Investors - Determining Values in this Crazy Market
The other day I had a call from an investor friend who asked how I determine values in this crazy market.
The first thing to do is to pull the comparable property sales. Comparable property sales are properties that are as close to the subject property as possible. I know that an appraiser would say that you could take properties from as far away as a mile but we know a mile away is a long distance and neighborhoods can change significantly in a mile. I look for properties as close to the subject property as possible. The best would be on the same street, block or neighborhood.
You want it to be similar square footage. If you are talking about an 1800 versus a 1900 square foot house your average buyer is not going to see that hundred foot difference. If you are talking about between 800 square foot and 900 square foot obviously your buyer would see the difference between those two houses. There should be similar bed/bath configuration.
Similar in age; age is something that is relative. If we are talking about a ten year difference between a house that was built in 1996 versus a house built in 2006, then yes buyers would see a big difference between those two houses. If you are talking about the difference between a house that was built in 1959 and a house that was built in 1969, still a ten year difference, your sellers won’t see a difference between those. You are looking for houses that are essentially the same in your buyer’s eyes.
Now assuming you have that, what are the comparable sales? What are you seeing that has sold? In this crazy market it is no longer enough to know the value of the houses that have sold in the last six months. What you now have to do is look more at what is happening. Look at the trend. Break down those comparables and find what has been selling each month of the last six months so that you can see a trend. Yes, six months ago they were selling at this, five months ago they went to this, four months ago they went to this, and so forth. Instead of just saying overall they are selling at this level you want to see if they are going down. Are they going up? Are they staying flat? And if they are going down, at what rate are they going down? How fast is that decline occurring and is it picking up speed? Is it slowing down? What is happening with it?
I also want to know are there buyers on the market buying or is the market stalled? My investor friend said there had been no house sales in the last four months. Well if there have been no house sales, none, zero, in that area that concerns me. I can take a house and I can make it the best house out there at a favorable price and I will attract the buyers that are in the marketplace but if there are no buyers it really doesn’t matter what I’m doing, I’m not going to get it sold.
You have to look at buyers. If there are no buyers I would definitely not be purchasing that house right now. If you are seeing an area that nobody is buying in then that area must be an area of town that nobody wants to live in. Not an area that I would necessarily want to buy in. Generally, that is not the case. The case usually is that houses are selling. For instance, there are 200 houses on the market and in the last 6 months 15 of them sold. Okay? That means 1 out of 10 houses are selling. That just means the market is slow. It doesn’t mean it has stalled out. Now a slow market I can deal with because I can take those 15 buyers and make my house the most attractive deal to them to get them to focus on my house. I’m not scared by that. The only thing that scares me off is if there are no houses selling at all.
The next thing is looking at what is listed on the market in the area today. What’s your competition? And how do those prices compare to what is sold? In other words, if you look at everything that has sold, it was $200,000, but everything that is listed on the market right now is at $180,000. It tells you that the prices are dropping. Nobody is going to list their house at $180,000 if realistically you could still get $200,000. It must mean that they are dropping their price because they are getting beat up by the marketplace.
Which leads to the next question, what are the days on market? How long have those houses been sitting there? If they are well under what houses have sold for in the past I’ll bet when you look at the days on market and how long they’ve been listed they are starting to exceed 60, 90, 120 days. The next thing to look at is how many rehab dollars is it going to take to make the house the nicest house in your price range. I am not saying to go crazy in your rehab and build a palace when everything is on a lower income level. That’s not the point at all. The point is to make it the nicest house in that area. Sometimes making it the nicest house simply means that it has brand new carpet, paint, fresh landscaping, just looks all clean and fresh. Then I want to be able to price it right.
The next thing is to be able to determine how long it is going to take to get this house on the market given the rehab needed. Is it going to take me a month to get it back on the market? Is it going to take me six months or more? The further out obviously the more risk there is. That is why right now most renovators are looking for properties with minimal amounts of rehab so they can get in, get out and not risk being in the marketplace too long. What you want to do is project out when this house be on the market and figure out what the prices will be at that point. If they have been declining at a rate of 2% per month and you are not able to put this property back on the market for three more months, then estimate a 6% decline on the market. Given that this is going to be the estimated value of the property at that point. You will build into your deal the right sale’s price and the right rehab dollars so you are buying smart. If you buy with your profit built in on the front end you will make money on the back end of the deal.
What you want is to price your houses in the middle of the pack. Don’t be the highest priced house. Right now is a buyer’s market. If you were in a seller’s market then you absolutely price it above the marketplace. Give them a great product and then charge them. If you do your research then it will feel like you have this crystal ball that you know what your house is going to sell for and you can buy feeling comfortable that you are going to be able to sell this property. The bottom line is that you have to build your profit in on the front end of the deal.
by Lou Castillo
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"