One of the most common questions I get a lot is “How Do I Know If This Property Is A Good Deal Or Not?” In fact, a gentleman this week asked me this same question… He said, “you are absolutely right when you say that people fail in real estate…its because they are afraid they wont be able to sell the house later… I am one of them. I have come across more than one opportunity to buy houses and I do not take them for that specific reason. Another reason that keeps me from making offers is trying to figure it out if its a good buy or not… how do I know if it’s a good deal? Will I be able to rent it if I decide to hold it?”
I would like to spend some time explaining to those who might be having the same challenges and hopefully shed some light on the situation so anyone can gain more confidence making more offers, because ultimately, that’s the only way you are going to make any money.
When I first started buying and selling houses over a decade ago, it made sense to me that if I wanted to play this game and play it well, I would need to get good at finding houses people wanted and pick them up at bargain prices. That’s why I started out doing short sales. But how does one know it’s a bargain? What research is involved? The reason someone might be afraid to make an offer is because they don’t know what the property is worth or what someone is willing to pay for it. Knowing those two things right there will allow us to be more confident making the right offer so it’s not to high.
How to Determine Property Value
If you don’t know what a property is worth, it’s never a good idea to make an offer. There are several ways to determine value, but the most efficient and least costly is through real estate agents. They have access to the Multiple Listing Service (MLS) which will show you what properties have sold for within the last few months. You need to be able to find out these values so you know what to offer the seller.
This is one of those steps that is critically important because if you value a property more than what it’s worth, you will have a difficult time selling it (most people’s fear). And you don’t want to end up with a property you can’t sell.
Call up a local real estate agent and ask him or her to run a CMA, stands for comparative market analysis. This will show you “comparable” properties that have sold recently, which gives you an idea of what the property is worth. Make sure you only compare those houses that have sold within the last 6 months.
You’ll want to take it one step further and also ask them to give you all the active listings. Because these markets change so much, this will help you stay on top of the market trends so you know if housing prices are going up or trending down. Of the ones you are comparing, find out how long they’ve been on the market. DOM – days on market. Why is this important? Could mean the price is too high. Could mean no one wants to buy in that area. These are all things you need to find out.
Now if you’ve never run comps before or had an agent pull comps for you, there are important things to consider. Remember, you are using these comps to get an accurate estimation of what the market will pay for this property. So it had better be pretty accurate.
When pulling comps, and most agents know this, make sure you’re comparing apples to apples here. In certain neighborhoods, a home that is a mile away, is too far. In rural areas however, there may not be another comp for 10 miles.
Regardless, here’s what’s important when pulling comps in typical neighborhoods. Ideally you want comps in the same subdivision and better yet the same street. Anything beyond a mile is just way too far. You want to make sure it sold within the last 6 months, 30 – 90 days is best. Anything older than 6 months is just too old. You want to make sure they are similar style houses where even the exterior is the same. You want the same square footage (within a few hundred sq. feet), same bedrooms, same bathrooms, same everything. You even want the same lot size because that too makes a difference. You want to always double check the comps if you are not pulling them yourself. BTW, you can pull these yourself if you have access to the MLS. Don’t have access? Get creative then and figure out how to get access.
If you ever have trouble getting an agent to work with you, tell them you are an investor and you purchase a lot of properties. They know eventually you will put these properties back on the market. They also know that if they treat you well, you will send other people to them, which will increase their chances of other sales. They love referrals and word of mouth advertising.
If you find an agent that is less cooperative with you when you ask for comps, I suggest you move on and find one that will bend over backwards for you. Don’t be afraid to call more than one real estate agent to get a list of comparables either. This will help you see what agent wants to earn your business. The more comps you have the better as long as you are comparing apples to apples, within close proximity, and sold less than 6 months ago.
Also understand that the comparable properties that a real estate agent might pull up for you are most likely in good condition which is what you want. You want the good condition value. Take the list of comparable properties you get from the agent, average them together, and this is a good estimation of what your property is worth when it has been repaired. From there you can begin plugging in the numbers we’ll talk about in a bit so you know what you can offer on the property. But at least for right now you know what that property is worth after it’s been repaired.
With a CMA, remember these are coming from previous and existing listings. These do not include For Sale By Owner houses. So it’s a good idea to walk around in the neighborhood and find out what others are selling their homes for too, if there are any. This will help you verify the price you’ve just established. Again, and I can’t say this enough… be sure to compare apples to apples. Compare homes that have the, same sq. footage, bedrooms, bathrooms, lots size, exterior, etc. Homes in neighborhoods vary quite a bit so you need to make sure you are comparing similar properties.
Most important, find out how long it’s been for sale by owner. I had one that was FSBO and had been on the market for over 2 years. The market just wouldn’t sustain the price they were asking, which was important to know.
There are two types of properties you will be dealing with in this business. Those that need repairs and those that don’t. You can be successful making offers on both kinds, however the formula is a little different when repairs are involved. Remember, before we know what we are going to offer, we need to determine what the value of the property is first.
For those properties that don’t need any repair, this section won’t apply. Those properties that do need repairs, which will be most, it’s important to know what those repair costs are going to be. This can be a very time consuming process, so here’s what I would recommend.
Call up a few handyman or contractor and have them come over to the property to give you a bid. When they come over to give you a bid, be there with them. Walk through the house with them. Look at what they are looking at, start getting an idea of what things cost to repair. Have a few contractors come out to give you bids. Once you do this a few times, you’ll start feeling more comfortable and confident walking through analyzing the repairs and know what it’s going to take to fix them up.
Then to double check your estimation, take the sq. footage of the property, and give it a bad, really bad or awful rating. Bad would be minor cosmetic repairs throughout the house. Awful would be major repairs like electrical, plumbing, foundation or structure, etc. Really bad would be somewhere in between.
Once you give it a rating, then multiply that rating by the sq. footage. So a bad rating would be $10. Really bad rating would be $15. And awful would be $20. So if you gave it a bad rating, you would multiply $10 x the sq. footage. When you do this, you might be surprised how close you are to the estimation. That’s exactly what you want.
How much to offer?
Now that you are confident you know the value of what the property is worth after it’s fixed up and also know what it’s going to take to fix it up, you only need to know one more thing. What is someone going to pay you for it? I actually wrote an article on this earlier that you can read here. Basically what it says is that most of your rehabbers and investors are willing to pay you 70% of what it’s worth in repaired condition because they too want to make money. Once you get that number, you subtract the rehab costs and then you can feel pretty confident you won’t be holding on to this property very long.
The formula looks like this -> (.70 x ARV) – repairs = what investor will pay.
Now you also need to make something, you might offer (.65 x ARV) – repairs = what you will pay so you can make a profit.
If you find a home that doesn’t need any repairs, you can feel pretty confident that if you can pick up this property for 70% of market value, you shouldn’t have a problem selling the home. Now, every market is different, however, as long as you do your research right in the beginning, it shouldn’t matter what market you are in.
If you can get good at finding houses for bargains, you won’t have a problem selling them to an end buyer. We’ve been having a lot of success lately finding some AMAZING deals that quite frankly you just shake your head and say, “Never in a hundred years would I have thought I could buy a house this cheap!?”
Take a look. We bought and sold these just a few months ago.
So yeah, they are out there, if you know where to look. And if you do enough of them, they start to add up. I know there are lots of ways to make money in real estate, this is just something that is working extremely well for us right now. Some of these are such great deals, we simply keep them as rentals. You only need a dozen of them cash-flowing and it really starts to add up very quickly.
Well, I hope this has helped and has given those that might be struggling to make offers, more confidence to get out there and not be shy. There is so much opportunity right now. I know you probably hear that a lot, but it’s true.
What are some specific things you struggle with?
Also if anyone wants to know what we are doing to find these kind of deals let me know. If there is enough interest, I’ll create a report and show you.