How to analyze?

Question

Hi how do you guys start working the numbers for a property?

Thanks

Lucas Machado · Answer

@Nick Campanella

(1) Look up subject property on county online database.  Note: year built, living area, lot size, beds/bath, last sale price/date, home features (pool, waterfront, garage).  County database is not perfect, but gives a basis to understand the property.  Also look up listing history: if a property was listed and it didn't sell, most likely it was worth less than list price.

(2) Look up "comps". Find recent close by sales and active listings, similar to your property.  Determine how much subject property is worth after repairs (so called "After Repair Value" or "ARV").  More of an art than science, but look at all available data.

(3) Make repairs estimate to establish ARV.  We use $10,000 for light rehabs, $20-30,000 for medium rehabs, and $40,000 for full rehab.  Adjust based on square footage.

(4) Apply Formula.  Many investors use (.70 x ARV) - repairs = Offer price.  Not a golden rule, but it's a decent guideline.  For rentals, conduct a capitalization rate analysis.  Just google cap rate for a detailed explanation (it's an ROI measure based on financial investment).

That's how we start working up numbers.  If you and seller are worlds apart, no reason to go further.  You can't create motivation to sell.  If you and seller are in range, dig harder into the data.

Daria B. · Answer

@Nick Campanella

@Steven Pesavento

In my opinion from what I have read from other investors and what I've done myself.....

For a lot of people they look at the growth in the area like jobs and businesses that are moving into the area, or out of the area. If there are a lot of top (maybe not necessarily too top but job growth in general) companies moving in then it could be a good sign of jobs coming in and the need for housing. Of course if everyone is leaving town then it might be a sign that rental would become stagnant due to the lack of jobs in support of housing.

Most people that move to an area generally rent before they buy because they want to find out about all the neighborhoods and school systems before laying down roots.

For college towns, I think it's a matter of doing the same research (ie growth) but the student population in and of itself seems to be one that is a very good market. Lots of people have student rentals that have proven to be very successful.

Then there is "housing" or section-8 as some refer. This seems to also be a niche market for a lot of people. From what I've read, there are those that have had great success with this niche-market and those that have not been successful due to any number of things.

Crime, it's out there and in abundant in most areas than others. Do you care about this and the level that exists, most if not all investors do but I know some really don't for what ever their reasons are. It's not something we can escape but needless to say, there are some areas that (in my local area) I would not invest in because it's a known drug den.

If you get with an investor-centric agent then you can get some information about the housing in the areas you are interested in and get a handle on where you want to invest. By investor-centric I mean someone that may be part of a local REI group that is focused on helping investors achieve their goal. I have worked with both, sales (this is the type that is looking to help people find a permanent home to live in) and another that was more in line with my thinking on offers, analysis, etc.

As part of my "looking" for a market I look at things like taxes, insurance, cost of PM, essentially cost of anything that will be an expense like city landlord permits (are they required and if so, now much?), and a number of other things that generally come after choosing a area that I want to find out about housing.

I guess I don't have a step by step that I could list, which is what I think you are asking. When I started it was what comes first, the chicken or the egg? What I did was just learn about all the things will still be part of "when I find a property" like what I mentioned above (taxes, insurance, etc).

Hopefully this will give you some idea of where to start. I'm sure I'm missing some crucial elements but this is off the top of my head as I'm typing this.

Good luck....

Joe Villeneuve · Answer

This is close to what I would consider to be the correct answer, on how to analyze a market.  Here is where I would make changes/additions to it:

(1)  My biggest concern is the size and number of bedrooms, from what was listed above.  Also, the date of sale must be within the last 6 months (for a market analysis), and I would track changes in sales prices over those 6 months.

The DOM is a little different. There are two different DOM...one that tells me if the seller is desperate or not, and the other tells me what the correct sales price is.  They are not the same numbers.

(2)  Comps (analysis) is a science, negotiation is an art.  The best scientist, in REI, will make the best artists.

(3)  The market dictates the rehab budget, the house dictates the rehab needed.  If the budget is less than what the house needs, walk away.

(4)  My formula is solid.  ARV - profit (pay yourself first...or why bother) - rehab cost = offer price.  This number is not negotiable.  If I adjust the "offer price" higher, I'm negotiating against myself.

Steven Pesavento · Answer

@Joe Villeneuve - Great advice for Nick. How would you normally go about performing market research other than just looking at the MLS? Do you have a process that you follow?

Joe Villeneuve · Answer

You start with the market...and you end with the market.  The market is 95% of the analysis.  Find the right markets, actually micro-markets, and you found all the properties.  If you start looking for the properties first, you're working it backwards.

Nick Campanella · Answer

Thanks appreciate it!

Nick Campanella · Answer

thanks that's a lot of good info!

Nick Campanella · Answer

That's a question I'm interested in too

Nick Campanella · Answer

ok thanks

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