation will be. This is what we do want.
Now that you are confident in the After Repair Value of the property you are interested in, along with the value of any repairs that will need to be made, you only need to know what someone is willing to pay for the property. Basically most rehabbers and/or investors are willing to pay 70% of what the property is worth in repaired condition because they want to make a profit as well. Now you will take the After Repair Value deduct the rehab costs and you should feel confident that you won’t be holding on to this property for very long! This is an example of the formula- (.70 X ARV) – Repairs= What an Investor will pay. You will also want to make a profit so your formula may look more like this – (.65 X ARV) – Repairs= What you will pay for the property so that you will make a profit.
If you can find properties that do not require any repairs, you can now be confident that you will be able to pick them up for approx. 70% of the market value and still be able to sell the property. Of course every market is different, but as long as you do your research and pay attention to detail, it shouldn’t matter what market you are in. The “deals” you are looking for are out there. We suggest that you train yourself in the art of “finding deals” as once you are good at it, you won’t have any problems finding a end buyer. These are the tools that most professional investors use to make great profits in the real estate business. We know that if you follow these simple guidelines you will be investing with confidence in no time.