How to Avoid House Investing Blues

Real Estate - Knowing A Real Deal

Property Information Sheet Buds

With so many foreclosure homes on the market, how do you know if that great deal you have your eye on, really is a good deal?

I often work with buyers that want to look at foreclosures because of the low prices. In many cases, the condition of the home frightens the buyer and they get frustrated by what they perceive as too big a project.

The problem in this case involves two areas. First, you cannot be emotional about investment homes.  They are simply an inventory for producing income. Secondly, every investor needs to create a project plan and budget. Are you planning to rehab and flip the home? Or, do you plan to make it livable and rent it out. The strategies and their costs for each are very different. 

As in any investment, you must get a fix on what properties in average to good condition sell for in the area you are considering. This is called, determining the "fair market value." The place to start this process is with a CMA or comparative market analysis.

Most CMAs are prepared by taking all of the comparable properties and adjusting the values in each to make the home's value based on features, comparable to the subject property. Most Realtors include all of the features but miss one critical element. The CMA should compare not only bedrooms, baths, pool/no pool, square footage heated and garages, but also the condition of each home. I use a scale of 0 to +3. Obviously my wife and I preview a lot of homes. We also get information directly from the listings. My criteria used for establishing my grading system includes, from top to bottom:

• 3 = Has new or newer (new to 2-3 years old) roof and A/C as well as upgraded kitchen, baths and flooring.
• 2 = Has either new or newer (new to 2-3 years old) roof OR A/C as well as upgraded kitchen, baths and flooring.
• 1 = Has been well maintained and has newer items individually. Perhaps the windows and doors have been replaced and a bath upgraded. Generally it just has to be in a condition that shows it is well maintained.
• 0 = A home that hasn't been upgraded but can be moved into and lived in. One could expect to have to invest money in the near future.

Homes that have roof leaks, heat and air systems that are at the end of their useful lifespan and no other upgrades, should not be used to determine fair market value. I apply the following values to the grading system and make the appropriate adjustments to the CMA:

• 3 = $30,000
• 2 = $20,000
• 1 = $10,000
• 0 =$0

To determine if the home is a good investment requires that once you determine what fair market value for the home's general area is that you determine a purchase price that will yield the profit you want.  The investors I work with normally plan to make a minimum amount of $20,000 after factoring in their time, materials, contracted work and buying and selling costs.

Example:
$100,000 Fair Market Value
-$40,000 - Home cost
-$   3,120 - Purchase costs
-$30,000 - Rehab costs
-$   3,250 - Selling Costs
$23, 630    PROFIT

They normally stick to "bread and butter" homes because they sell faster and can yield more profit. A "Bread and Butter" home is normally considered to be a 3 bedroom, block home with more than 1,000 square feet of heated space. The market for these homes is much greater than for smaller homes. Many of these homes are available from $30,000 (or less) and up in the Pinellas County area.

How do you clearly decide what the rehab costs might be? Experienced investors know. They use a form to break down these costs. I've attached a copy of the form I use.

Keep in mind, the calculations for an investor depend on their "exit strategy" or plans for the method of making income on the property. That is information for another blog, but the same strategy can be used for someone wanting to buy a home at a good price and not get burned. As an experienced real estate investor and Realtor®, I use the form for all distressed homes as I do my own investing or when I assist a home buyer or seller. 

I'm willing to share. If you are in the Pinellas County area and would like to work with a Realtor® that knows investing and understands making profit on investments, give me a call at 727-459-5460. I can help you, too!