by Investmark Mortgage | Jan 26, 2017 | Blog
Since I’ve been in real estate, I’ve seen investors infatuated over 2-4 family dwellings (i.e., duplexes, triplexes and fourplexes). The reason: these properties have the ability to produce high cash flow, and conforming loans are available (30-year, fixed-rate mortgages) for long term financing.
When a real estate investor finds one of these deals where the returns look compelling, they are often frustrated by the fact that the ARV is not proportionate with the income it produces, and many times that blows up their deal. How does this happen? Most of the time the investor is using a rental multiplier approach or the NOI approach to determining the value, and that gets them into trouble.
Consider the following example. Our client John was recently looking at a duplex that had 3 bedrooms and 2 bathrooms on each side and would rent for $950 per side per month. With $1,900 per month in total rent, John assumed the value could be based on a gross rent multiplier (GRM) of at least 100 (meaning 100 X rent), making the ARV worth $190,000. Although appraisers do look at the GRM on investment properties, it’s not going to be used to determine the value for a conforming or conventional loan.
Even worse is when investors start to analyze fourplexes as small apartment buildings using a net operating income (NOI) calculation, which is the commercial property approach. This approach to value takes the total rent minus total expenses, not including the debt service. Although it’s always good to know what the NOI is, the lender in the transaction will not allow the appraiser to use this method to determine the value.
The Challenge and Reality
Although they are multi-family by nature, 2-4 family properties are considered 1-4 family from a lending perspective. This means they will be appraised just like a single-family property does use a sales comparable approach. In many markets in Texas, there are not enough sold comps to support a value equal to what you would get by taking either of these approaches. Why is this the case?
To answer this question you have to ask yourself: who buys these types of properties? With some exceptions, most of the time the buyers are investors. How do investors buy? Most investors try to buy at a discount to the market value, and many times are buying off-market. When there is not enough sales data available, the value becomes more difficult to determine, and this, in turn, tends to lower the value of the property.
Conclusion
Many times (but certainly not all) we see the value in the 2-4 family deals coming in at the purchase price plus the repairs. In the scenario above, John’s purchase price was $152,000, with $16,000 in repairs. The appraised value was $170,000. However, his positive cash flow is almost $800 per month with a cash-on-cash return of 24%. He had to bring $40,000 to closing but wanted the returns this deal offered. The point here is don’t get too disappointed if the value is not where you think it should be for these types of properties. Just set your expectations upfront and know what returns you need to make the deal happen for you. You might end up finding a deal that works.
by Investmark Mortgage | Jul 20, 2016 | Blog
Most of you have probably heard the saying, “No man is an island” by John Donne, a 17th Century English author. I heard someone say this at the first mastermind meeting I attended as the reason they wanted to be part of it. It has resonated with me to this day. Translation: no one person is 100% self-sufficient. We all rely on others at different points in our lives. Not only in our personal lives but also in business. Having a team that you can depend on in a business environment is critical to your success.
Now this might not be intuitive if you’ve never been in a mastermind group before, but I want to make it absolutely clear that one of the most valuable assets you can possibly have for taking your real estate investing (or any business endeavor) to the next level, is a mastermind group. I can tell you in all honesty that I would not have the portfolio, the resources, or the knowledge base I have today, without my mastermind group. In fact, most of what I know about real estate investing came from being part of my mastermind group.
I learned how to buy deals correctly, protest property taxes, find the best real estate attorneys, create special provisions to my leases, find my property manager, find my CPA, as well as excellent tradesman for any type of work—all from my mastermind group. I’ve learned more than I can possibly relate here, but literally, I’ve found resources on anything involved with real-estate investing from difficult situations with tenants and clients, code enforcement, the city, contractors, etc., from my group. I have also done multiple deals with everyone in my group—we all do business with one another. I cannot stress enough how it’s more powerful than you can possibly imagine. So if you are currently not in a mastermind group, I encourage you to get one started ASAP.
So What Is a Mastermind Group Anyway?
The mastermind group concept comes from Napoleon Hill’s book Think and Grow Rich. If you haven’t read it, I highly encourage you to do so. At least read the chapter on the mastermind concept. For now, you can watch YouTube videos where Napoleon explains the concept if it’s completely brand new to you.
Basically, the concept is this: the whole is greater than the sum of the parts. That is, 1 + 1 = 3. The point is that 2 brains together are actually equivalent to 3 brains on their own. This principle works exponentially the more minds you add. So imagine the power of 15 people. This synergy will produce valuable information that will propel your real estate investing faster than anything else.
Who Do You Need In a Mastermind Group?
There is no hard and fast rule about who must be in your group. For example, our group consists of full-time real estate investors and everyone owns rental property. We have agents, brokers, an appraiser, some lenders, an accountant, a financial planner, and some wholesalers as members. However, we weren’t looking for those types of backgrounds when we got started, it just happened to evolve with those individuals over time. Just to give you an idea of the volume of business we do, combined we close over 100 transactions each month.
What’s key is that those in your mastermind group are open, honest, and trust each other. We have no secrets, and no one would ever go behind anyone’s back in a deal! We discuss everything openly and I consider everyone core members of my real estate investing team.
Starting Your Own Mastermind Group
So how do you start a mastermind group for yourself? Begin by networking with people in the real estate investor community (i.e., local investor clubs, meetup groups, etc.) Find those people that are at your level or higher—those that have different backgrounds but share your goal of getting to the next level in their real estate career.
Focus on finding someone with similar interests (wants to build a rental portfolio, flip houses, etc.) and start meeting with them on a regular basis. Then, add a 3rd person that you both agree to bring into your group. Have a meeting or two with them and then find another person and add them. Don’t rush into adding too many people at one time or feel like you have to build a large group immediately. This is about quality, not quantity. You need those individuals where you can build strong relationships of trust.
Setting the Ground Rules For Your Mastermind Group
As with any organization, it’s important to have a set of rules or guidelines that everyone can follow so that meetings will be taken seriously, and you will make the most productive use of time. After a few meetings, it will become easier to get a feel for how you want to structure it. You certainly don’t have to do it the way I am going to describe, but after 10 years of meetings, I have found the following to be most effective:
- Group Size: No more than 15
- Frequency: Every other week for no more than 2 hours
- Agenda: Roundtable discussion where each person has about 5-7 minutes to discuss what they are working on and/or bring up any issues they are seeing or experiencing in the market. Maybe have a guest speaker occasionally that adds value to the entire group.
- Participation is Key: You want a group where everyone participates in the roundtable discussions. If you have this, meetings take on a life of their own. This is where the real “mastermind” takes place. Once everyone has heard from the rest of the group, the meeting can take on a new form where members can jump into the conversation and share what they believe would add value and benefit the entire group.
- Attendance Policy: Try to get everyone to commit to attending every meeting
- Adding New Members: Pace yourself here and do this slowly by getting consensus from the group on specific people to add.
- Removing Members: It’s important to have the right people in your group to have the most success. From time to time you may need to remove more than one person, so don’t be afraid to do this. Anyone who never shows up, is toxic in the group, is a pessimist, or brings the meetings down, needs to be removed. If you don’t, you will regret it because other members will leave your group. To remove someone, simply send an email with a message like this: We have had some members that have not attended any of the meetings. I am requesting that anyone who does not want to participate, to please let me know and we can remove you from the group email list. Or, give them a call them to explain the fact that you (and your group) feel that they may not be the right fit for the group and that you are going to remove them from the email distribution list.
Conclusion
Find the right people, the right venue for having the meetings, and have fun with this. After your first meeting, you will experience the value I have described, will look forward to every meeting, and will soon watch your real estate investing accelerate to the next level.
If you are a Real Estate Investor, looking for a Hard Money Lender, contact us today!
by Investmark Mortgage | Feb 24, 2016 | Blog
Recently, one of our biggest clients had a large package of houses where he was going to refinance out of a hard money loan and into long term, permanent financing. One option he was considering was doing a portfolio loan with a small bank. For those of you who are unfamiliar with this type of loan, let me explain it.
A portfolio loan is a loan that is serviced by the underwriting lender (to be held on the lender’s books in their portfolio) and is not sold on the secondary market. These loans (also called blanket loans) allow a borrower to bundle or package more than one asset into a single loan with one monthly payment. Over the years, I have used portfolio loans with different banks where I have packaged multiple properties into a single loan.
In theory, they are easier. Hey, it’s one loan with one payment. If you have 30 houses, it’s much easier to make one payment vs. 30 payments. And let’s face it, we all pay enough bills every month, so who wants to pay 30 more! One payment each month sure sounds good. But before you consider a portfolio loan where you package several of your properties together, read the rest of this to understand not only the advantages, but also the disadvantages of using them.
The Challenge
If you are buying houses and keeping them as rentals eventually you are going to be exposed to portfolio loans. Why? As you may know (and as of the date of this writing) Fannie Mae allows 10 non-owner occupied mortgages before you have to seek other financing options. I reference the date here as Fannie Mae changes their rules frequently and so do the lenders who underwrite Fannie Mae loans with their overlays (additional rules on top of the Fannie rules).
To qualify for a Fannie Mae loan you must have good credit, a low debt-to-income ratio and some cash reserves. I have encouraged many clients over the years to do as many of these loans as possible as they have the best rates and terms, which ultimately leads to much higher cash flow. If you do not qualify for a Fannie Mae loan or you have exhausted your loan limit, small banks can be a great resource.
Small Bank Financing
When I refer to small banks, I mean any bank that is not considered a money center bank. Without going into the financial requirements that technically make up a small bank, they would not include Bank of America, Chase, Wells Fargo, Citibank, etc. which are large money center banks that do not offer these types of products. I have done a number of portfolio loans with small banks and so have several of my clients. The thing to keep in mind is small banks (that like to do real estate loans) like for you to package multiple properties into one loan. They get more collateral which helps lower their risk, and they are easier to manage internally for the bank. Here are the advantages and disadvantages based on my experience:
Advantages
- You can finance a large package of properties as long as it is under the loan limit of the bank. Banks have limits based on their size as to how much they can loan. With the banks I have used over the years I have seen it range from $1M to a $60M loan limit per borrower. Individual loan limits are based on your creditworthiness along with the bank’s appetite at a given time for that particular loan.
- In the most recent market, I have seen banks offer up to 75% loan-to-value (LTV) and you can get cash out if you are refinancing up to the LTV, if you have owned the property for over a year. It’s going to vary by bank, so you will have to call around to find the terms that work best for you and your situation.
- Very competitive interest rates, which are based not only on market conditions, but also your creditworthiness and possibly the deposit relationship you have with the bank. Some banks have no deposit requirement and just want to do loans whether you open an account there or not.
- There is one set of loan documents that you have to execute, vs. a separate set for each property, allowing for much lower closing costs.
- One payment each month vs. many.
Disadvantages
- Tracking the P&I (principal and interest) for each individual property in a portfolio loan is a time consuming battle and almost too difficult to administer. Also, if you are like most investors, you (as well as your CPA) will want to know the profitability of each individual property by itself. Running a P&L (profit and loss) statement without the P&I factored for each one will be not only time consuming, but extremely difficult.
- Probably the biggest disadvantage is when you decide to sell a property (or properties) that are under one loan.
- The first thing that happens when you sell is your bank will need to determine what the payoff amount will be. If you have been paying on the loan for a while there could be significant principal reduction that is applied to the overall loan, but this will not necessarily be applied to the individual property (or properties) that you are selling you’re your bank sends the payoff. So what does that mean? That means that your lender may adjust the payoff to an amount that is much higher than what it would be if you did an individual loan with a single promissory note and lien (not good!)
- Your bank will not automatically modify your payment unless there is a provision in your loan to accommodate this. You need to read your docs carefully to make sure there is a provision in here to do this, prior to going to closing. If it’s not there (which it most likely will not be) your cash flow will certainly be lower. This is because your payment remains the same, while you are now collecting a lower amount of rent.
- If your bank does make the adjustment for you, they may make you re-qualify for the loan again before any modification. What? Yes, that’s correct. If you have been in the loan for over a year, and sell a property (or properties) in your portfolio loan, you will probably have to submit your financials in order for the loan modification to take place.
- Your bank is more than likely going to charge you a fee to modify your loan. There will be some document fee from their legal team and there may also be some administration fee to complete the transaction.
My Advice
Personally, I like portfolio loans with small banks. Sometimes they can be easier to get than a Fannie Mae loan depending on the bank you are using and your experience with them. However, I think the disadvantages far outweigh the advantages of packaging properties together in one loan. As an alternative, I would recommend doing individual notes and deeds of trust (the mortgages) and set your payments for each on auto-draft with your bank. After discussing this option with one of my biggest clients, they decided to go the individual route and are very happy they did. The cost was a bit higher, because you have individual docs that need to be created for each property, but these costs can be recovered in a relatively short timeframe.
Wells Fargo does offer a portfolio product but it is different from most smaller banks and not for purposes of this article.
by Investmark Mortgage | Feb 4, 2016 | Blog
Many investors think marketing a property before it is totally complete will give them a jumpstart on finding a buyer and that it will help them sell the property faster. While in theory this may seem to be an advantage, it will more than likely hurt rather than help.
I consider marketing a property early as any of the following: listing the property on the MLS, putting a for sale sign in the yard, letting potential buyers in the house, or posting ads online (through real estate sites, social media, Craigslist, etc.) all before it is 100% complete. When you do any of these things, you potentially lose some of the desirability, along with any market momentum that comes from a house that has been structurally and of course cosmetically completed. As my friend and realtor Mike Perry says, “When your house goes live on the MLS, it’s the Belle of the Ball. It will get the most attention the first week more so than any other time. You want to capture as many ready buyers as you can during this timeframe”.
Think about this for a minute. If you are a real buyer, what are the chances that you are going to want to make an offer on a house that isn’t finished? Minus a new build where the builder is offering buyer incentives, along with selections on the flooring, paint color and maybe the fixtures, in most cases you are going to want a finished product ready for move in. In fact, you cannot close until everything is completed anyway as the appraiser will inform the lender as to the status of the property.
As a seller, one thing you may experience, whether there is a for sale sign in the yard or not, is the buyer who will stop by the house when there are contractors there, claim that they love it and would like to buy it. They also want to know if they can make some changes, even though they more than likely have a lack of imagination and really don’t know what they want. I have seen some of my clients actually work with these so-called “buyers” without a contract in place! About 90% of the time, these buyers don’t close, but love the fact that they can have a say in the finish out and be put in a position to control the seller.
Most of these buyers are not even approved for financing (especially someone who is not represented by a good realtor who would verify this before even showing a house). They are tire kickers who like to look at houses they cannot afford, but think they can get a “deal” by negotiating a seller down in price, since they are working with them directly. This turns into a big waste of time and money. I am not implying that the buyer is doing this intentionally. Some just don’t realize what it takes to get approved for a loan and for whatever reason, think they are, or that it will be easy. Also, just because someone says they like your house, doesn’t necessarily mean they want to buy it. Many times they are just being polite.
I have sold many properties over the years and just like you, I am always ready to sell ASAP. To get the fastest and best results possible, you want to list when everything is completed. This includes the landscaping and curb appeal. If you are working with a good realtor (which you should be doing) they are going to make sure it gets listed at the right time so you can have successful showings that result in qualified offers.
by Investmark Mortgage | Nov 30, 2015 | Blog, Uncategorized
This advice is very timely for many of our clients who are selling property right now, and what I learned years ago the hard way. Even if you don’t have a property for sale, or are not flipping property at this time, you might hang on to this for future reference.
Making that first offer work is fundamental to maximizing your profit. Consider the following scenario. Your contractors finish remodeling your house and do an amazing job. It takes a little bit longer than you would have liked (but what deal doesn’t?) After 60 days, you finally have it on the market (you correctly decided to list it on the MLS to get maximum market exposure and not do something crazy like FSBO).
You list it on a Thursday afternoon to attract the most buyers for the coming weekend, and get 3 showings on Friday and 4 on Saturday. You realize with this amount of showings, you probably have it priced right (because showings are a key indicator of correct pricing). On Sunday, your agent informs you that you have 2 offers. One is a low-ball, investor offer that you reject and the other is a full price offer for $200,000 with no concessions! Sounds great, right?
Your agent verifies that the buyer is approved for financing and that the buyer is actually putting 20% down, with 1% earnest money and a $200 option fee for 7 days. You accept the offer and are now officially under contract. The option period starts and the inspection is taking place in a couple of days.
You finally get a copy of the inspection report and discover that the electrical panel is a Federal Pacific and the inspector flags it as a known fire hazard. The hot water heater doesn’t have a pan underneath it, and the roof has hail damage that was never discovered during your initial walk through with the contractor. In addition, there are multiple little things that were not part of the code requirements when the house was built. The buyer is very scared as this is their first home and they are requesting that everything be repaired/replaced!
I know what you are thinking (minus the expletives), because I have been there many times – “There is no way I am going to agree to this! I just spent $45,000 on this house and I’m not spending another dollar on it”. Well, I totally understand.
This is where you really need an experienced real estate agent to negotiate this for you, and keep you at a safe distance from the buyer. If your agent is a good negotiator, they can try to have some of these things removed from the buyer’s list. If you are dealing with the buyer’s agent directly, it may be difficult for you to maintain your composure. You don’t want to lose your temper, say the wrong thing, and blow up your deal thinking, “Who cares about this offer, there are more buyers out there and this is a hot market! I’m telling them NO to everything!” If this is your attitude, you are making a big mistake and here is why:
Statistically (and commonly known between brokers and agents), your first offer may be the best offer you are going to get. Now of course this isn’t always the case as there are no absolutes in anything. However, if you have given the property market exposure, and had a number of showings with 1 or more offers (especially a full price offer), it’s probably going to be your best one. In fact, if everything checks out with the buyer (approval letter, earnest money, and option fee), you more than likely have a solid offer. If you don’t get the sense that this buyer is solid, and something is telling you that this buyer is going to be difficult, by all means, don’t accept the offer and wait for the right one.
Another thing to mention here is just because this buyer wants all of these inspection items resolved, doesn’t necessarily mean they are being difficult. This is a normal part of the negotiating process. In fact, if the big items (bad electrical panels and/or a damaged roof) are not addressed, you are more than likely going to have to deal with this with the next buyer on their inspection. Solution: do a more thorough inspection before you buy the property.
Once your property is under contract, the status changes in MLS and there is a history with your property. If you don’t close, the status is going to change back to Active again, potentially raising questions to other agents as to what happened. Yes, they can see that the status changed and may question what happened to the first buyer. If this happens more than once, you can be certain there will be some questions as to whether there is something wrong with the property.
There is something else going on here as well and that is time is elapsing. Even though your days on market stops once you are under contract, time is elapsing and that is costing you money. Remember, once you close on the purchase, the clock starts ticking. It’s ticking on any interest you are paying, utilities you are paying, and pro-rated taxes that you have to credit to your buyer at closing for the time you owned the property. It may also be ticking on that ideal time of year you want to market the property.
The longer you take to sell the property (and the higher the days on market), the more pressure there is for you to adjust your price. If you don’t lower your price after a certain amount of time (each property and market is different), you will probably see an offer that comes in lower because that buyer sees you’ve had it listed for a while and it’s still active. When they see this it can prompt them to throw a lower offer out there. Also, they see that there was some activity but now it’s back on the market.
If you cannot come to terms with the buyer on what is going to be fixed and the buyer decides to terminate (remember the buyer is the only one that can legally terminate the contract and they must do so during the option period) it may be a while before you get another offer. Depending on market conditions, your property may look tainted and showings will come to a screeching halt. These are all reasons why you need to do your best to make that first offer work.
In the previous scenario, I would probably agree to replace the panel, install a new roof, and negotiate the other items off the list through my agent. This is very reasonable based on my experience. You are not giving in to everything, but you are focusing on the most important items that are going to come up again and impact the next buyer. If the buyer agrees to this, you are more than likely good through closing. If they do not, you may be forced to move on to another buyer.
The point in all of this is keep your emotions in check and focus on your main objective which is to get the property sold, make money, and moving on to the next deal. No two situations are the same and there is no way to document every scenario that you will encounter. If you are on your 1st deal or 51st deal, my advice is use an experienced realtor for all of you sale transactions. I am speaking from experience because it has worked well for me over time. If you have any questions about this, we are here to help you. Feel free to reach out to us by phone or email and best of luck on your deal!
by Investmark Mortgage | Sep 22, 2015 | Blog
Over the years I have bought, rented, sold and funded many houses with garage conversions. Yesterday, a client of ours asked the following question, “How does a garage conversion affect the value of a property?” Great question and one that confuses new investors and some seasoned ones as well.
The Challenge
Garage conversions can be complicated to evaluate. Some garage conversions may appear to be seamless parts of the original home, while others will give the appearance of an obvious garage conversion, which will look and function differently from the rest of the house (meaning you can tell it was a garage that has been converted to a living space). In any conversion, functional parking and storage space are lost. So any potential “gain” has to be weighed against the value lost to the garage space. To properly evaluate, the buyer must first ask a series of basic questions:1) Is the newly created space necessary, or is it simply creating an over improvement?2) Is the functional use of the home better, or worse off, with this conversion?3) What is the quality and functionality of the finished product?
4) Was the conversion permitted by the city?
When answering the first two questions, the buyer must look at the broader market. Many investors feel like anytime additional living area can be added, it will guaranty a return, but this is not always the case. In a community of 3/1 or 3/2 homes, is it really necessary to have a 5 bedroom, 1 bath home? In that same community, would a second, or even third living area be well received? Probably not, especially if this means surrendering and thus losing the value of enclosed parking, or valuable storage in a neighborhood in which a primary occupant may be blue collar workers with trade tools to store. Often, the easiest way to determine market demand for this sort of “improvement” may be to simply stand in front of the home and note if any other homes in the area have similar conversions. If none are noted, then it is likely a good indication of a lack of market demand. Remember, every micro market is different.
Once you have determined market demand for a conversion, then you can evaluate its financial return in the market. Keeping in mind that you have lost parking and storage, you will be starting at a deficit. So any monetary return must exceed the financial loss from the parking before it makes sense. Whew! That can be a bit much to grasp, but this is exactly what an appraiser is going to do when evaluating a house like this. With that in mind, there are two basic types of conversions you will encounter: The Do It Yourselfer and the Professional Conversion.
Types of Conversions
The Do It Yourselfer is typically the most common one you will encounter. If the house you are evaluating has this type of conversion, it will more than likely not add any value and could very well reduce the value after considering the loss of parking. These conversions are notable from their step down and/or sloped floors, dis-functional access and oddly shaped or oversized rooms (a 20’ by 20’ room with few or no windows). These conversions typically have little or no wall and attic insulation and may have undersized cooling and heating systems, or even separate window units. The best approach when encountering this sort of conversion, in absence of consulting with an appraiser, is to attribute it zero value return, as any gain will likely be offset by the loss of parking.
On the other hand, I have seen some garage conversions that were so professionally done, you could not tell the house ever had a garage. If the conversion is professionally and correctly done, it will typically look seamless to the rest of the house with same level flooring (no slope and no step to get to the next room), a vent drop for a common HVAC with the appropriate amount of tonnage (i.e., no window unit supporting the space) and appropriate siding in place of the overhead garage door. It will also need to be free from any functional obsolescence, and of comparable finish out to the rest of the home. Most importantly, the new space will enhance the functionality and use of the home, relative to the neighborhood, and still remain within a reasonable size range. For example, a 2/1 home in a neighborhood that contains many, if not mostly, 3 bedroom 2 bath homes, would likely do well to have a garage conversion to transform the home into a functional, seamless, 3/2 design. Particularly if the existing garage is a smallish sized, single car garage, which would not likely be utilized for parking modern sized cars. Another thing to note here is whether the conversion was properly permitted by the city. In some cases, certain conventional lenders will not allow the appraiser to count the additional square footage if it was not properly permitted.
Determining Value
When evaluating a house with a garage conversion, we typically see the following investor approach. The investor will add the square footage of the conversion to the overall livable square footage of the house, and then look at price per square foot of sold properties (many times using comps without garage conversions) to determine the value of the subject property. This approach is what gets investors into trouble….
Let’s consider the following as an example. You have a house in a given area that has 3 bedrooms, 2 baths, with 1400 square feet, and a 400 square foot garage. The garage gets converted to a living room. You add that square footage to the overall number making it 1800 square feet. However, the homes in the area naturally range from 1100 square feet to 1500 square feet with similar bed/bath count and 2 car garages. The homes in the area sell for $100 per square foot putting the top value at $150,000 of any sold comp. You take the $100 per square foot and multiply that times 1800, giving the subject property a value of $180,000 or 20% higher than the highest comp. Do you think you calculated the correct market value?
What you must do is ask yourself the following question: if you were an owner occupant buyer, would you pay 20% more for a house in a given area to get 400 square feet more living space and not have a functional garage? The answer to that is probably not. In fact, the property will more than likely not appraise for a value this high for the same reason. What many investors forget to do is put themselves in the position of an occupant buyer when evaluating a property’s value.
Here is the correct approach to evaluating a property with a converted garage. If there are supporting comps with converted garages, use as many of those as you can to evaluate the subject property. However, if you cannot find any supporting comps, then you have to back out the garage (by subtracting the additional square footage), and evaluate the property with the comps available to determine the value.
Why do we have to do this? First, the square footage of a garage is not included in the overall square footage of the house, as it’s not considered livable space. Second, a conversion, even if professionally and correctly done, could add square footage to a house making it larger than any of the area comps without conversions potentially forcing larger adjustments to be made to determine the value. When evaluating a property with a garage conversion, 3 results can occur: the value of the subject will increase, remain the same, or decrease in value. It’s based on what the market is telling you in that area. This can also change as market conditions change.
In some cases, not having a garage (even with a nice conversion) can actually lower the value of the property. We have seen this many times and it bothers investors because they cannot understand why that additional square footage does not help. You have to put yourself in the shoes of an occupant buyer. An occupant buyer (especially true in properties with higher values) most likely wants a garage to park their cars and store things. If that’s not available, they will find another house that offers this. Of course, this is not always the case, as there are no absolutes in real estate. However, you don’t have to guess at whether this is the case or not, as the appropriate comps are the evidence that will support the correct value. Use those comps and you should be able to determine the market value of a house with a converted garage.
Mike Hanna is a real estate investor, mentor, author, and public speaker. He has been an active real estate investor since 2002 in both single family and multi-family properties, and has been in the hard money business since 2005.