Making sure you have the correct numbers when investing in real estate can help keep your business in the black and get your pants ripped off. A crucial aspect you’ll need to be aware of is how to calculate the worth of a property you invest in. This knowledge can be helpful regardless of whether you’re selling, buying or simply looking at the value of your property. Do you have the ability to calculate the value of your real estate investment property quickly and accurately? Or are you merely stumbling around on the outskirts, estimating it was ballparking and trying to get “close enough?”
Estimating home values is easy when you know where to examine them. The most effective method is to evaluate your comparatives, or “comps.”
Comparables, also known as “comps,” are comparable to the property you’re trying to evaluate. They can give you an idea of the value of the property worth. However, I’ll discuss this further down. Let’s first discuss why you need to get your estimates the first time around. Then, explain what competitions to look for and what to do if you need help meeting your goals. Let’s take a look.
THE IMPORTANCE OF GETTING THE MOST ACCURATE ESTIMATES IN REAL ESTATE
I’m sure you understand how crucial it is to match your estimate to the smallest possible amount, but let me for a second. Some experts think that, in the property business, a one-per-cent deviation from the forecast could result in a 10% variance in the final sale price. Let’s look at a reliable estimation of the value a property can make for your company.
Much can depend on making the proper estimate depending on the amount you earn and the time required to sell. In dollars, If you think of a property as worth $200,000 and it is sold at $210,000, you’ve earned an additional $10,000. If you calculate the property’s value at $200,000 and it’s sold for $190,000, and you lose $10,000, you’ve just lost. This is a significant distinction when you’re beginning, and every dollar matters, and that’s why it’s essential to be as exact as you can when estimating the value of a home.
There are numerous things to consider when estimating an investment property, from the dimensions and state of the building to current market conditions, which I’ll discuss below. To get this down further, it is crucial to your income stream to consider all of these factors when estimating your property and make it as accurate as possible.
Take this part seriously.
THE QUICKEST (AND EASIEST) WAY TO GET AN ACCURATE PROPERTY VALUE ESTIMATE
Now that you’ve been a bit scared about making the proper estimates Let’s go over what you must do and how to do it.
Step 1: Find 3 – 4 Comparable Sold Properties
The best way to estimate a home’s value is to examine comparable properties in the same area. They can be located by looking up real estate sites such as Zillow and Redfin. These sites allow you to look for properties within the area you are interested in and also view an estimated value for each property that will give you an understanding of the value of an investment home located in a location.
My general guideline is to locate homes within a 1-mile radius of similar characteristics. You should generally have the exact bed dimensions, square footage, baths, and other aspects of the house. You’ll want to select the most affordable benchmark if you’ve got 3-4 room alternatives. Better to underestimate than underestimate and get into the red, so you should always pick the lowest-cost comp to be your primary one.
Step 2: Find 3-4 Comparable Properties Currently on the Market
Once you’ve sold your comps, you must examine what’s available. It’s essential to explore the current listings first due to the speed at which the market moves and how quickly data can become outdated.
It is essential to be aware of market fluctuations even if only the last few months have passed. Consider thinking about it this way Imagine that you’ve discovered what you believe to be a good comparison, but it’s been eight months since you made your sold property study, and the market has slowed by 5 per cent. For a home worth $200k, it’s $10k that you’re missing out on.
Utilize the same criteria you used previously, and check out the homes currently on the market. Pick the most affordable one as your baseline to determine whether your offer will be profitable.
WHEN TO THROW COMPS OUT THE WINDOW
Although comparables are your best choice for getting the most accurate value of your property estimates, there are occasions when they need to be better. Here are some factors that can make your comparables less than perfect.
When the Comps are Too Old
Similar properties that are older can be untrue. The market can shift significantly in a year, and homes that are just a few months old are not a true reflection of the market conditions.
When the Comps are From a Different Area
If you’re trying to determine the property’s value in a different region than the comparables, then the prices could be affected. The market for property in other areas can be quite different, which is why it is essential to utilize comps in the area you’re trying to value.
My 1-mile radius is an ideal rule of thumb; however, use it only in some scenarios! It’s normal (especially in cities with large populations) to find a beautiful area of town surrounded by less pristine areas that are indeed within a mile.
It’s easy to see why this could be a problem without a better understanding of the neighbourhood; you could find expensive comparables in a better neighbourhood since they’re within a one-mile distance. However, if your house is in a less desirable area, even the most minor work could never reach the worth of homes on the street.
When the Comps are Not Similar Enough to Your Property
If the properties being compared do not match the investment property, you’re looking to purchase. You must determine if you’re willing to compromise your estimation or leave the idea of finding additional comparable properties out wholly. A few things to take into consideration when searching for similar properties to your investment potential are:
- Square footage
- The number of bathrooms/bedrooms
- The kind of property (single-family condo, townhome etc.)
- Amenities – pools, central air, garages, innovative home capabilities, etc.
All of these are shifting components that could drastically alter the accuracy of your comparable-based estimations. You’ll have to decide if you’ll need to significantly undercut your estimates to account for these differences or eliminate the concept of using comps entirely.
The Surrounding Locations are Too Different
Be aware of what is around the property. For instance, you may come across a home which appears to be priced under $30k, and you believe you’ve discovered your next fix-and-flip! After a closer look, you realize that the property is situated in a crowded street near Burger King – thus explaining the price drop of $30k.
The information in the region won’t be accurate because there’s not a single location next to Burger King! Burger King!
SHOULD YOU ADJUST YOUR ESTIMATE IF THERE ARE BAD COMPS OR SCRAP USING COMP DATA COMPLETELY?
I cannot advocate for either method over the other since the decision to be flexible with your estimation or to eliminate competition for an indicator is contingent on the risk you’re willing to take and any other feasible options you could have. I suggest taking your time, trusting your gut, and not letting the financial gain cloud your judgment.
WHAT TO DO WHEN THERE AREN’T ANY GOOD COMPS
Let’s say that you’ve ended in a low or no comparables. Is that a sign that you’re no longer in the position of finding a reliable estimation? Not entirely. There are a few methods to estimate the investment properties you own accurately.
Talk to a Real Estate Agent
An agent for real estate can assist you in finding comparable homes in your local area matching the property you’re looking to purchase. You’ll also be able to give the buyer an estimate of the price comparable properties have previously sold at.
Look at Recent Sales Data
If you do not have a real estate agent, you can have a good notion of what your home is worth by reviewing the latest sales data. The data is available on sites like Zillow (head into their Research section) and Statista.
Ask a Contractor for an Estimate
If you need more clarification about the property’s worth, it is possible to ask an expert to estimate how much work will affect the appraisal. It’s unlikely to get any advice in determining the selling price you’re likely to receive. Still, you can seek assistance from your contractor in deciding whether rehabilitation work will enhance the property’s value and increase its chances of being sold.
Look at Market Trends
Apart from looking at the latest sales statistics And recent sales data, it’s also an excellent idea to study market trends. This will provide you with an understanding of what the market is doing and whether it is the best time to purchase an investment house.
Ask a Hard Money Lender
If you have an existing connection with a hard money lender, you can make use of that to help. DoHardMoney is among the few lenders to offer independent real estate evaluations. For these assessments, we employ two highly experienced real estate experts in your area to assist you in going beyond your SOW and appraisals of each deal. Some lenders may need help to perform this. Still, most reliable hard money lenders are experienced enough to suggest the best places to look or do, particularly when we’ve loaned money to investors from your region. The concept of hard money was explicitly designed to be used in the property market, which is why we know how it feels to be stuck in a dead-end comp more than traditional lenders such as banks or credit unions.
Talk to Other Investors
Never underestimate the potential of networking! Investors are a great source for finding comps. They will probably possess information on recently sold properties in the region and can provide insights into the properties being sold and their prices. I’ve noticed that new investors hesitate to form relationships with their peers because they fear receiving poor advice or being victimized, but this situation is seldom the case. In fact, the majority of investors I’ve spoken to have been wonderful and friendly. All of us started at zero and required that extra hand to lift us up, know?
The ability to estimate the value of your property accurately is crucial to your success as an investor in real estate. However, it requires effort on your part to study the local market and the variables that determine how much your home is worth. To avoid putting your company in a position that results in financial losses, don’t underestimate the value and overestimate the costs.
What are your experiences with finding deals when there weren’t any conventional ones available? Comment below in my blog and tell me what other readers know!