No matter how flexible the seller is, the property is useless to you if the value of it does not support what you are considering buying. For example, there is no point in paying $200,000 for a house in a neighborhood that has houses that sell in the average price range of $60,000-$70,000. The chances of making money in a deal like that where you are paying that much over the typical market value of a piece is very slim.
A business exists solely for the purpose of making money; without making money and being profitable there is no way that, a business will succeed much beyond the infancy stage. My goal is to help you make the most informed decisions possible so that you start the real estate market a step ahead of others who are having to do their own research instead of reading my guide that has all of these tips and suggestions.
Property has several different ways of determining value, different aspects of the value effect the value differently however. Objective and subjective factors both play into effect in the value of the property. Objective factors include how many bedrooms, how much square footage is livable, how many bays the garage has, how many bathrooms, and other factors.
Objective factors directly influence how much you can get from the property in return for what you put into it. Other than the building specifications, that help effect the value of a house, the condition of the property is in is also quite important. A house in poor condition is not worth nearly as much as a house that has been kept in tiptop shape over the years. Water damage, termites and ancient windows can all add up to big remodeling expenses that must be factored into the price of the property to determine how well the value holds up.
Subjective factors tend to be tied closer to the color of the paint, the style of the house and other highly personal things about the property. Some people may discover they only buy houses in which the driveway is on the left, and they dislike those that have right sided driveways. These are all subjective factors; however, it is not the complete list of subjective factors.
There are several methods to use to determine the value of property. These methods are Market Sales Approach, Reproduction Cost Approach, and finally the Net Income Approach. While these sound very complicated and scary, calm down and take comfort in the fact that it is technical terms and not as bad as it could be.
Market Sales Approach is used to determine the value of property based upon comparing it to other pieces of property that have sold in the area that are similar in size and location. For example, this method would state that if 5 houses all in the same neighborhood have been sold within the last few months and all sold for approximately $60,000 that were the same size in square footage and comparable in design and building materials that the property we are considering buying should be worth approximately the same thing. Obviously, such factors as condition of paint, appearance of the yard and other small details can make a huge difference in the actual asking price. Nevertheless, this should give you a guide to go with to help make the informed decisions of a smart investor.
However, if you are looking at purchasing a multi-family unit, this becomes a bit more complicated. To determine the value then, you would have to base the value off of either the selling price per unit, in which the total price of the property is divided by the number of units and then compared to other multi-family units sold recently, or by basing the value based upon square footage of the property. This is obtained by dividing the price of the property by the number of square feet in the property, and then comparing it to other multi-unit properties.
Seemed quite complicated at first, however as you can see it is really quite simple. To use this method you must be willing to put some effort and research into your local real estate market to make an informed decision. Next method to look at is a bit more complicated and does take quite a lot of research and attention to detail. Enter…drum roll please… Reproduction Cost Approach.
As I am sure you can guess, this method focuses on determining the value of property based upon what it would cost to you guess it reproduce it. This means find a comparable piece of property that is empty, as well as determine based off building materials and square footage how much it would cost to completely “clone” the existing property. Once you have arrived at the price to reproduce the property, you need to take some away to account for wear and tear that exists in the course of a lifetime for property, scuffed floors, a small dent in the siding etc. This is not your Reproduction Cost Approach. As you can see this method is much more complicated than the Market Sales Approach. Proceeding on to the final method, we arrive to Net Income Approach.
Net Income Approach simply takes into account the amount of income the property can generate for you. For example, if you have a house that rents for $600 a month, that is $7200 a year. Most investors are looking at a 10% return rate on their investments. This means that for a house of this standard, you do not want to pay more than $72,000 or else your return rate will be lower. As you can see, this method of determining value is of little use to the average homeowner who is purchasing a home for their personal use. However, it is very important to the investor who is looking to make money.
In the next installment, we will cover Cash Flow Analysis, and how to determine if a potential piece of property is good to invest in based upon this analysis. Cash Flow Analysis are very important reports that can tell you a lot about how your investments are doing, and as such important documents deserve their own separate lesson or installment on them. Remember, keep making those calls and taking notes. Now that you have the methods to determine the value of property, you can seriously look at some of the properties you have decided to look at to see if they are financially feasible.