All Forum Posts by: Account Closed

 Sorry to hear. How did things turn out? Feel free to connect and discuss?

This really depends.. the specifics of the property such as: type of property, price range (current worth and price acquired at) and profit if sold today might help in getting some clarity. 

Some questions you might have to go through may be: Is there is a pressing need to sell or just a desire to cash in on profit? Is the plan to sell, get cash for an alternate investment that has a better return than what the property might offer in a year? Or perhaps just nervous of which direction the market might head in a year hence the need to sell today? Is there a fear that the profit might be eroded by waiting?

If the data from Zillow and the other real estate websites are correct (and their valuation/estimation could sometimes be way off), it does appear the values in the area is strong so there must be a reason for the intent to sell. 

If there are other investments channels that offer a better return then might have to think about the cost of deferring the sale for a year especially if you have a ready and capable buyer. If there aren't, consider the reinvestment risk before cashing in. Finding alternatives to reinvest and earn a better rate could also sometimes be costly.

The decision is however personal.

If you have something in writing which clearly states what was to be done, by when and for what amount per milestone, I don't seem to see what the issue would be. Was the contractor supposed to finish this when he felt like it or in between vacations?

 There are other less risky routes of compensating the contractor.

If you have MLS comps, which might include a few properties in the particular target neighborhood, you could always get the price per sqft for each of the properties and also the average price per sqft for all the properties used for the comps. You could compare these with the seller's property or the price per sqft in the particular city or nearest metro. You want to use as many approach as you can to see if there is any material variance that exist.

Data quality is often an issue especially when information is passing  through multiple intermediaries. It may get 'corrupted'. Here are some links that may describe some of these issues:

http://seattlebubble.com/blog/2013/09/16/zillow-trulia-still-apathetic-about-data-quality/

If you were also relying on any type of zillow estimate or anything that in some way relied on or utilized the 'zestimate', then that really might be a problem as anything with a 'zestimate' in it is often not only way off in some cases, they often literally revise the algorithm which does often mean revising their historical estimated data.

http://blog.louisgray.com/2011/06/zillow-rewrites-home-price-history.html

Zillows response on this is also somewhat of concern:

This is directly from Zillow:

Do you ever change prior Zestimates?

Yes. When major improvements to the algorithm are made, we do re-compute the historical Zestimates for affected homes. Our purpose in doing so is to provide consumers with the best estimate of historical property valuations. A historical Zestimate is not like a historical stock price, which doesn't change after being recorded. A stock price is a record of an actual empirical event (and, as such, shouldn't change). A Zestimate, on the other hand, is an estimate of the market value of a home, and can change when we have a better algorithm to estimate that value....

Does the Zestimate algorithm ever change?

Yes, a team of statisticians is working every day to make the Zestimate more accurate....

You typically would need to have a very clear exit strategy before going in. How long to hold any particular investment is in some ways is a personal decision influenced by what might be many personal variables. 

In most cases, your exit might be to sell the property a.s.a.p on completing the rehab (which might also be regardless of the occupancy rate) or, if income was the primary objective, then as long as the income makes sense. 

If you held the property for income purposes but were to receive an offer to sell the property prior to your planned exit, if the present value of the offer exceeds the present value of the future cash flow, there might be a decision to make. 

The issue then might be, is there is a reinvestment risk? How was the property financed? These might be some issues that may affect a decision of when to sell. 

Focus on the deal under contract and hope it closes without an issue. There is always an opportunity cost with waiting or trying to gamble. 

Relying solely on Zillow's estimates could often be a dangerous thing to do especially when trying to estimate ARV. The actual values of the property could be miles apart both between the various websites and compared to the MLS comps within the neighborhood where the property is located. If you are just trying to discover a pattern, try to get something that is also based on actual MLS numbers to compare with what the sites are reporting.

The internal rate of return IRR and Net Present value NPV are concepts you encounter frequently when discussing capital budgeting and also is utilized with real estate investments.

Regarding your question..when would you use an IRR? Using real estate investments for instance, whenever you make an investment where there is an initial outflow of funds (the investment say to buy an apartment building) and there is yearly net income from that investment (rents), you could use an IRR to determine the profitability of that particular investment compared to other buildings that you might be considering. (Assuming the investments are similar and that you have the same cost of funds on all the investment alternatives).

So the IRR is the rate that causes the Net Present Value (present value of all future project cash flows) to be zero but this shouldn't cause confusion. It might help to think of it as the discount rate where the investment breaks even or where the present value of future cash flows equal the all cash outflows within the period being examined.

You of course always want the IRR to be higher than what the cost of funds or discount rate is.

There are of course problems with the IRR-- the multiple IRR problem, accounting for inflation issue and its use in evaluating single period investments, but that's stretching the discussion beyond your initial inquiry.

On some investments the concern is on the magnitude of the investment in terms of what wealth is being created for investors and in that case the Net Present value might help or be more relevant.

The capitalization rate or cap rate, is mostly strictly utilized in evaluating income real estate investments whereas the IRR and NPV are concepts that apply to various types of financial investments not just real estate.  It is also not unusual to hear folks in other circles use cap rate term so you have to be aware of the context.

The IRR and the Cap rate are different investment evaluation tools and not the same thing.