How To Determine The Value Of Your Deals

New investors often struggle with how to determine the value of a real estate deal.

For instance, if a seller tells you their house was appraised to be refinanced for $225,000 and they are willing to sell it to you for $195,000, isn’t that $30K in profit? The answer, of course, is no for so many reasons, but that’s often what a new real estate investor thinks.

First, a house is really only worth what a willing buyer will pay for it. That’s the ultimate and final answer. However, you won’t know that until the house actually sells to that buyer, but there are ways to make a best guess estimate of what a house is worth and that’s what I will be discussing in this article.

Lenders (often through licensed appraisers) and real estate agents/brokers use the prices of similar homes that have sold in the past to determine the current value of a house. Most of the time they will also look at similar properties that are currently for sale, taking into account how long they have been for sale and how quickly and frequently such properties are selling. This process uses comparable sales – houses that are comparable or similar to the house we are trying to value. We usually call these comparable sales simply “comps.”

Real estate agents and brokers that subscribe to their local multiple listing service (MLS) have access to the data of what has sold recently and what is currently for sale which makes determining the value of a property much easier. There are services available for investors that can give you similar data.

The real question though is how, as a real estate investor, do you determine the value of your deals? Well, let’s take a look at some options and discuss them.

First, you could take a wild guess. I don’t recommend it, although plenty of investors do this.

Second, you can use a website that provides an automated valuation of a home. If you really believe the values that these websites give you, then I have a lot of property that I’d love to sell you at a 50 percent discount of what such websites value them at. In case you missed the sarcasm, these resources are not reliable enough to make investment decisions with. While you can use these services as a tool to see what type of comparable sales data they are using, I do not recommend using them to make a decision to invest based solely on the data they provide.

Third, you can subscribe to a service that is similar to what the real estate professionals such as agents, brokers and appraisers – use to determine comps. If you can purchase access to your local MLS directly, that would be a good option. If not, because it is rare to be able to do so, you might consider a paid service provided by some of the national title companies.

Some counties are starting to offer great comparable sales data on their websites free or for very little charge.

Or, as a last resort, you may find another real estate investor in your area that is willing to work with you to help you determine property values using their tools.

Fourth, if you are not ready to spend money on a subscription, you might try to team up with a good real estate agent, broker or appraiser and see if they would be willing to help you determine comps and values on properties you are considering buying. Realize though that appraisers are usually paid for doing this… that’s how they feed their families and asking them to do it for free rarely goes over well, unless there is a tangible benefit in it for them. Real estate agents and brokers might do this on a house that you are considering buying with them that is listed in the MLS. Most will not do it for houses where they will not be brokering the deal.

Once you have the data, there is both an art and a science to using what has sold to determine what the expected value of your property is. I will delve further into this in future articles.

Until my next post,

James

P.S. Need help with deal analysis? Tap into our consulting sessions and have us help you learn deal analysis using your own deals with our Real Estate Investor Bronze Membership.

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