The power of the expanding internet, together with the advances in real estate Multiple listing Services (MLS), has place increased power in the hands of individuals… power that can provide you the ability to determine property values, extended history of a property, its past sales, and ultimately, its future value! (all in the absence of an appraiser)
So, you’re starting your new Real Estate career. You believe you are ready. You are organized, have a vision, mission, a game plan, a simple business model, a stash of funds, some qualified staff, and you’ve done some reading and taken some sources. You are ready to go forth and begin your business! It seems like you’re ready, anyway, right?
Well, as Clint Eastwood would say, “Are you feeling lucky? Are you?”
You must be able to purchase the property, make repairs / improvements, and sell the property for a reasonable profit. It sounds simple enough….. but it is not. There are many things that you need to know, many things to manage, and many things that can go wrong. If you are not aware of them and do not track your progress, you are likely to have difficulties and even fail. This is where the majority of new investors take the hit!! I’ve seen it many times…because I have purchased their partly-finished rehabs and sold them myself for a reasonable profit!
The key to finding good property is good analysis. If you are doing your job correctly, you might have some friends tell you that you need to quit playing around looking for the right piece of property and just get on with it… pick something, for gosh (your word choice here) sake. Quit doing the analysis-paralysis stuff they say! Are they right? Not necessarily.* In English you learned about past, present, and future tense. Likewise, in real estate investing you need to know about past, present, and future value.
Until you know the answer to these three questions, quite honestly, you are not ready to put an offer on the table!!
Outside of direction (mission and goal focus), organization, and financial savvy, and workable properties location, the single most important tool a good investor must have is the ability to determine past, present, and future value. Here is why it is critically important:
Past Value:
Except for natural catastrophes and changes in city plans / zoning, if you know a property’s appreciation, and sale turnover rate, you know its historic value. (It is very likely that a property, showing good appreciation and infrequent turnover, will continue to do well in the future!)
Current Value:
You have to know the current worth (value) of your property (hopefully, without having to consultant an appraiser every time you look at a prospective investment!) Otherwise, you do not know when to cap your expenses (i.e., when you have reached market high).
Future Value:
If you don’t know what a property will be worth when you have finished developing it (i.e., you don’t know the target value), then how can you determine what resources are required to complete it (how much money and staff hours are needed)? You would not be able to determine whether the investment is workable from the very start!
This information is so critical to know, that it continually makes or breaks the investment, even if the timing, choice of property, staff, project management, and energy for the project are all on the positive.
Regardless of whether you have decided to find rentals for long-term appreciation (single family home, a double, multi-units), to flip properties for more immediate cash, or to rehab properties for future sales within months or more, you need to find a property that works, and a good percentage of them will not!!
Your first activity: To find workable investment property.
First, if you are not a Realtor, then link-up with one you trust and who will work with you. Ask them to run MLS (Multiple Listing Service) listing information according to your requests. If you have a property in mind from a foreclosure list or other sources (called subject property), then have your Realtor run your requested information against this subject property:
NOTE: If you find that there have been few to no sales of properties in the area of your interest, then you should not work this area. Find out why there are no sales. Remember, no matter how great a deal your find in a location, you have to find that properties are regularly selling in that area.
You are ready to determine, for each of your subject properties: Past history of value, a review of current value, and to determine future value.
For each of your 3-5 subject properties, perform the following steps:
Steps to Take:
1. Select the areas of the city in which you wish to find property. Start searching using a price ranges of $0 to the top limit of your purchase range. Pick properties in generally good market areas (good location, 3+ bedrooms, 1-2 baths, 2-car garage, buildings with potential market value, etc). Ensure your subject property is in a lower priced category, due to neglect, seller emergency or default, or some flaws you will on which you will make improvements. Pick at least 3-5 such subject properties.
2. Have your Realtor run a Street Search list for all properties within a number of blocks of your subject property The street search list will show you all currently active listings, those that expired (prices too high), withdrawn (no longer listed), or sold. Each of these categories will be of use to you. You could narrow this search to properties that have features like your subject property (i.e., same number of bedrooms, zip code), but I would not go too far with this, as there will not be that many active listings to review within a several-block area. NOTE: If there are few to no listings except your subject, you may need to do a Radius Search (1/4 mile or such)
a. Determine Upper-Limit Purchase Value for Subject Property: Start with active listings Keep two lists of Active properties. One list shows properties having the features of your subject property but, which are at the top of the market. This will give you some information about what you may be able to attain (price-wise) when you finish working on your subject property. The second list shows the bottom of the market - properties like your lower-cost subject property. If you determine the average of this bottom-market list, it should give you the upper-limit amount you should offer for the subject property.
b. Next , Review Sold Properties from the Street Search List. Look for properties on the Street List that have similar features of the subject property, are at the upper-end of the market, and that have sold within the last 2 years! Review the listings. If they are similar to your subject property, determine the average sale price for recently-sold properties in good condition.
c. Now, determine the price difference between the average sale price of good-condition properties (step 2b) and the upper-limit amount you have targeted for the purchase of subject property (step 2a) above. This will provide you with the amount of money you have to work with in renovating the property!
3. Have your Realtor use the MLS to run Past history listings for your subject properties. Have your Realtor perform and print an Address Search list for that property (no criteria listed, except list date period up to 10 or more years back). You are looking for past history of sales on this property. [Why? Because you may find that this property was sold several times for much lower prices than the current list price, or that the sales prices have been flat, or the advertised improvements on the property now were made some years ago rather than recently, etc.] This history will give you an understanding of the lowest purchase price you can offer that most probably will be accepted on your subject property.
4. Now ask you Realtor to run Tax information on each of the actively-listed properties that have features like your subject property. This tax information will tell you:
a. Past sales figures and dates
b. Tax values for the properties
This will be helpful, as the past sales data will be in addition to the MLS history you ran earlier and the tax values can be used to cross-reference the values of the properties. (i.e., you could do ratios of the tax values to MLS values for properties that sold in the recent past. This value can be used to calculate a more accurate value for you to use in purchasing your subject property.
Past History:
Have your Realtor perform and print an Address Search list for that property (no criteria listed, except list date period up to 10 or more years back). You are looking for past history of all the sales on this property. [Why? Because you may find that this property was sold several times for much lower prices than the current list price, or that the sales prices have been flat, or the advertised improvements on the property now were made some years ago rather than recently, etc.] This history will give you an understanding of the purchase price you can offer that most probably will be accepted.
* What is analysis-paralysis: Analyzing a property beyond the requirements that allow a person to make a decision without undue risk. (Every development activity has some risks associated with it.) When your analysis provides you no additional value toward making a good decision, you are stalling. Perhaps you are fearful. It is time to take the risk or decline it.
Monday, May 19, 2008
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