Knowing your home values and how to pull and evaluate comps is vital to your success in real estate.
What’s a home worth? How do you know? What if the comps are off?
HOUSE VALUES FOR REAL ESTATE INVESTORS
Knowing your property values directly influences your success as a real estate investor. If you know your values you can instantly spot a deal, and move faster than the competition to secure them, and profit from them. Failure to know your property values well can be a drag on your time, the velocity and height of your income, and can leave you stuck.
Appraising real estate is both an art and a science. Yet, when it comes to negotiating acquisitions, borrowing working capital, and reselling property investors have to know their hard numbers, and be able to justify their position with figures. This can include obtaining appraisals, repair estimates, and pulling comps.
THE DIFFERENCE BETWEEN HOME VALUE AND REAL ESTATE COMPS
In practice a house may be worth more or less to different buyers and lenders. Sellers and agents have the freedom to set whatever asking prices they feel like. So how do investors determine real market value? How do you accurately find and select comps to back up your offers, loan requests, and asking prices?
‘Market Value’ is generally determined to be the price which buyers are willing to pay for a property. This is somewhat influenced by the lending environment, but really commonly comes down what other similar properties have been selling for. This is where comps come in.
Replacement Cost is another method of valuing real estate. This figure can come into play when obtaining insurance, and getting a loan, but isn’t the most common way to value residential real estate. However, it will give you an idea of how much you are paying in relation to the cost to build new.
Cap Rate or Income Approach. The income approach is commonly used for appraising rental homes and commercial real estate. Commercial real estate such as office building and retail shopping centers, or apartment buildings are often priced based on their NOI (net operating income) potential, yield, and cap rate. Lenders typically minus vacancy and expenses when giving credit for rents, as well as reserves for capital improvements.
However what investors are normally looking at to assign a value to a house deal is Market Value based on sales of comparable homes. These are your comps.
HOW REAL ESTATE COMPS ARE DETERMINED
Comps are chosen based on comparison, proximity, and time.
To accurately determine the value of a property choose comps that are:
Pick comparable property sales with the same number of bedrooms, bathrooms, and similar square footage. Also look at view, size of the lot, and the neighborhood, as well as condition of the property.
Lenders, appraisers, and buyers will use the comps which are the closest. Typically this must be within a 1 mile radius of the subject property.
The Most Recent Recorded Sales
Use comps which have sold in the last 6 months. The more recent they are the more indicative of the current market they are considered to be.
Home Values and Comps for Real Estate Wholesalers
The most important factor in comps for real estate wholesalers is the quality of your data. If you have poor data and comps you’ll waste time on dead end deals while your competition is quickly scaling their volume and compounding their financial gains and market share. So watch where you get your data and comps from. What are estimates based on? Is it the freshest information available? Is the data accurate?
As a property wholesaler you’ll also look at the specific scenario, condition of the market, and market trends. You’ll have an as-is value, and a subject-to or after-repair-value (ARV).
Types of valuation to consider:
Property Values in a Rising Market
Some lenders and buyers may be willing to assign a higher value, pay more, or lend more on properties in a rising market. This is not a good play for wholesalers who are going to resell properties as is in a matter of days, but can be a factor for others. During the boom of the early 2000s appraisers and banks were often comfortable assigning values as much as 20% higher than their current market value. They calculated that due to the market rising so fast, that by the time the file was reviewed and the loan was sold on that the property would have achieved that higher value.
Property Values in a Declining Market
The reverse of the above quickly became the norm when the market begin degrading and declining in 2005 to 2008. Mortgage lenders began shaving down LTVs, and marking down appraised values. By the time an appraisal was done and in review the bank would argue the market had gone down, would demand another appraisal, and so on. Then lenders began loaning based on the lowest amount a property would sell for in an emergency fire sale.
As-is valuation refers to the current property condition. What is the property worth in its current condition, right now? This is a value that is particularly important to investors. Investors are often dealing with distressed property. These can be older homes, neglected homes, and vandalized villas, properties which has seen fire or storm damage, and more. Neighboring homes which are identical in bedroom count and size may be selling for more if they are in better condition. The as-is value highlights this difference. Simple being ugly and dirty may not take much off the value. But items like missing appliances and major electrical or plumbing components, structural damage, and seriously outdated items may make a difference.
Subject-To & After Repair Values
A subject-to appraisal or ARV calculates what a property should be worth after specific repairs are done. Investors can use their own comps to estimate this value. Or new investors, and those using bank financing can commission a licensed appraiser to perform this type of appraisal. This can help give a much clearer figure on ARV, and what the return on making specific improvements would be. Many lenders will loan based on this value. Some will provide funds for the repairs as well.
Other Factors Impacting Property Asking & Sales Prices Confidence
Buyer confidence has a big impact on what people are willing to pay, and how much they will bid up prices. This can be impacted by the news, the point in the real estate cycle people perceive we are at, and the global economy. In a rising market some will bid beyond the comps.
What the buyer will do with the property makes a difference in the value to them too. A rehabber who can add value and who has a good team at good rates and can operate efficiently may be able to pay a little more. A developer who just needs that last parcel to complete the footprint for a giant condo building may pay a premium. A home buyer who has dreamed of owning that specific property for a decade may be willing to stretch.
Who the Buyer is
Continuing from the above the buyer themselves has an impact on the sales price. Are they cash rich? Are they a deep pocketed fund? As they a foreign investor desperate to get their capital out of their home country or to obtain residence in the US?
Financing Being Offered
Low interest rates allow buyers to pay a lot more for the same property. The reverse is true too. Access to credit and down payment requirements play a big role. If self-employed individuals can’t get a loan that’s a problem. Verses when banks are offering 125% financing, or there are 100% No Doc and NINJA loans or seller financing.
Carrying on from the above affordability really plays a role. This not only incorporates current interest rates, but also property taxes, income taxes and capital gains taxes, and the amount of income and wage trends in the economy.
While visual appeal may have little to do with actual appraised value it can influence how much people will offer for a property.
Supply & Demand
In addition to the above factors values are impacted by wider supply and demand. How many buyers and renters need a place right now? How many homes are up for sale or are being built and are coming on the market?
Don’t be overly optimistic or exaggerate when providing comps to end buyers. They know the market too. You have to provide realistic information if you want your deals to be taken seriously and to maintain your credibility, and ensure repeat business and referrals. Earn a reputation for understanding values and trends and how to put comps together and you’ll be trusted and stand out from the crowd. Get the best comp tools you can, learn how to use them, let the numbers do the negotiating, and outshine your competition.