Real Estate is a numbers game. Sticking to your numbers is very important and knowing, that if the numbers don’t work, you will have to walk away from that property no matter how much you love it. Quickly analyzing data of a new property is critical in helping you move forward. Valuation of a property is partially subjective; but, there are a few key indicators that you can use as a guide. Determining property value is an essential part of real estate investing and mastering valuation will help you in your business decision. These are the 5 areas to look at, that can help you assign a value to the property.
- How motivated is the seller? The value of any property is usually determined on how much someone is willing to pay for it. If the seller is underwater or going through some life changing events such as divorce, they may want to sell quickly and get out from under their debt. On the other hand, if the seller has a lot of capital and they can afford to wait; they will be less likely to accept a low offer and will likely wait until they get an offer that is more to their liking. The question in the real estate world, of exactly when an investor makes there money is debatable. Some insist that you make it during the acquisition phase, assuming you have crunched your numbers correctly. While others insist that this is done during the sale of the property. No matter which side you look at. what no one can argue is that a acquiring property from a motivated seller are the best deals. Determining seller motivation will help define your value and give you an inside track on the deal.
- Comparable Sales. In the world of real estate the value of a property is determined by previous sales. We can use these indicators to see what other houses similar to the subject house will sell for approximately. Of course within this realm there are many factors to consider that will be looked at to value the property. The proximity of the sold house to the subject, the interior of the house as well as the neighborhood in which the houses are located, the size of the house. As a starting point for future offers, buyers look at sold transactions. This information allows us to make a judgement call to see where the house falls on the value scale. Local sales data will give you a better idea of what kind of value you may be dealing with. The use of past sales price value will be used to either defend or support our price range.
- Property statistics. When looking at data from outside sources it important to verify this data. While Online info is a great way to obtain information you still need to do your due diligence. Walking the property allows you to gather as much information as you can on the square footage, room count, layout and any other amenities. During this walk look for ways to add value. If the sq footage is big enough see if the budget allows you to add extra bathroom or bedroom. Ask yourself Can I knock down a wall and open up the kitchen or living room? While these changes take some experience always focus on the “bones” of the house instead of what you see on the surface. Take a look at the strength of the local market. In the right market small improvements can go along way.
- Exit Strategy. As an investor it is very important to have an array of exit strategies. For example, you might start off buying your investment to flip; but, then realize you could wholesale the property and make just as much without doing much work. You could also decide to make your property a rental if it turned out that the rental demand was high or if the market slowed down that it wouldn’t make sense to take a huge loss. Generally speaking the more options you have the more valuable the property will be. If you find that you are limited on your exit strategies, you may want to reduce your offer price and lower your value estimation. A conservative approach with numbers is the way you should always make when placing an offer. While you may think your after repair value will be one number; it could turn out to be slightly off and you also have to consider what you need to do to reach that goal. Exit strategy and value often go hand in hand.
- Carrying Costs. You need to know all of the carrying costs and any variables associated with your deal. These include your escrow fees, closing cost, holding cost and unexpected cost. You can have a great property;but, If you find a major problem that now needs to be fixed, That number needs to be factored into your cost. So, while getting a 50% discount on a property may sound like a deal; once you calculate all the cost it may hurt your profit line.
Understanding your market and mastering all the aspects of your deal, can you then begin to form a true value of a property.