Evaluating Profit Potential with 100% Accuracy

[Gordon Vaughn]

         Some of you are incredibly lucky to live in a city that provides a macro-market for investing. What this means is that most of the homes in a particular city, with few exceptions, have similar styles of construction, similar floor plans, use the same or similar materials, are affected similarly to exterior conditions, and carry the same values based on square footage. Evaluating deals become very simple and easy when the majority of homes in these cities share the same everything. Las Vegas is such a city, and most homes in LV really don't need to be "evaluated".  You can find 3 homes exactly like the subject home at any search radius and the numbers will tell the same story based on identical values, while material choices are limited and rehabs are similar in most instances. 

       Then there are most of you that live in Micro Markets such as Los Angeles or Atlanta. These markets are typically identified as larger land mass cities of numerous types and styles of homes located in neighborhoods that carry completely different values based on a multitude of different amenities, demographics, and desirabilities. Evaluating an investment deal in these markets based on a similar home 1 mile away can be the end of your investment career. 

       The biggest question on every investor's mind when approaching a potential deal for purchase is: "How much money am I going to make?" The reality is that this question begs the only answer we as investors want to know when it comes to purchasing a home for investment purposes. And in a nutshell, it all comes down to accurately determining the net profit to be made on a flip or rental. While this entails several different aspects of analysis, I will go over the 2 most crucial aspects of valuation that every investor needs to know in order to accurately determine profit potential with each and every evaluation. 

1.) Rely on comps in the same subdivision as the subject property.  One good comp in the same subdivision is better in determining value than 3 good comps within a 1/2 mile radius. This applies to both macro & micro markets. This assures that you know the home's true ARV and are not getting duped by high value comps in a nearby subdivision that carries completely different values than the subject subdivision. If there are plenty of good comps within a 1/2 mile to 1 mile radius that will "justify" the value you're looking for based on the one comp in the same subdivision, you have your value number plus or minus adjustments for square footage and amenities. If there are at least 2 good comps within the subject subdivision, you don't need to use a radius search. Just make sure that there are at least a couple of good comps within a 1 mile radius that will "support" the value you have determined. As you probably already know, appraisers only care about the paycheck and cannot be trusted with providing accurate values. Plan to cover your bases, but always rely on same-subdivision values to determine how much you'll make on a flip, or how much equitable margin is provided on a hold.

2.) Know your value "identifiers".   Identifiers are market trends specific to the subject home that determine the value of the home. Identifiers are school systems, exterior factors such as railroad tracks, power lines in close proximity, new or old area retail developments that can affect value, construction styles, materials and amenities that are expected in a particular market area, number of days on market for area home sales, and more. If you're investing in an established neighborhood where the majority of homeowners are empty nesters, you'll know that the school system will not play a value factor. If you're investing in an area w/a top market value of $200K or less and you notice that the majority of updated home sales comps are homes that have laminate countertops in the kitchen, why would you budget an additional $2,000 for granite countertops?  If a new professional sports complex was just constructed in the neighborhood and n'hood values are now 10% higher than the year before while the average number of days on market for your comps has gone from 30 days to 15 days, you'll know that it's a hot market. Why would you risk losing out on a potentially great deal by dwelling on the lowest priced comp in the subdivision that sold 11 months prior as your value gauge in a hot market?  If you see that the contemporary/modern homes in the subject subdivision are selling on average $50,000 higher than the traditional builds, why would you risk losing out on a potentially great deal because contemporary homes just aren't your thing? If there is a big electrical tower behind the backyard of the subject home that can be seen from multiple angles, would you pay full market value to live in this home?  Know the identifiers in your market to determine what the area market buyers are looking for, the type of rehab that will be needed, the type of rehab that is NOT needed, what amenities are important to the market base, how long your home will sit on the retail market, & ultimately how much you stand to make on the deal.

Use these 2 guidelines and you will be able to assess accurate values each and every time!