understanding market values....

Real Estate Deal Analysis & Advice
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understanding market values....

Ian MacLeod
Nanaimo, British Columbia · Member since 2012 · 10 posts · 0 votes

I am a relatively new investor and must admit I am really struggling with determining what a property is worth...I realize ultimately if the deal goes far enough we will need to do an appraisal and this will tell us the lending value.....However, when I am analyzing properties sometimes the pricing just does not make sense....for example two duplexes on the same street within a few blocks of each other....they appear to be in similar condition....One is a foreclosure listed for 97,000....another is a regular sale (not foreclosure or short sale) for 59,000....the foreclose is vacant and needs work...the regular sale is in good condition, has performing tenants in place for 650/side...I just don't understand why can be so different....When looking at properties I see examples like this all the time. Obviously, to me the regular sale with the performing tenants seems to be the better deal - particularly for someone like me who looking to buy and hold....However, these huge discrepancies cause me to second guess myself a bit....I think, what am I mssing here? Why is the property that is a regular sale so much cheaper....Its as though they put the price tags on the wrong houses....I would appreciate tips that anyone can offer on doing a quick analysis of value when I am considering properties. Thanks in advance for any insight.

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  • Kelly N.
    Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
    13y

    Hi Ian,

    Listing price is very rarely based on value to an investor, at least in my market. In the instance you listed, the regular sale looks like a good deal. I suspect the other is listed for what is owed on the property, or close to it. Don't forget a lot of people are underwater in their mortgages due to the big bubble burst.

    To evaluate a property quickly, I use the 50% rule-
    https://www.biggerpockets.com/forums/52/topics/17612-where-does-the-5-rule-come-from-

    Another test is how much the monthly rent is as a % or purchase price. People on BP like to see between 1-2% depending on their market, test a few out and you will see what is good in your area.

    Now that I've been at this a while, I can pretty much judge how much a house is worth to me by what it rents for, and how the utilities are handled. I made a spreadsheet (similar ones available under 'Resources' in the FilePlace on this site. I can plug in the current interest rate, rents, taxes, insurance, utilities, maintenance costs, and purchase price and it calculates how much money out of pocket I'll have, what my return is, when I will get my money back out of the deal. I set up a tab for each property I consider, then it is easy to go back and fiddle with numbers, and it is also a great place to put other pertinent info about the property- when they put a roof on, how much they paid for the property and when, who the owner is and where they live (that can be helpful if they are out of state).

    I've found that some properties are listed close to an amount I'd be willing to pay, others are way off. You never know what they will take in an offer til you try :)

    Kelly

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    The asking price is almost irrelevant, it's a property for sale and you need to look at a range of pricing, +/- 25/30%, maybe a tad more if you're wholsaling. Then work the comps to arrive at your value and base your offer on what you find. Retail buyers are generally guided within a range of 10% either way. Don't be intimidated by a bank's asking price, it is what it is. Good luck :)

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  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    And even though they are similar and one is $97K and one is $59K, they could still BOTH be overpriced. You need to find recent sales in that neighborhood and then determine if there are any issues, defects, major power lines, backs up to a convenience store, etc., that could explain the difference. There are definitely crazy listing prices out there -- a condo complex next to me had sales at $155K - $170K, but a foreclosure in the same building was listed over $220K. We looked at many SFHs listed way below neighborhood averages, but quickly found that here in MD, they apparently build homes on underground springs, and most of the ones that looked like great deals actually have drainage pumps in the yards and moisture damage/mold from flooding and no real way to fix the problem, you'd just be buying an eternal headache. If you know where you want to invest, take time getting to know the area as well as possible and keep up with current sales there (and condition of those sales -- needs rehab or move-in condition?) Then when a great deal comes along, you'll know it immediately and will feel comfortable jumping right in.

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  • Ian MacLeod
    OP
    Nanaimo, British Columbia · Member since 2012 · 10 posts · 0 votes
    13y

    Thanks for your responses...great information....Particulary that pricing has little do with the actual value. I was sort of under the impression that when selling a property you would ask close to what it is worth....Now that I understand that asking price and true value have little to do with each other some of the price discrepancies make sense to me....It's sure great to be able to bounce an idea off people with more experience than me.....Your insight is appreciated.

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