Have You Ever Considered Buying Real Estate investment Property To Rehab and Resell?
Are you curious about how you would go about analyzing the financial details of the property you are considering buying?
- Determining After Repair Value
- Current As Is Value
- Costs To Finance
- Costs of Holding The Property
- Transaction Costs When Buying The Property
- Transaction Costs When Selling The Property
- What The Estimated Rerun On Investment (ROI) Might Be
How would you go about figuring out if the property were a good deal or rip-off?
While different properties require more or less analysis then you’ll find here, the information presented in this Deal Calculator is the basis for analyzing any sized residential property.
The value of single family homes (investment or not) is generally determined by market comparables (comps).
Comparables are those properties in the same area that have similar characteristics – same floor plan, same number of bedrooms/bathrooms, equivalent garage size, same amenities, etc. normally within a one mile radius maximum. Usually within a ½ mile or less is preferred.
A single family investment home will generally rise in value if similar homes in the same area are rising in value, and lose value if similar homes in the area are losing value.
How to Analyze Real Estate Deals
Analyzing a Real Estate Deal- is one of the most confusing dilemmas
We hear from new and intermediate real estate investors with questions like
How do I know if it is a good deal
How do I come up with a price to offer
These are very common and not out of place.
It is very important to understand how to analyze real estate deals, in order to make an offer that will be accepted and not look like an amateur.
Analyze Real Estate Deals
Here are a few suggestions to help you understand how to analyze real estate deals and since it is a numbers’ game, how to set it up in a way that will save you time and allow you to analyze deals quickly.
- Being organized is key – set up all the properties with built in formulas in one spreadsheet. For instance, comparables for the area, average value multiplied by 70% (which equals your preliminary offer price to consider for the property), then use the deal calculator to determine your offer price against the 70% of the average value on the sold property, after completing REIR Deal Calculator and it’s requirements, you should have and indication of what to offer.
- For each property you should evaluate 3 different scenarios
- How much could this property sell for “as is?”
- How much would it sell for if fixed up?
- How much are the repair costs?
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Run a CMA (Comparable Market Analysis) – the MLS (Multiple Listing Service) is the best tool to give you this information. You need to use the same tool that appraisers and lenders do, which is still the MLS.
Now some important points to remember when using the MLS for the CMA:
- Look for houses that actually “sold,” not active, pending or expired, in the last 3-6 months(the closer to 3 months the better), which are similar to yours in size and age;
- Disregard if possible short sales and foreclosures – these represent “distressed” values and are not indicative of the market values; unless those types of sales are predominate.
- All the comparables should be in the same neighborhood and preferably within 1/2 mile or less of subject property. Occasionally, there could be exceptions – different zip codes, major streets separating the same neighborhood and values, rural areas, etc. That is why it is important as an investor to concentrate and specialize in one area at the time, so you can become familiar with exceptions and trends.
Even if you don’t do the repairs yourself, you will need to take these into consideration when you analyze real estate deals, the repairs will affect the value and what buyers are willing to pay for the property:
- If you are not familiar with construction repair estimates, take a contractor with you on the first few deals, even if you have to pay for their time. You will quickly get the general idea for costs involved and you will learn to do it yourself.
- Use the ballpark figure approach, don’t worry about an exact amount. Repair costs are highly subjective on how much work the contractor will do or ow much the buyer wants to do. It can vary widely, so use an average best estimate approach.
Rule of Thumb on How to Analyze Real Estate Deals
This is another question that gets asked frequently.
Do you have a rule of thumb when you estimate how much to offer?
- Most investors (rehabbers, landlords, etc.) will pay at the most around 70% of the After Repair Value
- If you are a wholesaler, you want to pay as much below 70% as you can, since that is your profit.
- If you are planning to buy and hold, 70% should be the most that you will pay for any property.
The After Repair Value is determined by looking at the CMA for comparable properties and your offer should be no more than 70% of the average value of similar properties that have sold in the last 3-6 months, then you want to compare that against the REIR Deal Calculator that takes into account all costs involved in the project.