Buying investment real estate deals and how to evaluate them?
A big mistake that we see most of the newer real estate investors are making is that they are overpaying for properties. They really overvalue a property and think that it is worth a lot more than it really is.
At the end of the day, you get paid for a couple of things.
1. You get paid to find good deals. You will never going to be a successful real estate investor unless you know how to find a good deal.
2. How to evaluate those deals to make sure that you are really buying investment real estate properties that are good deals. The key is to get them rehabbed or resold, which are really two separate things.
What I find happening is people falling in love with comparables and if you don?t have at least four comparables to justify the resale price of the house that is in the same neighborhood, then you don?t have a good value. You need at least 3-4 comparables that are in the same general neighborhood and can justify a price of what you think the property will sell for.
If you are jumping around from neighborhood to neighborhood and you are crossing the boundary lines, you are not going to find the right comparables. There are a lot of different types of boundary lines. A stream or a river could be a boundary line. For example, one side of a stream can have different houses than the opposite side of a stream. It could be rail road tracks. It could be a major street or even a minor street, which separates two neighborhoods.
The place where I grew up, there was kind of a division line and when you go down the second hill, you could definitely see that the houses below are different from the houses above. You can naturally see that they are in kind of same general neighborhood but there is a BIG difference in the homes that are there.
Knowing what those boundary lines are, you can find those just by looking around and then by looking at different neighborhoods. But you have got to find 3-4 comparables to justify that price and if you can?t, you are going to have some problems.
If you will really look at it subjectively and picture yourself as a new buyer on the property and you are out there searching for homes, you are going to look for the least expensive home that has the most fix ups and is in the best condition.
Lots of times, we fall in love with a comparable. You find one comparable and you hang on to it, you love it and you get excited about it and that?s the absolutely worst possible thing that you could do because one comparable is bogus. One comparable means nothing. It could have been a fluke. The walls could have been gold plated inside the house and it could be with an oil field yard but one comparable is like rolling the dice in the Vegas. You will never know.
But if you have got 3 or 4 homes that are sold in the neighborhood that aren?t across the boundary lines, that all make sense and that are all in the same kind of neighborhood and areas, then you are in good shape. That?s really what you should look for when buying investment real estate. You really need to analyze those four comparables because you can easily make mistakes.
You have got to make sure that you have four good comparables but with that there is a warning. When I say four comparables, I really like to have four solds and four actives. There is a big difference here. Active properties are not going to sell for what they are listed for as they are going to sell for less. Sold properties obviously indicate what they are sold for.
Therefore, you will need to have 3-4 actives and 3-4 solds and then, you would use the lowest of those 3-4. If it happens that the lowest wasn?t an active, you would reduce it even more because you know that the active isn?t going to sell for what the asking price is. I like to reduce it to 5% but it could be as much as 10% less. You never know how overpriced those actives are.
The other thing that I really like to do is that I take each house and think as a buyer. I am going to look at the pictures and I will look at the other things and analyze that whether my house worth more or less than this one. For example, if we will have an extra bedroom, I am going to add $2,000 for that or if they are going to have an extra bathroom, I am going to subtract out $5,000 ? $7,000. So, I will compare the subject property to each comparable individually.
I will take the subject property that is the property I am looking to purchase and I will have all my 3-4 actives and solds and I will compare them one by one. I?ll look at each one of them and say, ?I would rather have the active house than my house because it has got more square footage. It has got two car garages rather than one car garage.? This means that my house has to be less than that. Then you will start thinking, ?How much less?? A garage is worth $5,000 ? $10,000 depending upon whether it is one or two car garage. Hence, you are going to say, ?OK, I am going to price that down to $5,000 less because of the garage.?
After that, you are going to look at the other property, which is the active #2 compared to your subject property and say, ?Oh, you know what, this is actually little bit smaller than ours, so we know we can have a couple of thousand dollars for that.? Then, you can price out each one of those and you can compare them to each comparable and say, ?Compared to this property, this is called adjusted value.? Based upon that adjusted value, you can determine what your property is going to sell for.
If you will do that kind of research, you are not going to ever have a problem with values not coming in where you want them to be. I mean they may be off a little bit here and there but we see values that are off $80,000 and that just sucks. It?s a bad situation for you to be in; especially when you are paying to get the evaluations done and they come back and they are not what you wanted them to be.? We don?t want you to get in those types of situations.
Given that, if you will do the research and then move forward, it is going to bring the best results. It doesn?t take a whole bunch of time to do the research. You just need to have a strategic way of doing it like we have been talking about.
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Staging the property!
I can?t tell you how important it is to stage the property. I don?t recommend hiring a staging company because they charge too darn much. I want to give some really simple tips on making a staging work. You have probably seen on TV the rental centre or the weekly rentals, saying, ?Rent a TV for $5 a week etc.? Typically, I would not be telling you to use a company like that. Personally, you shouldn?t be doing that but when it comes to a situation with your properties that you are trying to sell; I?d like to use weekly rentals.
We actually have their magazines, so we know exactly what we want. They will bring the furniture right to the house and then, we pay them weekly. After that, they pick it up and take it away. It would be probably cheaper for us in the long run to buy all the stuff but frankly, the time for us to set it up, the time for us to take it down and the time consumed to store it and everything else like that, is not just worth it to us.
It may be worthy to you if you have a room to store it but if you don?t, you can go to one of these rental centers. You can just rent them by the weeks. You just need to sign up for weekly rentals and it would cost you around $100 ? $200 a week trying to get all these furniture in there.
What we have learned over the years is how to really do it on the cheap. Therefore, what I recommend you to do is when you are staging a house; you want to make sure that the front room when they first walk in looks awesome. We usually do a couch and loveseat. We don?t do a TV or anything else like that. We have also bought a rug to throw down and a couple of lamps, so it looks nice.
We don?t rent a whole bunch of things because we do everything ourselves. What we do is that we go to the Wal-Mart and we have got those blowup mattresses for the bedroom.? They are awesome. You can get a Queen Blowup mattress for $50.? What we do then is we take two of plastic bins and put up the mattress on top of those. We put up a bedspread on it and then, we put whole bunch of pillows. That looks just awesome. It looks like a queen bed. We also make sure that they match with each other to make it look nice
We also get some plastic end tables, which have got plastic on the sides and wood on the top. You can take them apart. We put two end tables in there. So, we will take probably two bedrooms and we will go ahead and put all these things in there.
In the bathrooms, we like to put two towels, couple of plastic plants, a rod and a curtain for the shower in there as well. So, it just looks homey. In the kitchens, again we put three or four little plants that are cheap, hand towels and the other thing that we?ve done is we have bought some of those square plates, bowls and plastic glasses from a second hand store to put in there.
If you have any weird area, you have got to take care of that. Let?s say, if there is an area that needs a desk; you need to get a desk that sits in there.
When somebody first walks in the property, you have got the loveseat and couch, nice rug on the floors, lamps and a bunch of plants. The buyer will think, ?Yeah, it looks nice.?They can sit down on the couch and look around. Then, they go into the kitchen where you can also put some bar stools and a kitchen table with chairs. You can also put a couple of plates that are up at the bar and some hand towels to make it look homey. When they go to the bathroom, they can see that everything matches and there is a nice rod and curtain. They walk into the master bedroom, where they can see queen bed with pillows and end tables, which looks good. They know that it?s not like the way they are going to live into it but they?ll say, ?Man, it looks nice.?
With that, if you think about it, I am bringing the queen bed, plastic bins, bunch of pillows, towel, collapsible end tables, few plates and other stuffs, which could be used time and time again as I can easily put them at the back of my truck. That stuff is not a big investment. It won?t cost more than $500 ? $800 and I can use them time and time again.
The other stuff is what I am renting. From the rental centre, I am renting kitchen tables, chairs, loveseat and the couch. I am paying them may be $50 ? $80 a week. The cool thing about them is that at the rental centre as you pay them, you are actually buying it as well. Anytime you can call them and ask them to pick it up but if you ever want to pay it off, you can actually pay it off completely.
We can actually put a little ?for sale? and it says, ?Hey, if you are interested in couch, let us know.? We can put that on kitchen table and other rental stuff too. We actually had somebody the other day who said, ?I am interested in the couch and furniture and I want to buy that too.? They can either throw into the offer and we?ll leave it. We?ll call and figure out how much we owe in the couch and loveseat, which we should be getting a full price offer or may be above full price to do that.
But the thing is that I have already being paying up for that furniture. Therefore, if I have already paid half the furniture down and they want the furniture included, I am going to say, ?Hey, the four-week rental price for this furniture is $1,000, so why don?t we do a full price offer.? It?s a negotiating point. There are basically two benefits of doing it:
1. It will help property to look better and sell faster.
2. It?s a good negotiating point, so you can sell the property better.
Before the real estate crash (if you want to call it a crash as it has been an opportunity for many people), I wasn?t a big fan of staging a property. But now, I would say, ?You should definitely stage your house but do it on the cheap.?
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Related posts:
- Real Estate Investment ? How to be successful?
- Buying Real Estate
- Real Estate Investment Strategy ? Pricing Your Property Effectively!
- Buying Real Estate
- Real Estate Investment Strategies
Tags: buying investment real estate
Source: http://www.dohardmoney.com/blog/buying-investment-real-estate/
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