With all the houses pricing dropping how do you determine the value?
Buying distress properties how do you calculate the ARV with everything declining if you want to buy cheap?
The answer is simple - KNOW YOUR MARKET. That means being out there in the market, talking to people (successful investors, realtors, sellers, etc), and if you’re just starting - looking at (inside and out) a minimum of 100 houses that are for sale in your target market area.
Good Luck,
Mike
Mike hit the nail on the head: Know your market. It’s going to take a willingness to take your real estate training and knowledge to the next level – driving neighborhoods, looking at comps, physically looking at properties so that you can really internalize what your local values are. If you base the price you’re willing to pay on erroneous information you’ll lose every time.
However, I’ll admit that nobody really knows where the bottom of the market is. By buying smart based on the best information available to you, it’s possible to insulate yourself as much as possible from future drops. That means finding motivated sellers willing to sell their properties for .60-.70 ARV, which will give you some equity to play with before you’re at risk of being upside down on a real estate investment.
There’s another component I’d add to the mix.
If buying and holding is in your future I’d say that you need – you MUST – do a solid cash flow analysis of any property you’re thinking about buying. The importance of knowing your local market rents and being able to accurately estimate your expenses is critical to your cash flow – and your success. If the market keeps dropping after you purchase a property you can afford to hold on until the real estate market improves and prices start heading north again. Depending on how much further prices drop you could have negative equity for awhile, but it won’t matter as much because you’ll have income coming in every month from your property.
As you can see, knowledge is going to be critical to your success. So read a book, learn from another investor, or find a good real estate mentor to help you along in the process. Most importantly, don’t just talk about getting started. Map out a plan and get going. If you’re trying to secure your financial future, now is the time to do it by investing smart.
Good luck!
Peter Vekselman
That means finding motivated sellers willing to sell their properties for .60-.70 ARV, which will give you some equity to play with before you're at risk of being upside down on a real estate investment.
I agree with everything Peter said except this. We are on the verge of a DEPRESSION and I would only buy at a HUGE discount - certainly no more than 50% of market value. Work hard and find the GREAT deals - good deals are not good enough in a depression.
Mike
I also have to agree that Mike’s advice “hit the mail on the head”. As part of the cash flow analysis suggested by Peter make sure you develop accurate repair estimates and very accurate schedules. The “time risk” in uncertain markets can kill you. I rehabbed a property 2 years ago. Prior to starting work I estimated $55K repairs and 6 months of work. Because of delays in the previous project I was finishing up, and insisting in doing all my own work the project took 16 months before I got it on the market and another 3 months to get it under contract. Even though I came in $3k under budget the time risk cost me $30K in sales price. I should have had a better detailed rehab plan and brought in a crew to get the work done ASAP. Between the lower sales price and extra holding costs my profit would have remained about the same ($70K) but the project probably could have been completed in 4 months and I would have gotten my money out that much quicker in the better earlier market thereby doubling my rate of return. I had planned for a price set by my estimate of market conditions in 6 months but realized a price in market conditions I had not planned for because of “time risk”.
jmd_forest
Basics for looking at comps are still pretty much the same. The main difference being that you have to get more of them and focus on sales within the past 6 months to make a decision. I also get an appraisal now to confirm my estimates.
The best thing to do now is to focus on properties in more stable areas, that way you won’t see the wild variations in values that are prevalent in the up and coming areas. One last thing,
make sure that when you look at comps you exclude properties that were foreclosed to give you a better look.
hassan - do you really get an appraisal for each property you evaluate? This seems to be a very expensive approach, don’t you think?
only when I am reeeeeeeeeaaaaaaalllllllllyyyyyyyy sure that I am going to buy it or option it to one of my buyers. It’s a heck of a lot less cheaper than finding out the hard way.
That’s why I always say that you should KNOW your market. It would be very expensive to get an appraisal on every property you intend to buy. If you are the EXPERT in your market, you won’t need an appraisal.
Mike
I have to agree with Mike again…that’s twice in one thread.
I just got the results of an appraisal from the bank I’m working with on a short sale (since they called it an appraisal, not a BPO, I’m going to assume its an actual appraisal) and they valued it at $202k vrs. my offer for $120k. It might have sold for $202K 3 years ago and if it had been in prime condition. My opinion of its current value is about $140K and with $10K of material and associated sweat equity, about $185K.
I’ll trust my own insights to my local markets long before I’ll trust an appraiser’s opinion.
The bank still hasn’t outright rejected or countered the offer. They’ve been dragging their feet since May.
jmd_forest
I only get an appraisal if I am really sure that I am going to buy a property and if there is a lot of variability in the market price. In today’s market with values dropping so fast, I can’t afford to risk having another valuation mistake like I did a few years ago, where I assumed that a house was worth 170k. I took over the loan on it at 130k and put a lease to own tenant in it. When it came time to exercise their option that value on appraisal came back at 129k; basically 40k just evaporated because I didnt have the sense to get an appraisal done.