You’ve found the ideal property you’d like to make an offer on and have to evaluate how much to offer so you get the property at your price, how do you do it?
It is said that Real Estate Investors make their money when they buy the property. For the most part, this is true. If you pay too much, you’ve just become a long term investor and potentially a landlord waiting for the market to catch up hoping you get positive cash flow on the property. If that was your strategy all along no harm, but if you wanted to resell the property quickly, you may not be able to. This article addresses the steps and items you should consider when evaluating investment properties.
First, you must have an exit strategy in mind and I recommend an alternate exit strategy in case your primary goal doesn’t work out. Typical exit strategies are to wholesale the property immediately, rehab the property and resell it, or keep the property and rent it out for cash flow. There are other strategies that incorporate several of these like lease options but the point is to decide what you will do with the property before you own it.
This is how I evaluate deals and make offers.
First, I will only work with a motivated seller that is not currently in pre foreclosure or a bank owned property. I choose not to work the short sales as they are quite labor intensive and take way too long with an uncertain outcome. My local market which is Broward County in South Florida has many such opportunities so that is my target. You need to have a target also.
Second, I only look for properties in what I call “hot zones”. I concentrate in areas that have a lot of buy and sell activity.
Again, if my exit strategy is to wholesale or rehab, I want to buy in an areas where the buyers are. I also pick price points where the most activity is. Study and understand your local market and what is going on with government programs like first time homebuyer etc. Always buy with your eye on your exit strategy.
Now the research
You need access to historical and current real estate information local to your market. If you are a Realtor you have the MLS and other tools. If not, there are several good websites that you can access to get historical and current information.
You local property appraisers website will give you important information on the subject property including square footage of the living area which is very important when determining price per square foot. To get the comparables you will search for the following.
Closed Sales preferably within 6 months of today’s date
80% – 120% of the square footage of the subject property
Same style home, same number of bedrooms and baths
Manipulate your search criteria according to haw many comparables you are finding. If you are searching hot zones you may have many to choose from so you can refine your search to 1/4 mile, square footage within 90% of subject property and comparables located in same subdivision which is most accurate.
Calculate sale price per square foot by dividing sale price by total living area. Once you have a good average range you can use that figure to multiply by the total living area of the subject property to get a good comparable value of what the subject should sell for.
Your offer will be 10-20% below this price if you plan to wholesale the property to another investor after you’ve factored in estimated repair costs.
Check pictures of properties, read the description to get an idea of general condition and come up with 3-4 similar closed sale comparables.
I go one step further, I look at active listings to see how many are currently on the market and at what price. I also look at expired listings so I see what didn’t sell. (90% of the time they didn’t sell due to price so I know what price point is not selling)
Here’s a tip, always look at the lowest priced comparable sale and see if you can use it as a starting point and couple that with whether you are in a declining, stable or rising market and go from there.
I also suggest you look at retail comps. These will be higher priced sales reflecting home that have rehabbed and resold to a retail buyer. This will give you and idea of the After Repaired Value (ARV)
Now get a print out of the good comps, get in your car and drive the area, subject property first, then the comps and you will soon have a good idea of the value of the subject property.
Consider the following: Location location, Always look at a prospective property imagining you are the buyer. What’s the property’s neighborhood like? Is it surrounded by commercial property? Railroads? High traffic? Overhead power lines? Curb appeal and general condition. All these things matter.
Even if I am wholesaling the property to another investor, careful consideration of these items will help get your house sold fast which is the goal of the wholesaler.
Finally, you want to inspect the inside of the property, now here’s a harsh reality. Even if you never rehabbed a home or do not expect to ever do one, you must know about repairs and what they cost. If you can’t do it, then bring someone who does, it can save you from buying a home you can’t sell due to high repair costs. It will also give you valuable information you can use in your negotiation with the owner of the home.
As far as what to offer, after all my due diligence, I assume Investors typically pay 65% of ARV. Here’s how I will work the numbers and base my offer.
Assume a property will be worth 100k ARV. Further assume repairs are 10k.
An Investor will pay 55k for this property. 65% of 100k = 65k – 10k repairs. I would offer 20% less than the 55k to build in my profit margin or 44k. this would be for a wholesale exit strategy. I buy it for 44k and resell it to an investor for 55k or however I can negotiate the spread. If I want to rehab it and retail it I can spend up to 55k and so on.
Most of the work can be done in the office analyzing the numbers and working the comps. This will save you drive time as often you will not be able to make the numbers work without a really low ball offer. Get to know an area real well, become the area expert and you will soon see a property address of a house for sale and immediately be able to estimate value. Good luck in your Real Estate investing career.
Anthony Dali is a licensed Real Estate Broker and Real Estate Investor in South Florida.