The Basics of Real Estate - Determining Property Value
The current economy is very shaky at best and no one seems to really know what is coming next. Will we soon be on the road to recovery or are we headed for another Great Depression? What we do know is that money is tight and most people are trying to save and build themselves a little nest egg for the future. But banks are paying extremely low interest rates on deposited funds and savings are actually shrinking, rather than growing, when inflation is considered. It’s no wonder that real estate investing is something that more and more people are becoming interested in. Many are choosing to invest in real property as a way to get their money to grow faster.
The current financial crisis and recent housing bubble burst have left a lot of people leery of jumping into the real estate market. Yet fortunes are being made, right now, in today’s market by multitudes of investors. For those who understand the basics of real estate investing, the current financial crisis has created an investment opportunity unparalleled in recent history. America is on sale and it’s time you went shopping!
In this series of articles on the basics of real estate investing, we will discuss much of what you need to know to take advantage of the current real estate market.
Although there are many different types of real estate investing, there are just nine core skills that need to be learned and developed in order to build a real estate investment business.
1. Learn the skill of quickly determining property values.
2. Learn the skill of being a problem solver.
3. Learn when and where to find the right kind of sellers.
4. Learn the skill of rapidly and accurately analyzing each real estate deal, so you will be able to make a quick offer or move on to the next project.
5. Learn the art of being a master negotiator – a negotiator who creates win-win deals.
6. You must become knowledgeable in all areas of real estate investment. The more knowledge you have, the easier it will be to solve people’s problems. You can specialize in a particular area, but you should have knowledge in all areas. That way you can take advantage of more opportunities as they come your way.
7. You must surround yourself with key people who can help you with your real estate investing and who are experts in their particular field. These key people will form the basis of your Power Team.
8. You must master the skill of marketing. You need to always be marketing yourself and your business to sellers, buyers, team members, and business associates.
9. You must master the art of delegation. If you try to do it all yourself, you will severely limit the growth of your investing business.
This list is certainly not exhaustive, but it encompasses the basic skills a person needs to learn and develop to survive as a real estate investor. But you don’t need to be an expert in every area to start your real estate investing. One of the great things about real estate investing is that it’s a learn-as-you-go business. You do need to know enough to make risk-free offers, but once you have mastered that skill, you should be making as many offers as you can every week.
A basic skill that every investor needs is the ability to quickly determine the current market value of properties. The number-one mistake new investors make is paying too much for a property. That is most often a fatal mistake. If you pay too much for a property, there isn’t much you can do to correct the problem. And if you pay too much for your very first investment property and lose money on the deal, that may be the end of your investing career. Don’t let that happen to you. Learn how to determine the value of properties.
Some new investors feel they don’t need to know how to determine the value of properties if they have a good real estate agent on their team. Yes, it is critical to have several good agents on your Power Team, but you need to know how to quickly evaluate a property’s value if you expect to compete in the real estate investing business. Great deals, and even just good deals, usually won’t wait around for you to contact your agent to run a comparative market analysis. You need to be able to run a quick analysis yourself and make an offer to tie up the property. You will then have time to verify your analysis with a comparative market analysis, to determine if you want to go ahead with the deal.
In this article, the discussion will be limited to residential home values. Commercial properties will be discussed in future articles.
Wherever you happen to live, the basic process used to determine a home’s market value is the same – you are comparing your home against homes that are located in the same general area, that have similar features as your home, and that have been sold within the past two to three months. The homes used for comparison are referred to as comparables, or comps. To get a good market value for your home, you want to use as many comps as possible, sold as recently as possible. The number of comps available will depend on how active the market is, but a dozen similar homes that have sold recently would be ideal. If you can’t find comps within a few blocks of your home, keep moving further away from your area, but realize that the further away the comp is located, the less value it has in determining the value of your home.
Common features used for comparables are:
• Number of bedrooms
• Number of bathrooms - full, ¾ (shower and no tub), ½ (no tub or shower)
• Square footage
• Number of stories
• Basement (percent finished or not finished)
• Lot size
• Age of construction
• General condition
• Garage (number of cars) / Carport / No covered parking
• Age and condition of roof
• Type of construction (brick, vinyl siding, or wood siding)
• Fireplaces
• Family room
• Dining room
• Heating/cooling method
• Neighborhood – location, location, location!
Other features that are taken into consideration:
• Views
• Decks
• Unique landscaping
• Hardwood or tile flooring
• Unique construction, such as custom home, tile roofing, and radiant floor heating
• Swimming pool
• Extra-large lot that could be split off as a separate lot(s)
• Proximity to schools, shopping, and transportation
A formal comparative market analysis done by a real estate agent will not only take into account all of these features, but the analysis will adjust for differences in square footage, age of construction, and general condition so that the comps are truly comparable. For example, if your home is 2,000 square feet and a home down the street used as a comp is 2,200 square feet, then the comparative market analysis program will subtract 200 square feet of value from the sold price of the comp to make it more comparable to your home.
Other things that should be considered in the comparative market analysis are the conditions under which the property sold. Were there any seller concessions that affected the selling price, was the sale a home in foreclosure, was it a short sale, was it an REO (bank owned property), or was there any special seller financing? All of these things really need to be considered in order to get accurate comp values.
This detailed comparative market analysis can be completed by a real estate agent on your team once you have the property under contract. During your inspection period, you will want to accurately determine the value of the home to make sure you really have a deal.
However, you are not going to be able to go into all that detail when you are trying to do a quick analysis just to determine if you should make an offer. So what should you do?
The best way to get good at determining home values is to look at lots and lots of homes. Determine the area(s) you want to start investing in, and start going to see every home that you possibly can in these areas. Go to all the open houses on the weekends – call and go see all the for-sale-by-owner properties. Keep accurate notes as to the asking price, square footage, and all relevant features for each home. Have real estate agents on your team take you to see listed properties. Have the agents on your team give you all the sold data from the past six months in your target areas.
Start calculating the average cost per square foot for various types of homes – one-level ramblers or ranch style, two story, and split entry. This is a lot of work, but it is a lot of fun to see all the homes, and it will be worth it in the long run. You will soon know more about home values in your area(s) than most real estate agents. Your goal is to be able to drive up to a home and have a general idea of its value, just by looking at it from the street. The value you are looking for is the price you could sell the home for once it is fixed up and move-in ready. Once you have seen the inside of the home, you can refine that value based on number of bedrooms, baths, and other features.
One very important factor in determining the sale price of the home has nothing to do with the home itself, but everything to do with the overall market condition. If the market is a buyer’s market, like it still is in many parts of the country right now, then you need to make sure that the selling price you use in your analysis has a discount built in so you can offer the home at a significant discount when you put the home up for sale. For example, if you found that the fixed-up value of a home was $150,000 based on your knowledge of comps in the area, then the sales price you should use in your analysis should be $135,000 so you can get a very quick sale. The actual sales price you would use, of course, depends on the actual market conditions in your area. Experience (and help from your team real estate agents) will help you develop expertise in this area.
Once you have determined the sales price, simply subtract all of the costs of procuring, fixing, and selling the property. This will result in your maximum-allowable purchase price. Don’t forget to account for your profit in the analysis.
There is no substitute for personally getting to know property values in the areas you want to invest in, but you can also use the internet as a tool to find comparable sales and listings of properties currently for sale in your area. There are several websites that provide various types of data. You will have to determine the accuracy of the data on the websites. You will find that, for your area, there may be some websites that give very accurate data, while others either overestimate or underestimate values. But once you find the general trend, websites can be very useful to provide you with a quick estimate of value. Just make sure you know what the values really mean.
Here are a few websites that may be helpful in determining property values:
• http://www.housefront.com
• http://www.eppraisal.com
• http://www.cyberhomes.com
• http://www.homeinsight.com
• http://www.domania.com/Resources/RecentSales/Default.aspx
• http://realestate.yahoo.com/Homevalues
• http://www.zillow.com
In addition to these websites, many real estate companies have websites with lots of property data available to the general public. This will mostly be data on properties currently listed “for sale” and not data on properties that have recently sold. You will probably have to get the sold data from the real estate agents on your team.
Knowing how to quickly and accurately determine property values in your area is a critical skill that you need to acquire as a real estate investor. If you get good at determining property values, you should never overpay for a property. Spend the time to get good at this skill. Cost to get this skill – a few months of your time. Value of this skill - PRICELESS!