BiggerPockets

I just bought my third property in the Phoenix area and my agent and I are having a debate on how to value it. I would appreciate any help / advice from the experienced investors on BP.

The property in question is a small property in a less-expensive subdivision in a nice suburb of Phoenix. All the other active listings on the MLS in the neighborhood are for short-sales or REOs. All these properties are pre-repair - they need some work or the other to make them really nice. In the past year, the majority of completed transactions have also been short-sales or REOs.

There was one normal sale (not REO or short-sale) in December and it was priced about 10% higher than the REO pricing. The previous normal sale was in April of last year so it is too far out to consider. That was also priced well above the REO price.

My agent feels that we are competing with REOs and therefore the price we can expect is going to be similar to REO prices. I feel that there is a market for homes that are properly finished with new carpet, paint, etc. and such homes cannot sell for the same price as a home that requires some work.

What do you guys think?

And even if I am right in thinking that the property is worth about 10% more than an REO, would it appraise for such a value when most of the comps are for REOs and short-sales? Do appraisers adequately account for the difference between an after-repair property and a before-repair property?

Vikram -

In my experience, it's very likely going to depend on the specific appraiser(s) you get assigned. For the most part, FHA appraisers these days have the authority to use REO sales if they find that constitutes the majority of recent comps.

That said, I've met plenty of FHA (and non-FHA) appraisers who abhor using REOs as comps for retails sales, especially for rehabbed properties.

So, unless you have some discretion over the choice of your specific appraiser, I would err on the side of conservative, and use some REO comps to determine your ARV.

I've had a few properties that I've had to turn down purchasing because -- even though I knew the property would be a steal at my resale price -- I knew there would be issues with the appraisal because all the comps were REOs.

Better safe than sorry...

So now that I have bought this property, what should I do? The REOs are selling for $135K and the one rehabbed property sold in December for $149K. They are all the exact same plan as my property. They all sold in less than 60 days - usually 30 or so.

Should I not do any work on my property and try to sell it for $135K or should I spend about $6,000 and get it to the condition that the $149K property was in and try to sell it for $149K?

I would appreciate the advice of Jason and others. Thanks!

Vikram,

I don't know how much you've paid for the property (if you've paid $135K for the property - you've made a mistake...but if you've paid less than that read further). What I would do is fix it (since you only need to spend $6K) but still sell it 10% below market or at $135K - line price it with the REOs (given that REOs are the majority of the houses in the area).

To sell houses quickly in today's market, you need to price your house 10-20% below market and make it the best house in the neighborhood.

Selling quickly and making a smaller profit is better than holding onto the house 6 months or even a year because you want to make your profit. You want to build momentum and you want your buyer to realize he/she has gotten a "steal" or a bargain. Why? So that he/she will refer you to his/her friends. The word of mouth marketing or referral business you will get by doin this will fuel your buying and selling houses business for many years to come. Again, the momentum and repeat business this will create will more than pay for making $14K less on one deal.

Makes sense?

Well it just depends on a lot of things. I would guess most people will offer you less and be around the price of the reos because they don't really understand how things work. I would suggest starting out a little higher and then drop it if you have to.

Brian Haskins

The appraiser will have to get into the house and you will be the one with the key. Just ask questions without getting in the way. They can adjust the subject to the comps. The better adjustments come from new roofs and or wiring, these bring the house closer to brand new. A good appraiser will make the adjustments. Also they will have knowledge of the purchase price to your buyer, which gives them a target to aim for even though it will not influence them.