Buying Rentals Below Market - How to determine FMV?

I have read on this site that the way to protect you investment in Real Estate is to buy 30% or more below market. This obviously is to protect against the ever present “bubble” that keeps threatening to burst. However, I would assume that buying a rental property with the intention to hold would limit some of the exposure to a “bubble”.

Anyway - my question is two fold:

  1. How is “market” determined. Is the assessed value or some other measure.

  2. If you are in a hot market is it possible to find rental properties below market value - if so (which I assume is yes) - is MLS the best method.

Thanks for any thoughts…

you can find FMV by looking at similar properties in the area that have sold recently. This is typically what they will sell for is in that range.

The best way to get a home under market value is to find a for sale by owner and not one listed on the MLS. Reason is paying the commision to the realtors. Most realtors get 7 percent of the selling price to be paid by the seller, so if John Doe wants to get $100,000 for his house, then he needs to sell it for 107,000 after paying the realtor his fees

Wow, Realtors must have given themselves a raise! I thought it was 6% and it was negotiable (negotiable of course when you are the seller signing the seller agreement)

It must be like Congress, Dan – they must have voted themsleves a raise! As if 6% weren’t enough of a gouge, the must be starting to go to 7% AND they are adding a listing fee in some places. My realtor in the DC area was supposed to charge $300 listing fee, but she is a realist and ‘ate’ it…of course 6% of $351K is over $21K for a listing that sold in 3 days, she could afford to!

I could be wrong, but ive heard 7% in our area here…but when the average house price is only about $75,000 then the percentages might be jacked up opposed to other places where houses are expensive

The going rate here is still 6% and the median price is probably $95K or so…

Keith

I just NEED to remark on the “bubble” – cause I’m a big mouth. The bubble everyone is speaking of is only in certain markets – and it’s a perception, no one really knows if it’s totally true nor when it will ‘burst’ – sure the rate of growth is difficult to sustain, but will the values come down? No one knows.

Mackie where are you investing? Where I am investing, there is this standard 8% growth rate still listed on any research I can dig up, but I don’t buy it, at all, in some cases it’s negative – but the rents are sustainable and generate income. Perhaps 2-3% max. annual historic growth with a blip up right now due to investors moving into the market for certain southern Atlanta suburbs. We’ve got literal war zones with 57% of the homes as rentals and an additional 24% vacant altogether and crime listed as 8 out of 10 for the worst in the USA. Those values are going nowhere at the present time, not up nor down. I don’t invest there because I don’t buy houses where I’m personally scared to go – if anyone wants the information, holler, I’ll e-mail it right over to you – there are definite deals to be made if you can don’t mine the dangerous situation LOL. What I do like about these areas is, that they fit an important criteria of mine, they have easy access to Atlanta, either via highways or public transportation (if you can get to work, you can pay me).

The new 7% cracks me up too. The gentleman I use for all my flooring has a sale strategy that I love – and it’s working well for him – he flips constantly after rehab. He pays to get the property into the MLS and states he pays a 4% commission. The guy is doing great with his plan. One a month easy – and he doesn’t do a thing once it’s in the MLS.

I’m a buy and hold person – so I can’t tell you personally how it works.

Tami,

I am in the greater Boston and Southern NH area. #1 on the list. However, my stragety is like yours. I am interested in a buy & hold with a positive cash flow. Over the long run - I am sure that property will appreciate in value, however, to me that is just an added bonus. I am more interested in cash coming in the door.

So my question is…if I plan to buy and hold rental properties…woulden’t I be insulated from real estate market conditions.

Thanks for any thoughts,

Mara

Mackie,

Buying rental property at 30% below market value is your insurance against anything going wrong. The vast majority of the nation does not have a real estate bubble, but buying at a discount is important in these areas as well. For example, suppose you buy a rental property and then, thanks to some miserable tenants, decide that being a landlord isn’t for you. If you’ve paid market value for the property, you could have a very difficult time unloading your investment (especially if the tenants have done a bunch of damage). If you had bought this same property at a substantial discount, you could probably absorb the damage and still sell relatively quickly without a substantial loss.

Buying at 70% of market value or less also allows you to finance your purchase at 70% of the appraised value and not have any money out of pocket. If you buy at market value, the bank will want a down-payment.

Finally, buying at a discount gives you instant equity. It’s like getting 30% appreciation literally over night. I’ll take that anyday over hoping for bubble type appreciation.

Mike

I’m with Mike all the way. Down here in the Atlanta area I can pick up a house for $80K with an ARV of $130K, needing $20K in improvements. I get the ‘For Rent’ sign out IMMEDIATELY and they stop in constantly (which is yet another reason why I prefer to work on my properties). I get my rehabs done in six to eight weeks tops, depending upon the work involved. I don’t like to carry my costs, so I make them work fast and hard, including myself. $20K lets you know it’s not a paint and go – but I’m not rebuilding. The rents where I invest: 3/2 around $1,000/mo and a 4/2 around $1,100/mo easy – and I give a perceived discount. All of my tenants want to purchase my properties. If they are renting in this market, we all know their credit is a mess. But I’m all for making a profit and helping them out – if they prove themselves.

I pay cash on the buy side and for rehab, but I have the expense of a refi involved at the end. My tenants make my mortgage plus – if I don’t have a positive cash-flow at the end, there is no way I’ll buy the property to start.

If I have to I can unload the properties below market (with solid tenants) – and because I’ve been burned, I’m ever weary of this scenario.

My last property has a FMV of $144k the mortgage on it is $104K and my tenants way more than cover the mortgage and expenses. Then this property flooded during Cindy and Dennis – OMAN. However, the cost to put it back together was around $1,100.

I only do one at a time – I am here to find the skills to do more and make more.

Mackie, are you shielded from a market downturn – no one can say for sure. However, if you do things purposefully and buy at the best discount you can find, you’ll make money and do very well. I’ve read many posts on this site from very smart people – in this business you are never done learning.

Take care all!