@Immanuel Sibero
Thanks Immanuel! I was looking at rental comps to determine what the property is likely to rent for, but didn't look at overall sales price comps as a guiding metric for offer price. The goal I'm working towards is determining what purchase price makes a property a good deal.
Recent sales "comps" are about the only metric for single family home valuation. As matter of fact, 1-4 unit residential properties are generally valued using comps. Your goal is correct, you want to purchase at a price which would make the property a good deal. This is the holy grail in any real estate investments. If you're investing in apartments then yes cap rate valuation is standard procedure. However, in residential properties you're also contending with another class of buyers who are not investors and makes purchasing decision based on personal taste, emotions, etc. So cap rate valuation is irrelevant in residential properties.
I'm still a newbie, of course, so I'm not claiming any expertise. My impression so far has been that determining what makes a property a good deal is less what others are asking for the property and more what the numbers show that you should buy it at. Price comps are of course very important in determining if someone is likely to sell at a price that makes the property a good deal, but the comps don't determine what will make the property cash flow.
I would actually go a step further and say that the numbers are absolutely 100% the only guiding principle in determining whether to invest or not. Again, this is the holy grail of RE investments. What I'm pointing out is that holy grail principle may not work well in residential properties. Generally, if you value single family homes using cap rate valuation you will be priced out in most markets.
How do you arrive at an initial offer on a single family home, one that will make the property a good deal? I got my understanding of cap rate from the ABCs of Real Estate, which is apartment focuses, but it made sense to me that it could apply to single family homes too, at least to me. However I'd love to hear a better way to go about it. I'm here to learn. :)
A lot of the concept in apartment investing is applicable to single family homes, after all they all do the same thing - providing shelter in exchange for rent. But there is one distinct difference between the two that's central to this discussion and I've mentioned it above - the pool of buyers. Only investors buy apartments and they all use the same calculation whereas investors and owner-occupants compete to buy single family homes. Owner-occupants use every method except cap rate when determining price. These prices become "comps" and override cap rate prices.
So your question - How do you arrive at an initial offer on a single family home, one that will make the property a good deal?
- Find a market where comps valuation is not so far apart from YOUR valuation.
- In a market where comps valuation is obscenely higher than YOUR valuation, you might make the numbers work by finding under market (discounted) properties - distressed properties, distressed owner, properties in disrepair.
