Shoot, how do I evaluate a deal? Use the calculator?

12 Replies

Hi BPers!

I found a very interesting property while I was goofing off on a realtor website / Zillow on Friday.  And it looks on the surface to have some great potential, so I would like to investigate this property for real, not just on a paper exercise.  I am hoping to drive by the house / neighborhood this weekend and go see it  with a realtor on Monday afternoon.  

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Exciting stuff!  But… how do I analyze the deal?  I have many questions!

1.  Right now, all I know are the listed price, property taxes and basic facts about the property.   I need to practice running calculators but it seems obvious that the numbers will work, the listed purchase price is very low and the rent would be quite good.  (assuming that rehab is not crazy nuts insane.)   

2.  There is only ONE photo on the real estate listing.  Could be a mess inside, but I have no idea.  I plan to go and see it.  What should I bring to view the property?  

First time nerves here!  What do I need to do to get prepared?   (I was going to start seriously looking at properties after the kids were back in school, and they are not back in school yet, but this property is very intriguing and looks like a must-see to me.) 

Thank you for any advice!  Karen

Have your realtor prepare comps for you, so you'll be able to accurately gauge the ARV of the property. Since you're working with a realtor, they should also be able to help with current rental rates in the area.

I'd say get and read J Scott's "The Book on Estimating Rehab Costs" prior to your walk-thru of the property.

http://www.biggerpockets.com/flippingbook

Take a good camera with you and take lots of pictures, so you can make sure you have a good idea of all the repairs that are needed.

It sounds like your strategy is Buy & Hold. That gives you a lot of flexibility in terms of % of ARV. Do you have your targets identified in terms of Cash Flow, ROI, or whatever your personal financial measurement is? As a Buy & Hold investor, you have only one person you have to please with the deal...yourself!

Probably your main issue as a newbie will be figuring out if the problems that are causing this property to be listed so cheaply are cosmetic or more serious, and what the cost to get it rentable would be. Do you have any friends with construction/rehab/handyman experience that you could get to come with you? If not, you might even consider hiring someone, perhaps a property inspector or contractor, to come with you. (Explain that it's not a full inspection or bid, you just want to buy a few hours of their time for some education.)

If this is the very first property you are looking at, be careful! It's easy to get over-enthusiastic and get yourself into something that you'll look back on and regret once you know more. When I was first told "there'll always be another great deal", I didn't believe it ;) But, there really will always be another great deal.

Take a flashlight, a camera, and something to take notes on.

There are only a few things that you need to determine.  (Assuming that this is an income property).  What is its possible uses and rental value given those uses.  What is an appropriate cap rate for this type of property in your area.  This is important because if will help determine the after repair value if you plan on reselling and will give you an estimated return if you plan on holding.  I find that operating expenses usually are usually 45% to 55% of rents for residential properties.

You need to estimate the repair cost.  I start with a walk through but ultimately have the property inspected and my contractor to give a bid.

You should be able to estimate a value and compare the potential return with your required rate of return.  Your maximum bid is the number indicated by your required return.

I take a camera, binoculars, and pencil and pad to my walk throughs.  I wish you the best.

Bill

Thanks, so much for the reply, Hattie.  This will also be my first time working with the realtor, and it has been years since we purchased our own home, so I am totally out of practice with all things real estate.

I have a copy of J Scott's book here! (Actually I met him once at a REIA meeting also.) I will go over the book this weekend. Good idea to bring a camera, it will be very interesting to see the inside of this house.

I am planning to Buy and Hold, and the point is to make a good return.  I need to get clearer on goals and criteria.  My stated goal was to purchase and rent out one under $50k home and basically get started with learning and get some practice / experience and learn the whole business of land lording / buy and hold property investing. 

@Karen M.  

The good new is you're buying as a buy & hold investor.  Don't stress too much about making all the determinations about the mechanicals of the property.  Just make sure, if you put an offer on the property, that the purchase contract gives you an inspection period and option.  If you're contract is accepted, get a reputable and licensed home inspector to do a full inspection.  If anything major comes out of it, renegotiate the contract or terminate it.  Either way, you're protected.

Jean, thank you also.  This property is a foreclosure.  I am not sure why it is listed cheaply; it seems there is a mix in the area (this is looking on Zillow).  There are definitely other properties that have been sold for inexpensive prices, and some properties that have higher values also.  

My investments to-date have been in the stock market, and that is my point of comparison for the returns.  Stocks are so easy compared to real estate, the transactions are easy and cheap! A rental should cash flow well to be worth the effort.  I want to get into real estate for cash flow and diversification. 

For ARV, is that what the house would be worth after it's fixed up if I were to turn around and sell it again like a flipper? I see on Zillow that some of the homes in the nearby area have also sold inexpensively. I would guess that there are definitely investors active in same general area. Some homes have higher values and the last sale price of this house was many times higher than what it is currently listed for.

Questions about making an offer -- how fast would you move if you determine that the property is a good investment?  In an offer, do you have to say how you will pay for it?  I could, in theory pay cash and show a brokerage statement as "proof of funds" to be speedy, or I could go talk to a banker about some kind of loan, which will probably require more paperwork / time to get together.

I am totally brand new and don't have any contractors ready to go. I would need to get to know some contractors that work with investors (read: affordable) and not the fancy contractors that advertise on the radio. I am a REIA member so there is potential to network and get things going rather quickly.

Hi Bill,

Thank you for the reply.  Questions:

1.  What do you mean by possible uses?  It is a single family home and so it would be either a single family rental, or it could be sold in some way to a buyer. 

2.  I will need to look at cap rate for sure.   I will need to read about cap rates, the concept is a little foggy in my head.

3.  So let's just pretend that my all-in cost with repairs is $45,000 (just a beginner's guess) and it can rent for $950/mo.  

4.  How much should I roughly budget for closing costs?  

Pause here for a second:
Ohmygosh the Bigger Pockets Rental Analysis Calculator is ***so cool!!!!!!****
I don't know if I am using it correctly.  I guesstimated some numbers.
$45,000 all-in price w/remodel (newbie guess), $950 rent, $2k closing costs, average cap rate 8% in my area (????no clue??), guessed ARV of $70,000 (but I plan to buy and hold). Taxes and insurance in from Zillow numbers.

The report that this tool generates is amazing!  It looks like **IF** my guesstimates are right, then the property would just make the 2% rule.  


What questions should I ask the real estate agent?  Thanks!

Karen

This morning I am going to drive by the property and check out the neighborhood in greater detail.   I hope to see the inside of the property tomorrow, if possible, or Wednesday, worst case.  If it looks good, I think I want to make an offer quickly.  Wow!  Scary!  Exciting!  

What actions should I have on my to do list?   I am starting from scratch….  
What should I work on tonight (from at home on the internet) 

-- Call a bank on Monday to work on possible loan / HELOC? / similar?
-- Set up viewing time with realtor for ASAP.
-- Ask realtor for cap rate / comparables / rental prices
-- Bring flashlight, camera, binoculars (@Bill Jacobsen   - what do you use the binoculars for, specifically?),  pencil/notepad, maybe a tape measure?  maybe a friend? to the showing

@Hattie Dizmond , how long is an inspection period / option usually for?  Thanks! 

@Dawn Anastasi   -- if you are available, would you like to go see this property with me? 

(I PM'd you with the listing, let me know what you think, thanks!)  

I described myself as a total newbie, but that is not totally true.  I have been reading and getting familiar with buy and hold investing concepts over the past year, so there are a few things that I know to look for.  There is still a TON of things I don't know, and no practical experience yet, but…  I can do this!   I think I can, I think I can, I think I can…..    

Thanks for all the help! 

@Karen M.  

I got notified of this property via email on Aug 20th.

For the area, the price is super, super low.  My first guess would be major foundation problems if it's going at that price, or maybe severe damage on the inside.  I don't see a house going for that low in the area and being on the market for 4 days and not have an offer already otherwise.

I would still recommend going to see it, because if it does have problems that will be a learning experience.  I'm tied up today until about 1pm but if you have time afterwards I could come see it with you (that's the best I can do on short notice).

(The binoculars would be if you wanted to see the roof better.  A camera with a good zoom also works.)

Hi Dawn!  Thanks so much for the quick reply.   I was just going to do a quick drive-by today as a first look on the way to a family event, but since time is flying by, I will have to drive by it later tonight around 6:00 p.m. - 6:30 p.m.  

But I was really planning on getting to see the inside.  Fun!   I would need a realtor and that would need to be tomorrow or Wednesday.  I'll PM you to see if something might work out.  It would be great to see you!  

@Karen M.  

Here in Texas the standard inspection period is 7 days.  However, that's completely negotiable.  Again, in Texas, there isn't an automatic inspection period.  We pay an Option Fee.  It can be $10.  The standard Texas Real Estate Commission contract writes it as a 7-day Option Period.  I write my contracts as 14-days.  During that period, the buyer has the right to cancel the contract for any reason, or no reason at all.

Just write it into your contract as whatever amount of time you think you will need to get the inspections done and feel confident in it, without it being so long that it puts off the sellers.

I use the binoculars to see areas that I can't get close to easily.  I usually want to look at the roof carefully. 

The cap rate is the Net operating income divided by the total cost of the property.  As I said before, the expenses will usually be about 45%-55% of the gross rents.  I want my cap rate to be at least 3 % points above my cost of money.  For instance, if my loan rate is 4.5% I would like to have a cap rate of 7.5%.

Good Luck.

Bill