One of the hardest things to do in real estate is to not get emotionally attached to a property. That “perfect deal” may be anything but—and you want to find that out before you commit to the purchase. Determining property value can be tough since it is fairly subjective. But with the following checklist, you can make a better determination of what that house is truly worth, and if it is the right deal for you.
Comps, or comparable sales, are the natural starting point for determining property value. After all, if the neighborhood is selling well, and houses are showing a steady increase in value from year to year, determining purchase price can be pretty straightforward. Whether for investment purposes or for primary residences, all buyers start off by looking at what similar houses are going for.
This information is easy to obtain, too. A quick search in the MLS (multiple listings system) will give you the data you need to make an informed decision about the current price point for that area with that size of a property. The closer the recent sales, and the more similar (not just in size but in overall quality), the easier this becomes.
While comps are great, they cannot be your only measure of property value. Nothing beats firsthand information, so trust your eyes as much as you trust the comps. Complete a thorough walk-through, make notes, and look for any signs of:
When you are inspecting the property for damages, check the basement, any crawl spaces, attics, and closets. Water damage can lead to mold. Fire damage can mean the structure has been compromised. Faulty electrical wiring can cause fires. Cracks in the foundation can mean costly repairs, as well.
When looking at the property for its potential, consider whether you can easily open up the interior space by removing non-load-bearing walls. Older neighborhoods often do not have garages, so if you have the room to add one, and city codes permit one, it’s worth looking into.
When you are looking at adding value, don’t forget to factor in your likely construction costs to make those improvements. This is where people can get carried away by the excitement of what the property could be, that they forget to ensure they have the budget—and that the house will increase in value enough to warrant it—to move forward.
Another important factor in determining an offer price for an investment property is the seller’s motivation level. Often, sellers who have properties in need of repair are looking to close a deal quickly and move on. Maybe the seller inherited the house from family. Or perhaps another investor had plans to rehab it but circumstances changed and he needs to get out fast. Motivated sellers are going to be more willing to flex on the list price. Knowing the circumstances behind the sale can help you determine a good value.
Investors do well to remember the sale price is not the only expense in this process. Once purchased, that property will have continually-accruing expenses until it has sold again. These carrying costs include interest payments on the financing loan while you are rehabbing it. They also include utility payments, property taxes, and insurance. If you are considering a property that is in need of extensive repairs, you will need more time to complete that work than if you are buying a house that only needs cosmetic updates. While you should stand to make a bigger profit on a house that needs more, you must factor all expenses into your decision-making process.
Finally, have an exit strategy in mind before you commit to a particular property. By this, we mean having a clear vision of what you intend to do with the property. Five investors can look at the same property and come up with five different offer prices. Where one investor may be looking to make minor changes and resell at a more modest price, another investor could intend to change the layout, the number of bedrooms and bathrooms, and completely change the target price point and buyer. Know where you are headed before you buy the property. That way, even if you have to make some course corrections along the way, at least you have a strategy that works with your budget and end goals.
Determining property value is not always straightforward, but knowledge is power; the more you know ahead of time, the more accurately can you judge your expenses and final selling point. All of these factors will help you determine the price you are willing to pay to start your property rehab journey.