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Now, I have mentioned in a couple of posts that I will talk about evaluating a property before you buy it. So how much is a house worth? Let me start with a contradiction and arrive at an assumption! Home buying is one of the most emotional purchases a person can make. Home evaluation is one of the most analytical exercises done. How do you value a person’s emotions? You just can’t. So all of this talk is going to be only worth so much. All you can hope to achieve is have an idea – a range, that’s it. Don’t let anyone tell you, your home or investment is worth this dollar amount and then expect to be able to trade it for exactly that. Most likely, it’s not going to happen. If it’s close, then you have gotten good advice. That’s as far as you can take it.
So in this post, I’ll try to educate you on how you should try to arrive at a value to be “reasonably certain”. First, we are operating in areas where properties are in the $120K to $160K range broadly. We try and buy these properties for between $80K and $100K. These properties are not going to be your custom builder homes. They are going to be fairly comparable to each other in quality of construction. They may not be “cookie-cutter” homes but they are not “Frank Lloyd Wright” homes either.
The methods you should know about are:
1. Comparative Market Analysis (CMA or comps): This is to find other properties that have recently sold that are comparable to your property (subject) and to use their sales price to arrive at a value for yours.
Actually, I’ve changed my mind on the contents of this post. I am going to make this a broad introduction and write separate posts on each method. So I’ll get into details of CMA in my next post.
2. Income Approach: This is to treat your property as an investment and use the income it generates to value the asset. Does the single family rental home qualify as an investment to use this approach? Let’s talk when I write about this approach in detail.
3. Cost Approach: This is more applicable to what an insurance company might use to arrive at replacement cost for your property. I am not going to talk about this in detail as there’s little value to our broad discussion here – which is investing in single family rental homes.
4. Historic Value and Appreciation Method: This is a cross check that I use once I have used the CMA method to arrive at a value. I will discuss this in detail.
As we are going to talk about the details in subsequent posts, I want to explain how the terms, appraisals and estimates are generally used. What’s the difference?
1. An appraisal is what a licensed Real Estate Appraiser does to value a specific subject property. An agent cannot give you an appraisal (unless of course he or she is a licensed appraiser as well).
2. An estimate is what you or your agent can arrive at using the methods here or any other method for that matter.
So we’ll pick up on CMAs in the next post.