Experience is wonderful and over time we have learned the good and bad areas and what houses in these areas sell for. The way we analyze house prices today to determine what we should pay for them is very much the same as we did when we started buying real estate over 30 years ago. But today we use a whole lot more technology and less interaction with real estate agents but the results are the same.
We compare the subject house to similar houses in the immediate area that have recently sold. Sounds easy but good and bad areas can be streets apart and often we only know this by physically driving and sometimes walking the streets.
When we first get our lead that someone want to sell, we get on the phone with them to discuss the condition of the house and the surrounding area with the seller. We gauge their motivation and knowledge of the market. This helps us understand the house, the street and the general area.
Then we do a desk top analysis of the property identifying its bedrooms, bathrooms and square footage. We then identify recently sold comparable houses in current condition and after rehab condition. To land at the correct price we need to have 2 or 3 comparable houses in “as is” condition and “after rehab” condition and get the average price for each.
Arriving at the After-Rehab Value (ARV) is the most difficult part of the analysis and it is the most important, so we spend a lot of time getting this right. Devising the exit strategy can only be conducted once we know the ARV.
So, we determine the ARV and we know a bit about the seller, their situation, the condition of the house and the area it is in. Next is estimating the Rehab – Light, Medium or Heavy. The rehab cost will vary based on the amount of rehab to be performed and the size of the house. On most occasions we have to visit the house to determine the rehab cost accurately. If we don’t visit the house then we mostly allow for worst case scenario, taking into consideration what the seller has told us.
The result of the analysis generally gives us the following;
- After Rehab Value
- Selling and Closing costs associated with retailing the property via a real estate agent
- Rehab cost allowance
- Holding costs including cost of money, taxes, insurance, etc.
Now we have our Maximum Allowable Offer.
Now the options start…