How To Buy Wholesale Properties & Not Take A Bath - Step 2

How To Buy Wholesale Properties & Not Take A Bath - Step 2: This series of articles will help you determine what to offer on any kind of wholesale property. The key to success as a real estate investor is to have a proper offering system in place. Our web-based offering software called What2offer makes this what to offer process easy and quick. But let's get into it. Today we will cover determining values of a real estate deal.

Determining Values: The first thing to do is verify the ARV (After Repaired Value) of the property – in other words, the market value of the property after it has been renovated. Someone told me recently that they didn't believe the ARV listed in another wholesaler's flyer because the house in the picture didn't look like it could support the value listed. Frankly, that's a ridiculous method to evaluate a deal – and I assume it comes from fear of not knowing how to determine the true value of the property. The only accurate measure is to see what other similar houses have recently sold for in the area. The "eyeball' method is dangerous and could lead to either under or over estimating values. I have been amazed at some of the prices at which I have sold relatively small houses. It I had eyeballed the house, I would have said that it was worth half of the price. But by studying the market, I knew what the real price would be. Often, it's all about the location. The only way to determine the ARV is to look at comparable sales (commonly referred to as "comps") for the area. Any wholesaler worth his salt will give you the comps used to determine the ARV (if they don't I would question how they determined the ARV in the first place). The first thing you want to look at is how far away they are from subject property, and how old they are. Appraisers allow properties as far away as 1 mile and sales as far back as 1 year. As much as possible, do not exceed ½ mile distance and 6 months from sale date. Next, drive by the comps. Compare them to the subject property you're evaluating. Is the neighborhood – or even the street – the same? For instance, if the subject house is on a street with several boarded up properties, and the houses that are inhabited are all run down; but the comp is on a beautiful street full of rehabs, then it is not an accurate comp. The same is true for evaluating the house itself against the comp. Are they basically the same house? Obviously the comp is going to look great – it has probably already been rehabbed. That's OK because you're trying to figure out what the subject house will be worth AFTER rehab as well. But is the construction essentially the same? You can not compare a small frame, plain-Jane cottage with no architectural design, to a huge brick multi-dimensional mansion – unless you've calculated enough in your rehab to get your subject house to look the same when it's done. What you want in a comp is similar size, similar number of bedrooms and baths, similar design, same frame or brick, etc. to what your home will look like when you're done. I've bought houses for rehab that did not look like the comp when I bought it, but I knew that it would after the rehab because we would add a bath or a bedroom, and would change the façade of the house. The key was that my renovation budget reflected that as well. Sometimes, there are no houses that are exactly like the one you're evaluating. That doesn't mean that you can't use the comps at all. It just means that you have to make a ARV price adjustment. Think of yourself as the ultimate homeowner. How much of a price drop will it take for them to buy your house over the competition if your house is different? How significant is the difference? For instance, a house on a very busy street will require a significant price decrease to sell as compared to the houses on the interior streets of a subdivision. On the other hand, a fenced yard vs. no fence will have little effect on the values. The acid test is to stand back and think about the final owner occupant that will be looking for a home in the area. Would any price concessions be necessary to motivate them to select the subject house over the others on the market? Don't rely solely on the sales data provided by the wholesaler. Obtain your own, more comprehensive list. There are several national companies to which you can subscribe that provide local sales date (www.SiteXData.com; www.RealQuest.com). You can also ask a realtor to pull comps from the Multiple Listing Service (MLS). There may be a fairly wide range of prices. Throw out the extreme highs and the extreme lows. Focus on the price range where most houses sales are clustered. You can take this one more step and look at trends. Look at all of the houses currently listed on the market. How long have they been on the market? Are they priced higher or lower than the ARV you've determined? If they are lower, it may mean that values are starting to drop. If they are all higher, then it means that the value is stable – maybe even increasing. But do not raise your ARV based on "listed" properties. This only provides you with trends. Better to leave your ARV alone based on sales history, and be pleasantly surprised at the end of the project when it is worth more than anticipated.

With all of this work accomplished, you will KNOW the correct ARV. You'll no longer have to wonder whether the wholesaler properly evaluated it. OK, but still, how do you know the right price to pay? We will cover all of this in our next article.

To Your Success, Tom & Svein What2Offerdotcom

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