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I frequently receive faxed flyers from real estate investing companies all over the Atlanta area, notifying me of their latest "Super Deal" on a particular property. I am personally acquainted with some of the companies and know that many of the flyers I receive are accurate. They generally read something like this:
123 Main Street 3 bedrooms, 1.5 baths Great & upcoming neighborhood
Asking Price $75,000 Repairs $0 ARV $175,000 YOUR PROFIT $100,000!
When I get flyers like this I always think, "Oh really? Then why don’t you just retail it yourself instead of wholesaling it?" Not all advertisements for "deals" are this extreme, but it brings to mind the importance of knowing how to correctly evaluate this type of information.
In my opinion the most critical part of any deal is the need to accurately establish the After Repair Value, (or ARV) of your subject property. ARV is essentially the same thing as "market value" or an educated guess as to the actual appraised value. Your profit is made when you buy. If you pay too much going in, you will have to cut your repairs in order to avoid losing money. Cutting corners on repairs, or making low quality repairs can cause you to have difficulty reselling the property, leading to unexpected holding costs. This could be disastrous if you are working on a tight budget.
I have seen many properties for sale by investors who completely misjudged their ARV. This in turn led to their paying too much when they bought the property, and then spending too much on repairs, or even worse, running out of money before the renovations are completed. They misjudged the real After Repair Value. This mistake can leave you in a situation where you are unable recoup your expenses, and forces many would-be investors out of business.
They did not realize in the beginning that their ARV was too high, and sometimes it can be very hard to judge accurately. Ultimately the ARV or market value, is what a willing buyer will pay at a given time. That amount can change periodically, and often fluctuates during any given year. Factors such as time of year, economic developments, like rising interest rates, supply and demand, and changes in the overall neighborhood may affect your final selling price.
Having at least a basic understanding of the real estate appraisal process, or access to people with this expertise is essential. While it is not necessary to become a certified appraiser, you do need to understand how to accurately determine a realistic selling price for any property before you buy it.
When determining that all important ARV, keep in mind the following guidelines:
| You should develop a very good knowledge of what similar homes are selling for within 1 mile or less of the subject property. I prefer to keep it under ½ mile whenever possible. It helps to identify a specific geographic area in which to work. Take an area of say, 500 to 1000 homes, in which you would like to identify investment properties. |
Become as familiar as you can with the actual selling prices as well as the asking prices in that area. Often, asking prices will be about 10% above the selling prices. Stop at homes for sale and get their flyers. Pick up the real estate books for that neighborhood. Real estate books are given away free at many convenience stores and restaurants in the local area. Read the real estate for sale ads in that area. In short, become familiar with the available information and sales data for the area you are working. Once you get familiar with this data, you will be able to make accurate predictions of value. This process requires practice. The more you do it, the more accurate and comfortable you will become.
| Be sure the prices you are comparing are for similar properties.
The same number of bedrooms and baths, the same general amount of square
footage, etc. Adjustments have to be made for significant differences. Check
the type of usage; i.e. single family, duplex, etc. Failing to use similar
properties with similar usage is a common mistake. As you practice making
these comparisons, you will also learn how to differentiate between
neighborhoods that are located close together, but have properties that
differ greatly. |
| Remember to check at least 3 similar properties that have sold in the
immediate area in the past 12 months. Don’t use asking prices for
properties currently up for sale. Appraisals are based only on SOLD
properties, and the actual contract selling price. |
| Valuing real estate is as much an art as it is a science. Like anything else, you will get better at it and more comfortable as you gain experience. If you have a property you need to make an offer on, and you are not familiar at all with the area values, you should consult with an independent party, such as an appraiser or a realtor for an idea of the accurate value. Don’t take the word of any seller! Verify, Verify, Verify! |