If you read my last post about The Biggest House Flipping Mistake You Can Make, then you already know why it is vital to your real estate business to be able to determine the real value of a property before you make an offer. We’re going to learn today how to determine property value the right way. Most of us reading this are likely wanting to flip homes and learn what a true ARV, after repair value is.
Property is typically determined it’s value in one of two ways. If we have a residential home it’s typically done with comps, which stands for comparables, or it’s a commercial property, which is done with a NOI and a cap rate.
For this blog post, we’re going to probably stick to residential properties and determining the residential value because many investors reading this want to flip homes or have rental houses or that kind of thing. We can do another blog post all together on cap rates and net operating incomes. This is more like running a business.
How do we pull the right comps? One of the major problems people have when they get into real estate investing is they don’t know how to pull a proper comp. Now many people say ask your realtor, ask your realtor for comps.
Now the problem with realtors, realtors and investors are always saying the other guy has a problem and it’s true. The realtors typically are very uneducated individuals. They went and worked as a shoe salesman or they had a job somewhere, they decided they wanted to make more money so they went and took a real estate course, which is a course not in property but a course in compliance.
Most realtors took their realtor course for 500 bucks or 1,000 bucks, they have a part time job. They learned about compliance, how to legally fill out the paperwork and that’s all the training they ever took. There’s some realtors that will take their customers to a house and say, this house is blue, it matches your yellow hair, you should buy this house, it looks nice. That’s how realtors run, they do that for 20, 30 years.
We don’t want to necessarily learn how to pull comps like a realtor. What we want to do is learn how to be like an appraiser. Now an appraiser is somebody who also went to school but they learned how to appraise and value properties. Appraisers typically work for banks or lenders and they go out into the market, they pull comparables and the appraiser actually went to school to value property. They can actually figure out what the property should be worth according to the bank.
There’s something else you got to know, I want to teach you something here, the government has a thing called a tax assessment. Now most people, a lot of homeowners, they’ll say, hey I have the appraisal done and they’ll pull out the tax assessment from the city. The tax assessment does not have anything to do with the actual value of the property. The common man, who owns a home thinks that his tax assessment is relevant. It may be too high, too low, guess what, the government has not been in your house since it was built.
This is the most valuable way to pull property value the right way. You need to go and learn how to pull property value like an appraiser, get the comparables. Now comparables, to be properly done, need to have the same vintage. Typically, this is everything from 1910 to 1919 or 1920 to 1929. I’m in a city with lots of old properties, so I’m using these numbers. Maybe you’re in a city, maybe you’re in Dallas Texas and we’re talking about 1980 to 1989, whatever the vintage is, it must be in the same decade. Every 10 years construction is changing and it’s usually becoming some sort of more advanced or some sort of cheaper and that is how we do these types of matching. You need to match the home into the same vintage.
Second thing is you need the same square footage. You need to be within 300 square feet of the other comps. The next thing that you need to do is to make sure the comps are done in the same time frame. I like to say 30 to 60 days is probably the freshest, most relevant comparables. You can’t take something from 2010 and use that in 2016, that doesn’t work.
The next thing is, you can’t have any influencing factors, so I’m going to call this onsite factors. Onsite do you have telephone poles, big telephone wires or do you have train tracks next door? Train tracks are not good for homes because typically crime and train tracks go together.
The next one is, school zones, the home must be in the same school zone. People buy homes, not because they buy homes, they buy homes to go to the local school. Typically better neighborhoods have better schools and people want to go to the school.
Next thing, this is very relevant in America, you want to check out sex offenders. Are there any sex offenders next door? They actually have a registry in America checking to see, is there a sex offender next door? Another thing you want to check, this is a problem I’m currently having is, I had a house where someone was murdered in it and I’m trying to sell it, it’s very difficult. You can Google the house and figure out has there been any crimes specifically in that house. I didn’t Google it because I just typically bought so many homes I skipped that one step on one deal and now I’m paying for it because I have a murder house.
Another thing you want to check, we’ve got the square footage, we’ve got the time, we’ve got the vintage, we want to check the style. You got to make sure the style of home is the same, so that’s a bungalow or a two story or a one and a half story or a one and three quarters story. That needs to be the same type of style of house.
In my market something that’s very important is the basement. Basement type needs to be the same. Believe it or not the same house in my market with a three quarter basement and a half basement and a crawl space or a full basement have four completely different values.
We also have something to check out, does it have a garage? Some cities, some neighborhoods garage’s can be worth $10,000 or $20,000 more just because it has a garage. We got many different types of ways that you can compare properties to make sure that they’re the same.
Now what this will do, you can take this, sometimes you can’t find a house that really fits all this, so you’ll do a dollars per square foot approach. That’s when you take the comps as close as you can get and you’ll do a dollars per square foot approach.
For example in Winnipeg where I’m at, homes retail, sell for $200 a square foot, wholesale you can buy for $100 a square foot. I know generally in most neighborhoods we’re probably trading at 200 a square buying at 100 a square. That’s a great a way to do it and the last way that I like to do, or to make sure comps are accurate is look at the pictures. I call it apples to apples.
You can actually look at the homes and click through the homes and see, does this house actually look like that house. Between these approaches, getting all this data matched up doing the dollars per square foot and doing an apples to apples approach, I’m confident, guys, that you can pull some pretty valuable ARVs and after awhile you’re going to start to learn the market and think like an appraiser. That’s how you determine property value the right way for residential.
I’m Stefan Aarnio, respect the grind. Like and share to get the word out. Leave a comment or ask me a question below.