Analyzing a Rehab Property for Investment

By
Mortgage and Lending with TVM Funding Group LLC

Analyzing a Rehab Property for Investment 

So many lessons can be learned in real estate. However, if you should always keep this one in the front of your mind which you should have hear before, "You make your money when you buy a property, not when you sell it." When you started as a real estate investor, or if you didn't keep this in mind, then you learned the a very difficult lesson. Sometimes the reason for making this mistake is simply that many real estate investors don't know how to correctly analyze a rehab property for investment in order to pruchase it correctly. We all would like to "snatch a deal", but first, we have to research and determine what the true market value of the investment property really is. How do you go about this?

When I am working with an investor especially if they are newer I will interview them about the property and loan they need from me. I ask questions like, "Do you know what the fair market value of the property is, and when they give me an answer, the next most obvious question for me is how they came up with that value. Here's the scary part for me, the number one answer that I usually get, (especially from newbie investors), is that they were told the market value of the property by their realtor.

Now, I don’t want to alienate any realtors. As in any line of work, there are good ones, and bad ones, but the one constant, is that they are all overly optimistic about the price that a property will get on the open market. In my experience, if your basis for analysis is on their opinions solely then it is not a very safe analysis to use.

The best way to use your realtor is to have them run "comps" (area comparables of homes that have sold in the last year) for you. You can pull "comps" yourself off the internet, but the realtor software for this is usually much more reliable. Also, sometimes it's better to see all the "comps" of a neighborhood or area then locate the properties that best match yours. This way you know you are using the right comps.

I’m sure that many investors reading this article already know this, but what is the best way to analyze these "comps"? This is another question I ask of potential private or hard money loan candidates who come to me for financing. When there is a large enough spread between what the lowest "comp" sold for, and what the highest "comp" sold for, how do you relate this to the property that you may be trying to buy?

Once again, the most common answer is scary. Most real estate investors never even bother to look at the "comps". They often take the easy way out and decide to average the numbers of the various "comps". This can give you an inaccurate number that will cause you to spend time on a deal that is not profitable for anyone. Some investors actually think this is a good idea to do this, deleting the lowest price "comp", and the highest price "comp", and averaging the rest. Bad idea! Don’t ever do this because it will cost you money in the long run for taking this shortcut. The five or six "comps" that you get should all be less than a mile from your property and each other, this way there is never a reason to not take 30 minutes to an hour of your time to review them thoroughly.

Just taking an average is a basically a bad way to analyze the true market value of the property. Realistically, in most areas of the country (especially metropolitan areas and cities), the actual market value of a property can vary significantly from even one street to the next. If you personally review each property, you can analyze them correctly and accurately establish the after repair value of your deal.

For each property that you analyze, you should consider the following criteria:

  1. How do the properties on the "comp" block compare to the properties on the block of the investment home that you are interested in buying? If the block that the "comp" property is on, looks as though the homes are worth more or less than the homes on the desired investment property block, throw them out. These comps are no good.
  2. Compare and contrast the physical structure and the amount of ground that the "comp" has in comparison to your investment prospect. Are they similar, or different? You’d be surprised how many times I’ve seen a single family home that was assigned the "comp" of a twin, duplex, or something else entirely. If you don’t see for yourself, you just never know.
  3. On the "comp" itself, it lists the square footage, the amount of bedrooms, and the amount of the bathrooms that each house has. Once again, is it similar to the investment property that you might buy?

If your evaluation finds one or two "comps" that pass all these tests, you have a real basis for assigning an after repair value that makes sense and is accurate.


The minimal amount of due diligence that you put into this evaluation could end up saving you thousands of dollars, and a lot of heartache.

 

TVM Funding Group represents many private equity firms, lenders, and investors nationwide.

We welcome any commercial or residential loan scenario nationwide.

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Comments (1)

Harrison K. Long
HomeSmart, Evergreen Realty - Irvine, CA
REALTOR , GRI, Broker associate, Attorney

Thanks for your article here on analyzing a rehab property for possible investment.  Some of the points you make a right on.

The investor for first hire a qualified and experienced Realtor agent who would then provide information about properties available, find a property the investor likes, provide information on all relevant comp sold properties, in the city, area, and neighborhood. The Realtor would be careful to look at each property and see how that would compare to the possible purchase in terms of lot size, size of the house, amenities, condition of the properties, location on the street, views, proximity to major streets and noise, where schools are, etc.

Investor buyers should get personally involved and do extensive due diligence, including working with a reputable property inspector and checking the local title records for the property and area.

Best wishes. Harrison

Jan 08, 2009 11:39 AM