How to estimate correctly a property

2 Replies

Hi all,

I am a newbie, learned a lot the last few months and I feel ready for my first deal. However I have a pretty basic question but even though I read a couple of books, I still don't have a clear answer.

The basic rule of REI is make the profit when you buy. Mostly investros look for a property that need rehab or buying from a motivated seller. When you ask an agent for such deals they will call you and say that the got you a hot deal and the price is lower than market value

My question is how to verify the agent's information. How can I do the analysis of evaluating how much a property really worth, and be confident that I actually made money on the buy. What are the tools the pros are using? Without asnwering this question I cannot make a deal, so I need to know how to do it, and preferly do it easily and fast.

Looking forward reading your answers, and thanks for helping!

You would simply put the subject property address into Zillow, or Redfin and search for recently sold properties that are comparable to yours. These are called comps and they are how you would determine the real world value. You also need to make sure your rehab estimate is correct. That is an equally important number that can make or break your deal.

Hey Isaac, welcome to BP! You've got the first rule down, that you make the profit when you buy. The second one is "don't ever let anyone else tell you what a property is worth" and it looks like you're getting the information you need to run your own numbers.

There are a few ways to do an analysis. The first one is what they term a quick "back of the envelope" (BOE) analysis for calculating the maximum you should pay for the property. It uses the sales price of the finished product (essentially the ARV, After Repair Value that you determined from comps adjustment and analysis) and costs to rehab the property. If you've heard of the 70% rule, it generally looks like this:

(ARV * .7) - Rehab Costs

Left out of the BOE/70% rule are two other important pieces: holding and fixed costs, and the profit you want to make. So, another, more exact formula is:

Max Purchase Price = ARV - Holding/Fixed Costs - Profit - Rehab Costs

That said, the first step like Brian mentioned is running comps and adjusting them for features. I recently wrote a Biggerpockets blog post on how to do this and hope it's helpful:

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