12 Steps to Determine the After Repair Value (ARV)

by | Mar 8, 2017 | Blog

Every investor needs to be able to determine the After Repair Value (ARV) as close as possible, prior to ordering an appraisal. In order for a property to be considered comparable to the subject property, it needs to meet certain criteria. I have put together a list of twelve criteria that will help you get as close as possible to the ARV.

Try to find at least three comps. Remember, one comp is not enough to determine the ARV in most cases. You need to find at least three in order to determine the ARV because this is how an appraiser is going to do it. 

Stay within the major subdivision of the sub­ject property. Try to find properties that are as close to the subject property as possible. Don’t travel over one mile or into other unrelated subdivisions to get sold comps, unless you absolutely have to do so. 

Do not cross any major roads or highways. Sometimes crossing a major road, intersection, or highway, etc., can give you a false impression of what the value might be as one side may have higher values than the other side for similar properties. You may not understand why until you drive the area to see. Certainly, if you cannot find any comps (or enough comps) you may have to cross over to find some. 

Stay within the tightest timeframe that you can. Start with comps that have sold in the last 90 days or less, and then incrementally expand your timeframe to one year if you cannot find enough data. 

Find homes built in a similar time period. This means homes built in the 1920s and 1930s should not be compared to homes built in the 1980s. Find homes built around the same time period when looking for comparables, generally, plus or minus five years at the most. 

Find homes with similar square footage. Plus or minus around 15% can be a good rule of thumb to follow to find enough data to utilize. So if the sub­ject is 1500 square feet, select a range that goes from 1325 square feet to 1725 square feet.

Look for similar style homes and/or a simi­lar builder. Tract neighborhoods are much easier to evaluate than an area with custom-built homes because many of the homes were built around the same time with very similar floor plans. You can have neighborhoods that have a mix of both. There are subdivisions and neighborhoods that have a combination of everything–older custom homes, newer custom homes, older tract homes, and newer tract homes. Be sure you are comparing the right ones when doing your evaluation!

Look for similar school districts. There are subdivisions that can cross school districts that are right next to one another with similar homes to the subject. However, one area sells much higher/lower than the other, and you cannot figure out why. Be sure to look at the school district because it can have a major impact in determining value.

Don’t just pick the highest sold comp(s). Many new investors like to go straight to the highest sold comp and use that to determine the value. Look for comps that are in similar condition as the subject is going to be once completed. When an appraiser is doing an appraisal like this, it is called a “subject to” appraisal, which means the value is subject to the underlying improvements that are listed in the actual appraisal document. Also, it takes at least three comps to determine the value and not just one (and certainly not the highest one).

Look for any external influences. This includes things like is the property on a busy street, does it back up to the commercial property, are there high ten­sion power lines above the house, does it back to rail­road tracks, is it across the street from a school, does it side to a four-lane through street? Any of these things can have a negative impact on the value. Of course, do not neglect any influences that can have a positive impact on the value such as backing to a golf course, a wooded lot, lake view, or nature preserve.

Look for any functional obsolescence. Things like walking into one bedroom to get to another bedroom (known as a deficiency), or $20,000 worth of appliances in a $90,000 house (known as super adequacy) are examples of obsolescence. This is something that you must take into consideration, and whether it is curable or incurable.

Subtract any seller concessions if they exist. If the seller gave the buyer $3,000 towards their closing costs, this will be reflected in the listing on MLS and needs to be deducted from the sales price of that particular comp.

That’s a lot of stuff, so be sure to review it again! Once you have all of this data, take the three best comps you have, and start comparing them to the subject a bit more. Keep narrowing it down based on the data above until you can determine yours after repair value (ARV). For example, if you have three sold comps that are $145,000, $150,000, and $147,000, the value is probably going to be somewhere between $145,000 and $150,000. So if you go with $147,500 you are probably going to be extremely close to the ARV.

If you have a Real Estate deal and looking for an experienced and award-winning hard money lender in Texas, please contact us today!

The Real Value of an Appraisal

by | Feb 22, 2017 | Blog

 

Appraisals eliminate the guesswork in determining the market value and actually lower your risk before you purchase. In addition to providing you with the after repair value of your property, an appraisal will show you photos of the comps, location of the comps, and how the appraiser arrived at the final number.

The challenge is appraisals can take time to get, and if you are in a competitive situation and need to close quickly (like a week or less), you or your lender will need to find someone who can meet the timeframe.

Three Key Things a Good Appraiser Does

Determines Actual Square Footage

In Texas, most of the county appraisal districts list the square footage of each property on their website, so investors look up the property online and treat that data as fact. Unfortunately, over 25% of tax records are wrong on square footage (some very slightly and some more severely)! Many investors rely on this data too much and end up getting burned.

Recently one of our hard money clients purchased a property where the online county tax roll records said the house was 1800 square feet. When our appraiser measured it, the actual square footage was 1350 square feet, which, as you might imagine, had a tremendous negative impact on the value. The good news is our client was able to renegotiate the purchase price and get it lowered to offset the difference. But if they hadn’t had it measured, they would have overpaid and lost money in the deal! 

The first thing an appraiser does when they get to the property is to measure it. If your lender doesn’t require an appraisal, you may need to order the one yourself, or find another lender who will.

Drives the Sold Comps and Analyzes the Competition

Appraisers will normally drive by the sold comps they are using for the appraisal to see how they physically compare to the subject. Looking online is the starting point. After that, it’s seeing how they look in person that can take on a whole new meaning. Things like the layout of the lot, location on the street, property amenities not seen or discoverable online can all be taken into consideration.

If you are going to be flipping the property, you may want your appraiser to help you analyze the competition (those are the active properties on the market right now) both now and when you get ready to sell the property. Why do this? It’s good to know how many actives versus sold properties there are. This ratio tells you the health of that particular market. For example, if there are five actives and one sold in the last six months, that probably indicates that the market is not very strong in your area and you may want to reconsider this as a flip. If the numbers are reversed and there are five sold properties and one active, that market is probably very strong and you should not have any issue selling it. 

Looks for Obsolescence and External Influences

Things like walking through one bedroom to get to another bedroom, or not enough bathrooms for the number of bedrooms in a house, can create functional obsolescence that otherwise might not be seen or understood by a new investor. External influences such as the property backing to large power lines, commercial/industrial property, a drainage ditch, or other negative influence, can impact the value significantly. A good appraiser is going to catch these things, make the appropriate adjustments to value, and note them in the appraisal.

A while back a friend of mine came to me with a house I told him not to buy. It sided to a busy, four-way through the street, and backed to a power transformer that was the size of a two-car garage, both of which could be seen online. Despite these issues, he insisted the ARV was in line with the rest of the comps in the neighborhood that were not exposed to these influences. I politely disagreed and tried to explain to him that he should absolutely order an appraisal to confirm the value, even though he was paying cash for this deal and not getting a loan. Rejecting that idea, he closed on the purchase and called several months later to tell me he still owned it. He was willing to take a loss and wanted to know if any of our clients would want to buy it as a rental. This is a situation that could have been totally avoided had he ordered an appraisal.

The Bottom Line

As you can see in the stories above, you expose yourself to greater risk when you do not get an appraisal. If your hard money lender is just relying on comps, you might think twice about what I just discussed so you don’t get overexposed in a deal and end up losing money.

 

Set An Offer Goal Every Month

by | Feb 15, 2017 | Blog

There is an old saying in real estate investing circles, “If you’re not making offers, you are not going to get deals.” It sounds so simple, but you would be surprised how many investors I speak with on a regular basis who say they cannot find deals.

My response is usually, “How many offers did you make this month?” Their reply is none, one, or some very small number. The bottom line is it’s a numbers game, and you will need to make many offers to get a deal under contract.

How many offers does it take to get a deal under contract? It’s a difficult question to answer. You might make one offer and get a deal. That would be great if it happens, but it can also make you jaded into thinking it’s that easy.

A Story to Illustrate My Point 

When I first started utilizing direct mail campaigns many years ago, I got very lucky and got two very good deals under contract that I was able to wholesale quickly and make money. Because of this success, I stopped talking to wholesalers and didn’t make any offers on MLS deals. I also failed to follow through on some of the other direct mail leads I received because they didn’t seem to be as good as the first two deals I wholesaled.

So guess what happened? I had no deals working, and my phone wasn’t ringing like it did the first few weeks after I launched my direct-mail campaign. This was a big mistake and set me back a couple of months before I got my next deal. Sometimes you have to learn things the hard way, and I was certainly no exception to this.

What was I thinking? Because they came so easily, I falsely made the assumption that my phone would keep ringing and I would get more deals just like the first two. I also made the rookie mistake of thinking if I make too many offers, how would I handle all of the volumes if they were all accepted? It’s crazy what you think might happen when you are just getting started. When neither of these things happened, I realized that I had to start making offers and do it consistently. These offers now included REOs listed on the MLS as well as wholesale deals. I also realized that a direct-mail campaign needs to function as a campaign and not as an isolated event.

My Advice 

My advice as a hard money lender is to make as many offers as you can until you start seeing results. These can be offers on MLS deals, offers to wholesalers, or offers directly with the owners of record of a property. Just as you would set a goal for the number of deals you are going to do, or the amount of cash flow you want to make, or the profit amount you are targeting, you need a goal for the number of offers you are going to make each month, because you will not reach your deal goal without an offered goal.

Criteria For Being a “Good” Real Estate Agent

by | Feb 9, 2017 | Blog

Many years ago, I heard a broker with 40 years of experience say, “Of all the licensed real estate agentsin the market, only 1% of them are actually any good.” Whether that’s an accurate percentage or not, finding one that can work successfully with investors is certainly a challenge.

If you’ve had an unpleasant experience with an agent/broker, I want you to understand it doesn’t have to be like that. You just need to find a good one and work with them. I realize the term “good” is very subjective, so let’s qualify what I mean here.

How did I determine It?

I got lucky. The first real estate agent I decided to work with called me off one of my For Sale By Owner signs in front of a house I was selling. I actually had many agents call me off the sign, but this one was different, and in ten seconds, I knew I could work with her.

She immediately told me that she had a buyer for my house and asked if I would pay her a commission. I agreed and we ended up working together for several years until she left the business. She delivered value by setting expectations and stayed focused on getting deals closed. From working with her and other good real estate agents, I learned what to look for before hiring one:

  1. Someone who is highly motivated, who actively strives to close deals, and is full time in the business.
  2. Someone who is easy to work with and makes a good impression on potential buyers and sellers.
  3. Someone who has invaluable industry experience, as well as experienced in the area where you are buying or selling.
  4. Someone who is a great manager of people and communicates effectively throughout the buying and selling process.

Talk you your investor friends or others in your investor circle to get a referral. If you believe they meet the criteria mentioned, you should definitely consider hiring them. Once you find someone that works out, be sure to hang on to them for as long as possible, as they will have a positive impact on your success.

Three Reasons “For Sale by Owner (FSBO)” Is A Mistake!

by | Feb 2, 2017 | Blog

The more time you spend in real estate, the more you will see things and wonder if they make sense or not. One of those is certainly the decision to list your property on the MLS with a broker or go the other route: For Sale by Owner (FSBO). When I was getting started, I thought FSBO was a great way to market a property and didn’t see any value in using a real estate agent. At the time, I didn’t think it made sense to pay someone a commission just to list a property. I have a sales background, so why would I let someone else sell my property when I can do that myself. Once again, this was one of the things I learned the hard way.

Early in my investing career, I sold many houses FSBO, which skewed my thinking even more. The first few I sold were rentals I had owned for a while, and it was during a time when financing was becoming easier to obtain. You are likely very familiar with the story of subprime lending and the subsequent mortgage crisis that followed. If not, well, it was very easy to get financing which made it easier to sell houses. This made selling to tenants customary. If you didn’t sell to a tenant who was looking to buy, they were eventually going to vacate because they had seen their friends, neighbors, and co-workers get mortgages, and they too wanted the dream of homeownership.

Selling FSBO does the following:

  1. Limits your market exposure
  2. Taints the market’s perception of you and your property
  3. Costs you more than hiring a real estate agent

Limits Exposure

Think this through with me: If your property is not on the MLS, it is receiving ZERO market exposure from every other broker/agent in town. If all you have is a sign in the front yard, you only get local traffic. No exposure means no buyers. Why would you limit yourself to such a small buyer pool? Even if you paid too much for this deal, or repairs spiraled out of control and you are going to lose money, you still need to move the property of your books as quickly as possible. The fastest way is with an agent/broker listed on the MLS.

Taints Your Property

There are two things going on here with regard to perception:

First, you are being cheap and don’t want to pay a real estate commission. Whether that is true or not, that’s what is going to be perceived. This will certainly prevent many agents from even showing your property to one of their clients, because they know they are going to have to deal with you personally (and not another agent), and they will have to negotiate some form of compensation/commission with you.

Second, if the asking price for the property is higher than the average sales price for the area, and/or is in an area that is more affluent, the perception will be that your property is not worth it. But you just spent $20K on the hardwood flooring, $18K on the custom cabinets, and $15K on the appliances. You put travertine in the kitchen and baths, modern chrome fixtures, and a number of other upgrades. No one knows this because they would have to call you to get the info. You are asking $750,000 for this house on the same street as another house that is listed with a local, brand named brokerage sign, who also has a stellar reputation. That house has a description of the same things in yours, but theirs is on every real estate site on the Internet. When buyers drive by, they see your $3 sign you bought from Home Depot that says For Sale By Owner with your phone number scratched in the white space at the bottom. Please don’t do this!

If you think that all an agent does is enter the property address and description in the MLS and wait for the deal to close so they can get a commission, you are absolutely mistaken. If that’s all your current agent does, it’s time to go out and find a good one. I can personally guarantee you from experience, this will make all the difference in your ability to make money flipping properties.

Costs You More

In most cases, you are going to have to pay someone a commission to bring you a buyer as most homes are sold by agents/brokers that are listed on the MLS. Also, in most cases, FSBO is going to keep your property on the market for a much longer period of time. The longer it stays on the market, the more interest, utilities, and property taxes you pay, along with the more landscaping you have to maintain. If you don’t have any experience working with buyers, you may end up going with someone who is not really approved for financing, wasting even more time. It’s much safer and faster to list the property on the MLS, with a good real estate agent, as it will certainly be more profitable.

If you have a property deal and you are looking for an award-winning hard money lender in Austin, please contact us today!