Originally Posted by John Dessauer on January 4, 2016
One of the reasons inexperienced real estate investors often fail is because they pay too much for properties. Over-priced real estate can’t be resold for a decent profit, making the deal worthless. However, there are several ways to accurately estimate a property’s true worth before a purchase is made. With careful research, the true value can be determined and a sizable profit can be made for the investor.
First, if your dealing with a residential property (under four units) comparable sales of nearby properties that have sold recently should be considered. Usually, the comparison of three properties are thought to be adequate research for this purpose, but why not more? The more information gathered means the more accurate the final conclusion. The properties sales to be studied ideally should be within a one-mile radius, or as close as possible in location.
Secondly, if your dealing with a commercial property (over four units), like apartment buildings, you should look at the income produced and the market cap rate. Those items may be a bit more in depth for a beginning investor, so be sure to reach out to your local team/network for assistance.
The next step involves research to find out the dollar amount the property has been declared to be worth by a county property assessor. This information is usually less than the appraised or market value, but it is worth knowing. Tax-assessed value can be acquired on the Internet or at the courthouse in the county where the property is located. Also, information on the amount of property tax paid yearly can be collected at the same time.
Next, research any money owed on the property, such as mortgages or loans. Obtain all totals in writing from the mortgage company, if possible. Are there any other expenses involving the property? This is where it will be useful to know how much yearly property tax is paid. Investigate whether there are any back taxes owed as well.
Are there any repairs that need to be made before the property can be sold for a profit? It is a good idea to have a property professionally inspected before purchase. Some buyers wisely request in the sales contract that the sale of the property is contingent on passing this important inspection.
A property inspection is definitely not the area to scrimp on money. A knowledgeable inspector can save a potential buyer from making a very costly mistake. Out-dated and dangerous wiring, hidden water damage, or a cracked foundation are all flaws a competent inspector can discover. Also, environmental hazards can be uncovered, such as black mold or asbestos that would be very expensive to remedy.
If problems are found that need to be corrected, get several estimates on the work that needs to be done. Be sure to get all work and material estimates in writing and not just a verbal contract. The results from that inspection can also be used to your advantage when negotiating the deal.
The last step is to bring all of this information together for a final analysis. Add up the property assets and compare this with the money owed on the property and the cost of needed repairs. If the final amount shows a reasonable profit can be made in the reselling of the property then consider it a good investment.
We often discuss these things in more details on our weekly webinars. If your are a member of Real Wise, don’t be afraid to discover all of the archives that are stored on the website to find out more.
Remember, “Wealth has nothing to do with money, success has everything to do with failure, and life is a simple as you make it.” – John Dessauer