You're interested in a particular piece of property. How much should you pay for it?
There is no single "right" answer because each person is likely to look at it differently depending on how the property suits their needs. BUT, rest assured... valuing property is probably the most important skill you must develop to be successful in real estate investing.
The first lesson I teach my students is "Never..Never..Never.." pay too much for a property. Paying too much means you've given away profit or it may even mean a loss on the deal. And, once you've paid too much you can never replace that lost profit.
At its simplest level, you will be looking at a property and determining the value you believe it should be purchased for... AND, at the same time you will also be figuring the price you think you can sell it for. You'll try to get into your eventual buyer's head to estimate what it would be worth to him or her.
Before making an offer on a property you must estimate a value that makes business sense to you. There are 3 ways to help you know whether your valuation or the seller's asking price is within the ballpark:
#1 Contract for a certified appraisal
#2 Research market comparables
#3 View tax assessor values
Let's discuss each of them to help you make the most of these valuable tools:
A Certified Appraisal is the most costly of the three but it is the most accurate and objective. It may also help you determine whether you will be able to obtain conventional financing. To order a certified appraisal report, use the Yellow Pages or the internet to contact a local appraiser. Be sure he/she has experience in the neighborhood you are researching. The cost of a residential property appraisal is generally $250-$400. The appraiser will provide you with a specific amount the house will sell for, say within a 6 month marketing period based on factors such as square footage of living area, comparable selling prices of properties on the same street and within the neighborhood, the overall condition of the house and other factors. The appraiser will come up with a most likely sales price and you can then determine if the deal is feasible or not.
Knowing the Market Comparables of like properties in the area can be helpful in determining how much the property "should" be worth. A real estate agent routinely provides CMA's or comparable market analysis reports as a free service if they feel you might become a customer sometime in the future. The real estate agent will be able to pull up a list of similar properties in the area that have sold in the last 6 to 12 months using their Multiple Listing Service database. They will also look at properties currently listed and the ones currently under contract. You can also see typical sales prices in many newspapers or the public records (see County Property Appraiser in formation below).
Once you have a CMA or market comp analysis, how do you determine if your target property is a good deal? Let's take an example. According to market comps the highest sale price in the area you're interested in is $115,000. The purchase price for the investment property you plan to buy is $75,000. You have determined the rehab cost to be $20,000, closing cost on the loan is $12,500, and you expect your cost during the holding period to be about $4,000. Your total cost on this project is $111,500.
Is this a good deal? No! unless you like working for peanuts. On this deal you are only going to make $3,500. for all your trouble. My bottom line is this, if I can not make $15,000-$20,000 rehabbing a property then it's not a good deal.
Another great source of information is to view your local county Tax Assessor values of property. These are available to you on the internet. You will be surprised how much free information is available to the general public. This will help you estimate a value for any property you're considering.
You can search for information on any property using the owner's name, address, folio number, or other I.d. number. Once you find the property, you will see the most recent sales transactions/prices, the assessed and taxable values (whether it is owner-occupied or not), and you will find a reasonably accurate estimate of replacement cost and estimated value based on the condition of the structure. Some sites even have a button you can push to pull up all recent sales of similar properties within a close area of the home - thus providing you an automatic comparable sales analysis.
You can find information on the size of the building, its dimensions, lot size, number of bedrooms and baths and construction materials (frame vs. masonry, etc). You can also call them on the phone for explanations and other tips - they're surprisingly helpful. Your tax dollars help pay for this county appraisal service so make the most of it!
Hopefully this article will help you the next time you are out there evaluating a property to purchase. Real estate investing is really just an art. What is too risky for some investors might be right in line for others. You just have to set your buy parameters and follow them for success.
If you are looking for more articles related to real estate investing then please visit my site at http://www.kennyrushing.com
Kenny Rushing,
Real Estate Educator for the People
Real Estate Educator for the People
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