The Value of Analyzing Your Market For Beginning Real Estate Investors
- December 29, 2020
- Aaron Graham
When you are looking to make offers, remember your obligation is to the most important person in your company; the shareholder. Most likely, the shareholder is you. You should have set criteria on what a profitable transaction looks like, and you will need the courage to stick with that criterion in order to have success.
The absolute key to meeting your goals and having your success as a Real Estate Investor in buying and selling single family residences, multi-family units, and/or commercial real estate is a complete and thorough understanding of VALUE. Understanding the value of the potential property is the basis for all sound investment decision.
If you want to buy a car, you can research Patrick Darbois Immobilier value to assist you with finding the accurate value. In the stock market, you have daily stock indices which can tell you exactly where a security is priced. But real estate is much more subjective, and you must be arduous in your research to be able to gauge the estimate of the property.
In my experience, the number one reason why NEW Real Estate Investors become FORMER Real Estate Investors is due to poor property valuation. I remember recently talking to a new investor who was excited about an 800 sf ‘shack’ that he could acquire for $190k. He was excited because there was a house next door, that was 2500sf, that had recently sold for $600k. So in his mind, the After Repair Value of his shack was about $600k! In reality, he would’ve gone bankrupt on that house.
So why do people make these career-ending valuation mistakes? There are several reasons. Some people will take the word of a Realtor or Broker as fact and make their decision based on their recommendation. However, it is the job of the Realtor or Broker to sell the property and will overemphasize the good qualities of any property. Some people are lazy on their research. Some people just go off their ‘guts’ or from speculation. Others are so desperate to make a deal that they will accept whatever offer comes their way. None of these are good reasons to determine value for a property.
But the most common reason why new investors over estimate a properties’ value is they fall in love with how much the property may be worth after it is fixed up. For example, let’s say a property is in bad shape, needs a lot of work to get to market value. The best course of action would be to bulldoze and rebuild. If you were to place a 1000sf house and the cost to rebuild was $100/sf, then it would cost $100k to rebuild, plus holding cost, cost of borrowed money, etc… The after repair value is $250k. The Seller is asking $150k. Is this a good deal? No. But too many times, the investor falls in love with the $150k in equity and makes a poor choice.
The key in this situation is to pick up the property for what it is CURRENTLY worth. The Seller realizes that the neighborhood is highly valued and speculates that it will continue to appreciate, and feels that he or she deserves a slice of that equity. The fact is this… they do NOT deserve to receive any more for the property than what it is worth in its current condition. If the property in its current condition is worth $75k, then make your offer at that price. If the seller wants a cut of the equity, then they will need to invest in fixing up the property. Be firm. This is why only 1-2% of the offers you make will turn into transactions. Your obligation to your shareholders is to make an offer that will generate a profit for your business. Your obligation is not to make an offer detrimental to your business so it can get accepted or so you can please the Realtor or seller.