Saturday, May 16, 2015

How to evaluate investment properties Part 2

Find, Buy, Sell Series Part 2
In my Find, Buy, Sell Series I will be taking you through the four categories of real estate investing. Part 1: How to find properties. Part2: How to evaluate the properties Part 3: The renovation process and Part 4: Sale and closing.

How to Evaluate Property: Part 2

Property evaluation is critical when investing in real estate you have to be spot on with your numbers and take everything into consideration from the very beginning. The more due diligence you do in this period before purchasing the greater your chance of winning in the end. Remember the old saying “I became successful because I can say no to 99 out of 100 opportunities presented to me” Don’t be so hungry for a deal that you are anxious just to take anything, wait it out and never invest outside of your standards, be patient and focus on a solid win, this is absolutely a business where you will say no to 99 out of 100, and that’s ok.

Below I will cover some key steps briefly when evaluating the property.

Step 1: Initial walk though
To properly evaluate the home on the initial walk though you have to know your strategy going in. How do you like to renovate? Are you looking to get away with the bare minimum? Are there things the property must have in the end? Are you an investor that guts everything and starts over, or are you like us who use a hybrid approach where we try to save as much as possible and renovate the key items only. As you walk through the home make sure you are taking detailed notes as to the condition of each room. I like to look at each room separately and break down the cost per each room. In the end I can say Kitchen $5,000, Bath $2,000, Living room $500 and so on.

Some common missed costly mistakes
  • ·         Is the electrical updated?
  • ·         Is the plumbing updated? In Michigan if it has galvanized pipes plan on plumbing!
  • ·         How many years are left on the roof?
  • ·         How old are the furnace and hot water tank?
  • ·         Did you thoroughly check the foundation?
  • ·         Have you considered the cost of city permits and inspections?
  • ·         Do the windows need updating?
  • ·         Are there any major cracks in the driveway or concrete outside that may be an issues for a buyers financing?

When evaluating always look at the future and the end product, have the end goal in mind and then work backward from there. Keep in mind to always cushion your budget it is better to be safe than sorry. Always add an extra 10-15% for extras and unforeseen circumstances.

Step 2: Looking at the comps.
Looking at the comparables in the area to determine your ARV (After repair value). Here are some key points you need to remember when looking for an ARV:
  • ·         Always be conservative, have a worst case price, likely price, and best sales price. Base your evaluation off the worst case scenario!
  • ·         When doing a market comparison only use sold comps, what is listed or pending is irrelevant!
  • ·         Try to stick as close to the property as possible start .25 miles out and expand from there
  • ·         Never use comps older than 6 months
  • ·         Use comps with similar features, benefits, square footage and style. You cannot compare a bungalow to a ranch or a property that has 1,200 sq. ft. to one that has 1,800 sq. ft. If there are not at least 3 clear comparables, you may want to pass on this property.
  • ·         Whenever possible (And I recommend to only) use the MLS to find comps, sites like Zillow, Trulia, eApprisal etc can be extremely inaccurate. If you don’t have, access to your local MLS find a real estate agent who does.

Step 3: Plug in the numbers
Once you are armed with your renovation costs and your comparables plug in the numbers. Most investors use a formula called MAO (Maximum Allowable offer) to make offers on properties. A very common MAO is the ARV of the home times 70%, less repairs. For example. If the ARV of a home is $100k and you determined, the repairs were $20k your offer would be $100k x 70% ($70,000) minus $20,000 in repairs. The most you could offer the homeowner is $50,000! When fixing and flipping a property, the vast majority of investors stick as close to 70% MAO as possible or below. This allows for a good return when the home is sold and any unforeseen issues in value or closing. (Also leaves room for the cost of financing your deals)
Lastly, keep in mind most investors completely forget when plugging in the numbers there is a cost to closing on the resale of your property. You have to take into account the real estate commission, in most cases 6%, taxes, water, title work, etc. A lot of investors lose big money in the end because they did not look at the resale closings costs. Don’t be one of them!

Remember the key to a successful deal is your planning in the very beginning before you make the purchase, the more time spent evaluating, the better chances you have at winning. Don’t forget to post your comments below and I would be happy to expand on any of the information. We look forward to seeing everyone in 2 weeks for Part 3: The Renovation Process.

P.S. Don’t forget for a more one on one approach check out my personal coaching program,  I offer a full money back guarantee visit

Michigans Premier real estate investment firm The Borland Group 

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