As an Investor, having a Realtor to work with is important in your business if you are buying or selling houses on the Multiple Listing Services. Many new Investors rely on their Realtor to send them “good deals” to buy, hold, fix and/or flip. However, a Realtor does not know what good deal means to an Investor. A good deal for us could be the cash flow that you receive on a rental property or it could be the profit that you would receive from reselling the home. As Investors, you are taught a MAO “Maximum Allowable Offer” Formula in which you use to make offers on homes for buying, fixing and reselling. The formula varies based on your own situation. The average formula used for Investors who have to get hard money to purchase the home would be: ARV (After repaired Value) x 65% - Repairs = MAO. Let me give you an example: $100,000 (ARV) x 65% = $65,000 - $10,000 Repairs = $55,000 Maximum Allowable Offer. This formula would then leave you with $35,000 for holding costs, cost of money, closing costs of purchase and resale, and then profit. Your MAO formula would be different if you are purchasing the home as a Landlord and/or you have your own money to fund the deal. You may be willing to pay between 70-75% of the After Repaired Value for the home - Repairs = Your MAO.
Determining the After Repaired Value on a property is very important and you should use comparables no more than .5 miles away and no more than 6 months old. I like to stay in the subdivision where your property is, as each subdivision has its own amenities such as gates, pools, and homeowner associations which will make a difference on your comparables. When making an offer on a home, you should always drive AT LEAST 2 streets in front of the house and 2 streets behind the house. Always pay attention if the subdivisions change drastically in the price and the subdivision amenities. I also like to ask for active, active with contracts and pending properties in that area so you will know what comparables are going to close that you are able to use for comparables. Obviously, you can’t use active houses or pending houses until they sell, but knowing that the same square footage house as yours in the same neighborhood is selling for $20,000 more is very important.
Many Realtors are able to set you up with a website for your comparables so that you can take the time to look at each and every one of them. Key factors to look for are the date they sold, what type of sale it was, and all the updates that were completed. I have found that often Investors will either go too high or too low on determining their After Repaired Value. When I first started out as an Investor, I hired an Appraiser to come out and appraise the house in its present condition and also in an after-repaired condition, too. I learned so much from the Appraiser as to what would increase the value on the property and what would not; but this was done after the home passed my home inspection and I had used sold comparables to determine what I thought would be a fair after repaired value. You could also ask your Realtor to provide you with a comparative market analysis (CMA) by either providing them the address and pictures of the house, or taking them to the house and providing them with a list of upgrades. Also, ask them what price they would list the house. However, what I did find was that, if you were using the same Realtor to buy the house and then to re-list to sell, sometimes their values would be higher than what you could truly get.
I would suggest that you have a minimum of 6 solid comparables that you can use to determine the after repaired value on your property. The comparables should have almost the same amenities such as: garage, carport, pool, basement, Florida room, same number of bedrooms/bathrooms, no more than 100 square feet difference than your house, and should be all one story or all two stories, if possible. Why six comparables? That is because if you are selling your home to an FHA Buyer, you will need two appraisals when selling after 90 days from your purchase date, as they require that the Seller (You/Investor) has owned the home for a period of 90 days. In addition, the Purchase Agreement cannot be signed between the Seller (You) and your new Buyer until the 91st day that the Seller/Investor has owned the property which is called “seasoning.” You can sell to a cash, conventional or VA buyer; however, before signing a contract with any Buyer, always call the mortgage company and ask if there is a “seasoning” requirement for the Seller as you are selling a flip house. I also like to have sold comparables that are no more than 6 months old so that is why I will look at the active, active with contract and pending properties, too.
Remember, you will need to purchase the property, rehab it, and if you can’t sell it to cash, conventional or VA Buyer, then you will need to wait 91 days to sell to an FHA Buyer. This would mean that if you are counting on your comparables which are already 6 months old from the date of purchase, they are now 9 months old and the appraiser may not use them due to the fact that our market is always changing. Remember though, an appraisal is just an opinion and if you provide the appraiser with comparables close to all the amenities of your house and a list of all the updates, you should have no problems with the house appraising especially in a Sellers’ market.
I suggest you learn your market and stick to investing in a few select neighborhoods that you really know the market value of houses. I am not saying don’t make offers out of your area, but finding your niche neighborhoods will make you tons of money.
Please keep sending me your questions and topics that you would like to hear about, so I can be sure to keep feeding you with the information that you need in order to kick off 2017 with high success and bring your Real Estate Dreams to Life!