Hey Guys! Tips on Underwriting Validation?

[Joey Gorombey]

Hey All!

My name is Joey Gorombey, and I became a BiggerPockets Pro member a few days ago after reading one of the books! I'm happy to be here! I've already listened to a podcast or two on house hacking and read a couple books, so I have a rudimentary idea of real-estate, but beyond that, know nothing!

I'm primarily interested in house hacking via FHA loan for my first deal, and I'm doing so in the Kansas City area. Any tips for a newbie house hacking in the heartland of the US? In particular with ways to validate numbers? They're easy enough to plug into the property calculator, but having the right numbers seems critical to success. What are some ways that you guys verified underwriting numbers yourselves?

Happy to make contacts and make friends! Cheers!

Joey

[Kevin Sobilo]

@Joey Gorombey, a very good question! You can spend a lot of time searching for sources for "the best" numbers, but I personally question whether there is such a thing. One of the foundational attributes of real estate is that each property is unique (although similar to others). In addition, prices are based upon a market which is always moving, imperfect (prices are not always in line with value), and has other factors not considered (such as distressed conditions of the property or the owner).

So, when estimating anything, I generally take the numbers I am not certain of and make my best estimate and then assign a confidence value. So, if I think rent should be $1000 and I'm 90% confident then I think it should be anywhere from $900 on the low end to $1100 on the high end.

Then I take ALL the low numbers and plug them into the estimate and evaluate... Then I take ALL the high numbers and do the same.

When I'm done I have 3 evaluations low, middle (original estimate) and high. The low is the worst case scenario that SHOULD never actually happen. If it looks ok, maybe even loses a little money that isn't bad. If you are happy with the original estimate that is good. The high estimate is something you are unlikely to ever achieve and shows you the theoretical limit of what the deal could bring.

After that you need to trust that YOU can manage the deal to get the original estimate or maybe a little better but also KNOWING that if things go sideways they won't be terrible (based on your low estimate).

This is how I get peace of mind with estimating. I use this process for initial rehab estimates a lot before I go out and get actual quotes.