"Is this a good Deal?" The investor asked me as we looked at a model home. I replied that it is and then did the research to back it up. Here's a simple way to verify the "deal" status of a new home.

The investment buyer will want to know two things:

   1. What's the marketability for this home?
   2. What are the rents for this type of home?

Let's use a recent purchase as an example.

The buyers looked to purchase a new home (after incentives) for $144K. They hoped to be cash-flow positive. Their target monthly payment for this home would be around $950/mo. They also wanted to know what they could sell the house for in the near term. Let's answer the questions.

Marketibility Analysis

If selling agents are kind, they'll include the marketing name and builder information for the homes they list in the mls (multiple listing service).

I searched the mls by model name and found the following history:

There are two homes of this type listed: one for $175k (City A), the other for $221,185 (City B). They buyer is buying in City D so this information is not completely applicable. Each area has it's marketing pecularities. Still, the buyer is comforted in knowing that they've purchased brand new for $144k ($78/sq foot) and that there are parties listing between $95-120.

Remember: List price is different than sale price.

Let's dig deeper. There's a pending sale in another city for $92/sq foot. Past sales indicate that over the past two years home sales prices for this model have measured at between $92 and $158 per square foot. More accurately... sales in the same city have varied from $98 to $145 per square foot in the past two years. Of course past price is not a complete indication of future value. Even so... this looks like a great deal!

Rentals:

The rentals tell a different story. In this case there are no models on the mls that have served as rentals. The next best thing to do is look for current rentals with the same approximate square footage, bedrooms, bathrooms, and garage in the same vicinity.

In this example the rentals are as low as $850/month to as high as $1400. When comparing against new homes the rents are from $950 to $1400.

It appears the buyers may be able to break even or make as much as $450 per month.

Conclusion:

The buyers feel they have great potential equity in the homes and have at least some cash flow possibilities. The history gives the buyer's the "warm fuzzies" they hoped for and the property is purchased.

Now to scout for the next property.........

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Chuck Willman (480.292.0600) is an agent specializing in discovering properties appealing to first time home buyers and investors. Though based in the Phoenix, Arizona metro area he also deals in properties nationwide with clients from around the world.

photo: "Open Sesame" by Daniel Wildman http://www.sxc.hu/profile/danzo08