Before you can make an offer on a property, whether you are buying it for your own use or as an investment, you need to know what the property is worth. In this discussion, we will focus on single-family homes, but the principles apply to any real estate situation.
Real estate expert Russ Whitney says that because they are emotionally attached to the property, most sellers have trouble objectively assessing the value of their home. They may have spent money on things that are important to them but don't really affect the investment value of the property. Even then, it's hard and maybe even insulting for you to tell them that the wallpaper they love so much or the bathroom fixtures they think are so wonderful won't add thousands of dollars to the price of the house.
Before you make an offer, do your homework and make sure you can explain how you arrived at the amount and terms - your offers will have a much better chance of being accepted.
According to Russ Whitney, these are the areas you should research to calculate a property's market value:
Sales price history. What was the property sold for in the past? This information is available through your county court or tax office and is available online in most areas. Consider trends in asset appreciation or depreciation.
House and property features. Consider lot size, home square footage, number of bedrooms and bathrooms, and other features. This information is available through the tax assessor's office so you can verify it before contacting the owner.
Offer and sales prices of similar homes in the area. It can be helpful to know what other sellers in the area are asking for their homes (you can find this out by making a quick phone call to the number on the "for sale" sign or checking the classifieds). More importantly, find out what comparable homes in the neighborhood have sold for in the last six months to one year. This information is available online or you can ask a real estate agent to prepare a fair market value analysis for you.
Other considerations. You'll also want to consider the condition of the home, whether or not it needs major repairs, whether there have been any recent improvements to the property, and whether there have been any significant changes in the real estate market in the area. Keep in mind that tax values are not a good way to estimate market value.
As a savvy real estate investor, you will rarely pay fair market value for a property. But when you calculate your offer, you need to know what the market value is and then put together a deal that will make the seller happy and be profitable for you.
