Could I have done anything differently, Please advice.

Before you bought the property you said the FMV of homes in the area was $176K, were those all from recent property sales around 3 months old? If that is correct then how long was the property listed at $134K? At $134K with only $1,500K in repairs in a neighborhood with average selling prices of $176K, I wouldn't think it had been on the market for very long.

An appraisal is done based on the comparable surrounding home sales. The difference between a Real Estate Agent telling you the FMV and the appraiser telling you the appraised value is exactly that. An appraiser is an appraiser and the Agent is an Agent. They both know (should know) home values based on whats selling.

You can look at a website like www.zillow.com to get an idea from what they call a zestimate. When I bought my duplex there was a zestimate of $40k-$42K, it appraised as is before I did anything to it for $38,300. 10 months later I refinanced and that appraisal came in at $55,000 after paint, carpet, and an electrical upgrade from 60A to 200A service. Maybe the appraiser liked me?

You can also use this http://www.totalviewrealestate.com/ website to research a homes property, it pulls all of the online info from many websites to tell you home value, rents, walking distance scores, schools close by, comparable solds, even the current temperature, and more.

However detailed Total view Real Estate is, its only a starting point. If you want to know what the current value of homes in your area are you need to scour the MLS sold listings. You need to look at over 100 homes currently for sale in your area and watch out for what they are selling for.

Once you have a lot of data to look over start sorting it all out. Look at all the single family homes that have sold in the last 90 days and sort everything out by Square footage, number of bedrooms/bathrooms, selling prices, and more to find out what the comparable sold price is. If your looking at neighborhoods and you don't have many houses that are physically the same then just determine what the home value is by square footage.

Bottom line is this, if you don't know how your Realtor determines the FMV you probably don't know how to either. If this is the case you could be taking bad advice from your agent and not know it. If you agent uses Current listing prices to determine FMV you better find a new agent.

You can look at all of the websites you want for a quick answer but it will not give you near the accuracy of looking at over 100 homes and scouring the Sold listings.

Lastly what are the Rents in the area. If you plan to rent this house out the only reason an appraisal matters is for refinancing. Other than that determining your Cash Flow is more important than the Appraisal price. If the rents in the neighborhood are only $900 for the house your buying your not going to cash flow. You would need to buy that House some where between $40K-$70K depending on what all the variables of taxes, insurance, mortgage interest rates, HOA (if any), etc.

If you buy a property and it cash flows $200 a month being financed at $60K it doesn't matter if it appraises for $200K. You could be offered a refinance bank loan upto 85% the appraisal, but if the rent can't be raised to cover the mortgage payment of a $170K loan you can't refinance.

Good job though on getting the selling price lowered, go back again and offer them less to see if you can really get the deal moving!

Thanks for taking the time and replying to my post. I determined the fair market value by going to totalviewrealestate (177k) ,zillow(zestimate -176k). Is that not the correct way to look for FMV? Does the FMV need to be determined by the recently sold homes?(still learning) It had been on market for 5 months with 134k with a contract in place, the contact fell through and seems like the bank got frustrated and reduced the price to 120k. Except for one house (REO) sold for 115k in that block, all other houses surrounding that area were sold in the range of 140-200k. The appraisal report just picked on that one house and gave us the appraisal for 115k. Now, trying to understand how to get the accurate FMV, you think I should have pulled the comps and looked for the lowest priced house? Is that how it works? I rented out the house for $1095, I could have rented it for more in that area but as this was my first rental property I dint want to sit on it and waste a month’s rent.
You said to see the comps in last 3 months for the appraisal value, so if I want to refinance I would need to look at the properties sold in that area for last 3 months and that would give me an idea of how much I can refinance for?

Also, if I was buying this property to assign it to another investor how do I calculate my offer price, I read somewhere that it should be 30% below fair market value, then deduct any repair costs and my profit. Is that correct method? Any advice is really appreciated.

Thanks!
Maddy

Maddy,

Do you now own this property? Its kinda hard to tell where you are in the timeline between your two posts, it sounded like you only had it under purchase contract since you hadn't mentioned you closed on it. If I read it right your telling me that you now own this house. You bought it for $115K and are renting it out for $1095. Also if you only put $1,500 into for repairs good job for you!

Depending on what your financing terms are and your price of taxes/insurance renting out at $1095 you could be making some decent cash flow. You were also correct to get it rented out fast at a slightly lower price. On a house that can be rented out for $1,200 a month sits Vacant for one month is the same cash flow for the year as home rented for $1,100 with 0 vacancy.

Okay so now for Comps. Here is the disclaimer, your not a licensed appraiser nor am I, so these methods are not to appraise a house they are just for us to come to an understanding of what your home value is so we have an idea of what the home could appraise for by a licensed appraiser.

I think why they may have only used the one property for a comparison is because it is an REO and the house you bought was an REO. I don't know if that is fair or not either way they did it. So here could be some good new for your next appraisal, its no longer an REO!!! You own it with a conventional mortgage!

Lets go back to my first post about how www.totalviewrealestate.com is a starting point only!! Have you ever looked at an MLS listing that was advertised as a "Great Investment" with fresh paint, new carpet, etc. so you waste no time to get over there and look at it in person. As soon as you lay eyes on it you realize this "Great Investment" was painted over peeling wallpaper, the carpet is all mismatched remnants, and the etc. is a bunch of crap.

The point is this, the way you view the world through the internet is with someones fuzzy camera, and that camera will never be as crystal clear as how you view the world with your eyes.

When looking at a neighborhood you want to invest in pull all of the sold mls listings and start comparing all of the single story houses, two story houses, duplexes, and etcetera. If you don't have enough single story houses to compare with then just take the sold price and divide it by SQFT do the same with the two story and average them out. Now for a neighborhood you can have a pretty close idea of what any size home should sell for/appraise for based on the price per square foot.

When pulling the sold listings try to go back for the last 3 months, the most recent data is the best data. If you don't have many comps then go back a few more months to get the data you need. Also you do not need to base the value of the home your buying soley by the lowest sold price of a similar home. You need to average out what all of the sold prices are to determine the FMV in your neighborhood.

Your future equity position will be determined by a new appraisal. You can apply for refinance and see what happens with a new appraisal, or you can hire someone to do an appraisal now for you, either way it will cost you something. If you order your own appraisal now then you have something to compare it to with the banks appraisal report should there be any discrepancies. It will cost you more out of pocket but you'll know exactly what your house is currently worth.

Example: Purchase Price $115,000
Annual Rent $13,140
Annual Taxes ($1,500)(guess)
Annual Insurance ($800)(guess)
Mortgage 25% down 5% interest for 30 years Annual Debt Service is $5556.10 Annual cash flow is $5283.90 or $440.32 per month which is an 18% ROI.

Refinance to a new principal amount of $115,000 at 5% for 30 years your cash flow drops to $285.99 per month at an infinite ROI!!

These numbers are only a guess as I do not know what your actual operating expenses are, they are to show the change in cash flow when refinancing to get back all of your initial investment cost. I assume you manage the property and the tenant pays all of the utilities.

If I don't stop now I'll just keep going, so to save myself from carpal tunnel I'll point you in the direction of some great books. They are written by Gary Keller and some of his associates. They are just as motivating and full of great information the Dean puts in his books. I will reiterate the fact about the information, it can be overwhelming at times but it is very solid information on how to price out deals.

Oh the assignment part, your pretty much spot on. The 30% deduction from FMV is essentially to cover the End Buyers (investor you assigned the contract to) profit, closing costs, and Realtor Commission fee's if they sell it with an agent. You would basically subtract from the FMV, the 30%, repair costs, and your assignment fee to come up with the MAXIMUM ALLOWABLE OFFER to the seller. Keep it simple and move forward!

BOOKS TO READ!!!!!!!

http://store.richdad.com/b/2243065011
"The ABC's of Property Management" Ken McElroy

http://www.millionairesystems.com/msys/index.html
"The Millionaire Real Estate Investor" Gary Keller
"FLIP" Rick Villani, Clay Davis
"SHIFT" Gary Keller, Dave Jenkins

All books are also available on www.amazon.com

Dundee,

Jake

Congrats on taking steps to buy an REO. Unfortunately, you have found the real pitfall of real estate investing.....having good comps. During normal times, zillow, totalviewrealestate and others could deliver good comps because their algorithms were created to apply a smoothing curve on the mathematical models that extracted sales across the country. The numbers were pretty good in urban and suburban areas, but not so accurate in rural. However, the algorithms didn't work so much in a decreasing market as the mathematical models weren't created with that in mind. Hence the problem. The only way to understand the true comps are to use actual sales in the area (why didn't your RE agent see the 115K sale down the street before you submitted an offer). Furthermore, if you thought the home was worth 176K but now you feel it is substantially less, I would have pulled the deal instead of moving forward with it UNLESS you feel that you can rent it for an amount to cover your monthly outflow. Hope this information helps.

Jake

Thank you for your elaborate reply risking carpal tunnel , being a new investor the detailed explanation was much needed, appreciate it. Sorry for the confusion but I own the house now for 115k and rented it out, I was trying to get to the lessons learned and see what could I have done better to make sure I don’t repeat my mistakes. That was a good idea to get the appraisal done before I refinance and hopefully it would appraise to a better value to get back my investment. Here are the numbers

Purchase price – 115k
Repairs - $1500

Rent - $1095/month
Mortgage + taxes + Insurance = $670/month

As you said if I refinance and get my investment back, my cashflow will go down but will cover all the costs. As you know in today’s market the banks are asking for 25% down for investors. Is there any way we could go around it and have the bank accept less down payment?

Thanks to you, now I understand how to calculate the FMV by looking at the sold comps for last 3 months. I will follow that suggestion for my future investments. Also, thank you for the book suggestions, I already made request for couple of them in my local library. Will get them in a couple of days, will order my own copies from amazon soon. The best investment is investment in yourself

Thanks!!
Maddy

Bill

Thanks for taking the time and replying to my post. My RE agent did notice that REO that sold for 115k just weeks before and he said that it was a cash buyer that is the reason the bank accepted such a low offer, so we went ahead and offered 122k but as the appraisal came low due to last REO sold in the area was 115k, our bank accepted our revised offer of 115k. Yes, you are right I should have checked the true comps in the area and gotten a FMV (not just the totalviewrealestate or zillow), will keep that in mind for future investments. Are there any good websites which show the recent sold properties apart from checking the MLS?

I am trying to read as much as possible and gain knowledge and I so much appreciate Jake’s and your reply. Your replies keep the motivation going on for us, thank you!

Maddy

Maddy,

I wanted to give you a breakdown when I comp a house. I have built a small REI business right now where we are doing 3-5+ deals every month and even though I have partners that help me, I still kept the role of deal evaluation, because it is the most important process in real estate investing. I am wholesaler, so knowing values and repair estimates is the only way I can make money.

You really should know your market inside and out before buying property. That is one thing that Dean teaches, and I know we all want to take action and get some properties moving, but you must know your market first. I can tell you from experience that zillow, totalview and even the MLS can mis-lead you.

The first deal I ever did was a complete failure. It was a wholesale deal where I took the ARV from Zillow and other online websites that said it was about 165k. When I went to wholesale the house, my buyers told me it wasn't worth no more than $130k. When all of my buyers said that, I know I had to of done something wrong. I also lost $500 on that deal, because I tried to wholesale through realtors. I learned a lot of lessons on that first blown up deal.

Your first step is to find a good agent who will make you their assistant. By becoming a realtor's assistant you will get your own username and password to the MLS so you can do your own research. Just tell the agent you don't want to have to bother him for comps all the time and you will pay for the fees to be an assistant. Here in my area it's like $65 a year, which is very cheap to have that kind of access! You may also be better off going to some REI meetings and networking. Find other investors who are realtors and you may have an even better chance with them putting you on as a realtor's assistant. Also tell the agent if you ever run into a seller who wants full value you will refer that lead to the agent so they can get the listing.

COMPING HOUSES:

Here is what I do in my area.

I open up 4 tabs in my browser.
- Local MLS Site
- Zillow.com (they are getting better and better in my area)
- totalviewrealestate.com
- express.realquest.com

Then type in the address on all those sites and start pulling information. Analyze all the information you get from every site, and start trying to put together an average. Depending on your area, zillow should show a lot of the homes that sold recently right on their map. They are starting to even add private sales which MLS won't show you. Once you get more advanced, I highly recommend you using Realquest Pro. It ranges in price, but I pay $125 per county here. The information you can pull from there is worth every penny!

By using all those sources you should get a good feel of the price in your area. Sometimes you may find similar comps to use, and sometimes you may have to do it by sq ft. I have become really good at determining values in my area. There are times when someone can just name the town, beds, baths, sq ft and type of home and I can tell them exactly what it's After Repair Value is (or very close to it). That is eventually where you want to be.

I know it's a pain in the butt, but study your market inside and out and just keep running comps on properties and eventually you will start to know your market inside and out too! =D

KEEP AT IT MY FRIEND!

P.S. Cash Investors will usually always get the best deals. I would definitely start networking and trying to use Hard Money or find Private Money. This will help you get your properties much, much cheaper than doing bank loans for the purchase. You can always refinance after you buy with cash!

Thank you so much for the awesome information. I would definetly put this into practice. Thanks for taking the time and showing me step by step on how to determine the value of a property. I just checked out your blog and it is cool!

Thanks
Maddy