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Make Them Prove It – About Deal Evaulation
What’s a Deal? It’s in the eye of the beholder as they say, by that I mean a property is only really worth what a buyer values it to be worth. If you are using a bank loan to buy it, then is it only really worth what the appraiser feels its worth and not a penny more (unless you want to bring more money to the table to offset the bank’s risk)
If such a great deal, why is it for sale? This is a valid question that needs to be “gently” asked to the seller / broker or wholesaler. The reality is that many sellers are only selling in order to capitalize on an “up” market, frankly I cannot blame them one bit.
Just because something is “for sale” does not mean its a good deal or that you have to buy it. Lately, a few buyers told me they were “lucky that the seller let them buy” (I wish I was making this up).
An important question to know the answer to is why the sense of urgency to sell, often it’s just a pushy Realtor or wholesaler wanting to lockup a deal and move on to the next one. To be sure we buy when the numbers make sense I will touch on some strategies below to help you determine the value for a flip or wholesale deal by using comparable sales. Please keep in mind that comparable sales are not as important with income properties, instead the income of those properties better ties into the value.
Valuation for Flippers / Speculators:
Use FHA Appraisal Guidelines! Why? Because your buyer’s appraiser will! As I stated above, the property will have to pass appraisal in order for the buyer to qualify for the loan in the first place, therefore use the standards they use to check yourself.
Don’t think that recent foreclosures in the area won’t impact the appraiser’s judgement, although in most cases they supposed to use foreclosure sales to compare arm’s length traditional sale values. If a neighborhood has a ton of foreclosures, this could swing the appraisers opinion to a more conservative approach which will have an impact on the final number.
In short, what has happened in the past in regard to a buyer’s perceived value will impact the value of your property now and in the future. This one major point is why I buy multi-family property.
Some of the appraisal guidelines / standards include:
- Using comparable sales that are located within a ¼ mile radius of subject property, if none found, the appraiser will extend out gradually until sufficient comparables are found.
- Use properties of similar construction type and architectural styles: Wood framed houses should be used as comparables for other wood framed houses. Ranch homes should not be used as comparables for victorian homes, etc.
- Keep the square footage of comparable properties within a range of +/- 20% of the size of your house, then adjust as needed to drill down your values.
- Be sure to do your best to match up bed and bath configurations as much as possible (3/2 houses to 3/2 houses where possible)
- Stay within 10 – 15 years of build date if at all possible
The sales comparison approach requires adjustments to be made because no two properties are identical. Adjustments must be made for any differences between the subject property in each of the comparable sale properties.
Adjustments are made for transactional differences changes in market conditions since the date of the sale for example and property differences (size, location, etc) All adjustments necessary to achieve the maximum degree of similarity must be made to each comparable property not to the subject property. The intent is to adjust the comparable property to make it as similar to the subject property as possible.
If a comparable property is inferior to the subject property on a specific feature an upward adjustment is made to that comparable property which basically means we are adding additional value to that property for what it is missing. An example of this is when your subject property has a garage, and let’s say the garage is worth $10,000 in the marketplace, we would therefore add $10,000 to the sales price of the comparable sale to make it equal with the subject property.
On the flipside if the comparable is superior on a specific feature a downward adjustment is made to the comparable property. An example would be if the comparable property has a swimming pool but the subject property does not, you might deduct $15,000 let’s say from the value of the comparable property. What’s important note here is that under no circumstances do you adjust the value of the subject property, you only adjust values of the comparable properties.
This amongst many other relevant topics are just part of the skills that are taught in the upcoming Mailbox Money Mastermind. For those who are “waiting for the next one” please understand that this will be the LAST one so head on over to http://MailboxMoneyMastermind.com and get registered to learn exactly what you need to escape the rat race this year and forever!