Real Estate Investor - Internet Marketing Professional · Denver, CO · Member since 2014 · 181 posts · 41 votes
So I pull comps in the same neighborhood or within 1 mile of the property. I make sure they have the same bed and bath, sometimes I'll go down a bath but not up a bath. I make sure the sq. feet is within 150 of each other, and I make sure the year built is close together.
After that I calculate the average price per sq. ft. of the comps and multiply that by the sq. ft. of the property. I take that number and subtract 20%-30% and subtract estimated repair costs. From that I get my maximum allowable offer, and herein lies my actual question. Why is it that I always end up with a MAO that is bellow what the person initially bought the house at? Is that just the name of the game?
As a side note I do estimate how much they have left on their mortgage and my MAOs are higher then what they still owe a vast majority of the time.
Rental Property Investor · Liberty Hill, TX · Member since 2014 · 285 posts · 166 votes
11y
The amount of time the owner has owned the home could answer your question and save you lots of time.
Many homeowners put 3% to 10 % down when they purchased their home. If they bought the home on the upswing say 2005 or 06 they haven't had time to build the equity to own 70% of the current value of their house so using a 70% rule of thumb is a waste of time on anyone who has purchased a home in the last 10 -15 years. Home prices are just reaching their 2005 and 06 levels so a huge number cannot have high enough valuations using your 70% rule to have equity. It is no wonder you are seeing maximum offer numbers below their mortgage value.
There is a lot to finding true comps and price per sq. isn't it really all that useful as it ignores the land value of location. Appraisers use 1/4 mile except in the country for just that reason.
If I use more than a quarter mile radius in Santa Rosa I can bring up properties that all are 3 /2, 1800 square feet with price tags ranging from 585,000 to 1,100,000. How useful is a price per square foot measure. Obviously there are other factors involved especially the location of that 1/4 acre lot. You have to drive and really look at the properties. And, as someone else pointed out, adjust the comps to the target property not the other way around
Property Manager · Denver, CO · Member since 2013 · 15 posts · 6 votes
11y
Austin you said subtract 20-30% do you mean for a wholesale deal? A flip? Or for a buy and hold?
Overall it sounds like you have a fairly good method for figuring your comps.
For a flip then yes you want to leave yourself a cushion for your profit and/or unforeseen repairs (along with subtracting out your known repairs). In this scenario you need to set what criteria is right for you to create your MAO. Determine how much you need to profit on each deal, how much your financing service will cost, accurately estimate repairs, closing cost, agent cost (if using one to sell), and a reserve for the unforeseen expenses.
Wholesale MAO should really just depend on your buyers criteria and what your investors need from a deal. For wholesale, most investors want to get properties that are priced at 70% ARV minus repairs. That means you need to calculate that, then subtract your wholesales fee, and viola, that is your MAO. Find out what criteria your investor buyers need met to help you determine your criteria.
For a buy and hold I would just say that your MAO should leave room for you to cash flow from the rent vs. monthly loan payments. Also you wan to make sure you are not overpaying considering the comps in the area.
What are you using to come up with comps, MLS, RealtyTrac or something like that, or something a bit more informal like Zillow or Trulia? Similarity and proximity are important for compa. Date sold is important, recent comps are the most helpful, especially in our crazy Denver market.
Real Estate Investor - Internet Marketing Professional · Denver, CO · Member since 2014 · 181 posts · 41 votes
11y
I'm getting my comps through REIBlackBook which is probably similar to RealtyTrac.
I'm currently working on someone who wants $210,000 without repairs, and the comps I'm pulling show that the ARV is $210,000 but it needs about $40,000 in repairs to update the kitchen, bath, hardwood floors and replace the roof. I've estimated based on the time they've owned the home that they owe about $95,000 and my max offer should be $107,000. So my offer is barely more then what they owe and over $100,000 less then what they want.
I'm just starting to notice that every time I run numbers I'm barely over what they owe, or I'm barely below what they owe. So I'm assuming it could be a deal if I can offer more then they owe, but it's not a deal if I can't offer more then they owe? Is that the correct line of thinking?
Property Manager · Denver, CO · Member since 2013 · 15 posts · 6 votes
11y
Yeah that sounds about right, obviously they are going to want to pull some equity out, if you offer less than what they owe then they probably want go for it, most sellers are going to want to cash out, pay off their line, and try to get a little equity out of it for themselves. A seller trying to get $210,000 for a house that is worth $170,000 in its current condition, is not motivated enough to make a deal for you. You need to find owners that are in a harder spot and realize how much work their house needs, and are in more of a position to want to sell quickly, those are the motivated seller types that you will be able to get better deals from. Stick to your criteria, don't bend on it or you may put yourself at risk on a deal. With the numbers you mentioned they could pay off their loan and profit $12,000 a a seller who is really motivated will go for a deal like that.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
@Austin Faux My philosophy is offer what works for you; don't worry whether the seller will accept your offer. You have no control whether a seller will accept your offer But you do have total control over what you offer.
When you are so busy you don't have time to waste on deals that won't go anywhere then you can look up mortgage amounts in the pubic land records. You can also get that info from services that provide public records like ReaList from CoreLogic.
In the beginning I wouldn't worry about what they owe on the mortgage. Mortgages get paid off, paid down or can be renegotiated. Also they can be negotiated down at sale time (short sale)
The 1 mile range you mention seems pretty far away but the distance acceptable is market dependent. In my area I like one tenth of a mile.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
11y
@Austin FauxIf you were to follow the bare bones of the "70% Rule" (of thumb), wouldn't you come up with an MAO of $119k (ARV - repairs x 70%) for your example property? Just wondering what different criteria you are using to arrive at your particular (lower) MAO(?). Cheers...
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
Only read the OP post.
1. You aren't close to a market value assessment, you're leaning into the replacement value using the sq. ft. and probably not adjusting for age, condition, or depreciation to bring the comps in line with the subject property.
2. Look up appraisal techniques, market value, income approach and replacement cost, that is where you will learn valuation methods properly.
3. Forget that MAO crap, as you study RE you'll learn what forced appreciation is, if you are making improvements and the level of the subject will be brought up to a higher marketable price level, that is where you make money.
The reason your MAO stuff is below the purchase price from day gone by is because you are probably curing deferred maintenance issues that doesn't bring values up beyond what the narrowly defined comps suggest. Broaden the value range of the comps to the point that improvements made have enough room for a profit margin. Comps that are so similar to the subject won't allow enough room to make significant improvements.
This is the proper approach as what you are really looking for is the possibility to of bringing greater value to your subject property, curing functional or economic obsolescence to a more desirable property not just bringing a 3/2 1500 Sq. ft. rancher in with new paint and carpet and a counter top so much.
Most likely, as in my market, you'll look at 100 properties before you find someone fool enough to sell at 70% of market value, that is for beginners, you'll save more time advancing you skills than trying to locate "rule of thumb" properties. Good luck :)
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
LOL, owners usually see what they think is a similar home in the area for sale, it sells and they assume the price was had, that means their place is worth the similar amount......hmmm?
You don't consider what improvements were made to a comp after it sold.
The OP is also taking the assumption that the asking price is the value range, just betting but I'll guess that the subject property is being adjusted to meet the comp prices, it's the other way around.
I'd also suggest you check the neighborhood and see if a much more expensive home can be supported in that area, as long as you are working under a ceiling price, there will be limitations as to what you can turn that sows ear into. :)
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
11y
@Austin FauxAah. I believe it is normal for those who DO apply the "70% Rule" to subtract the Repair costs from the ARV BEFORE taking 30% off (not AFTER), hence, by using your formula you might find it much harder to find an agreeable Seller, than for those who use the "normal" formula ie. why would a Seller sell to you for $107k when they might already have had an offer of $119k from another BP Investor - ostensibly using the same 70% "Rule"? Just askin'...
Rental Property Investor · Liberty Hill, TX · Member since 2014 · 285 posts · 166 votes
11y
The amount of time the owner has owned the home could answer your question and save you lots of time.
Many homeowners put 3% to 10 % down when they purchased their home. If they bought the home on the upswing say 2005 or 06 they haven't had time to build the equity to own 70% of the current value of their house so using a 70% rule of thumb is a waste of time on anyone who has purchased a home in the last 10 -15 years. Home prices are just reaching their 2005 and 06 levels so a huge number cannot have high enough valuations using your 70% rule to have equity. It is no wonder you are seeing maximum offer numbers below their mortgage value.
There is a lot to finding true comps and price per sq. isn't it really all that useful as it ignores the land value of location. Appraisers use 1/4 mile except in the country for just that reason.
If I use more than a quarter mile radius in Santa Rosa I can bring up properties that all are 3 /2, 1800 square feet with price tags ranging from 585,000 to 1,100,000. How useful is a price per square foot measure. Obviously there are other factors involved especially the location of that 1/4 acre lot. You have to drive and really look at the properties. And, as someone else pointed out, adjust the comps to the target property not the other way around