This may be a way outside-the-box type of post, especially in the realm of real estate investing. 

Being that the real estate investing industry tends to lean far traditional, often maverick methods are pushed to the side. 

But when a forward-thinking investor for the Huntsville Alabama market grabs a borderline radical concept by the reins, within a market that is usually closeminded… the chances of seeing success skyrocket for that investor.

Today, I’d like to talk about property valuations. 

We’ll first discuss the traditional way of coming up with a value for a real estate investment property… then, we’ll dive into a newer, faster, and arguably a more accurate approach to coming up with property values.

The Nuances of Traditional CMAs and Appraisals

When appraisers come up with a property value, they don’t actually come up with a price. Yes, in the end, they offer a specific value, but ultimately it’s an opinion. 

Truth be told, they come up with a price RANGE… then offer their one-price opinion.

To do this, nine out of ten times, they will use three comparables – three homes that are similar first in size, location, and age. 

Often, these three properties are homes that have previously sold. 

So, they basically take these properties and make adjustments to the price they sold for based on features that the subject property has or doesn’t have.  

There’s more to it, as you know, but in a nutshell, that’s the gist.  

And btw, real estate agents offering comparative market reports will use the same process…

… with the main difference being, the Realtor will offer a price range and suggest where the seller should decide to price their home. 

Sounds pretty good, right?

Are there any exceptions to the rule?

You bet there are. 

Realtors and appraisers today come from all over and it’s not uncommon to get an appraiser on the job who has never worked in that specific area.

This opens the door to mistakes, misevaluations, and vast differences in property price opinions. 

So, if you’re an investor wanting to close on your next real estate investor project in Huntsville AL, and you happen to get an out-of-town appraiser… what do you do?

I’ll tell you what you can do… Cross your fingers and pray

Hope, I mean, really hope that they don’t throw you a curveball. Short appraisals can change everything from the loan amount to how much is covered for repairs and even kill deals.  Over-appraisals can be just as disastrous.

What I want to do is give you ammo in case this happens on your next deal.

A better way to value real estate properties in Huntsville, AL for investors?

What I am about to show you will give you the upper hand if you ever come into a short appraisal situation, are on the brink of losing a deal, and even help with negotiations before you’re in the pending phase. 

Here’s what you do.

Let’s say you’re looking at a property and are not sure if you trust where the realtor priced the home. 

You can simply run your own analysis by doing the following on any home search site and it can all be done in about 15-25 minutes.

1 – Find your own set of similar homes that have sold – similar in age, size, and location.  Pull up as many as you can.  

Yeah, I know what you’re saying… “But Mike, what about outbuildings, fences, and this home over here has a closed-in porch…”

Don’t worry, include ALL of them as long as they are similar, again, in age, size, and location to the subject property.

2 – Now find homes that are still on the market.  They haven’t sold yet.  You got it – pull up homes that are currently for sale that are similar in age, size, and location.  I know some will have vast differences in amenities, add-ons, etc. Just get them all. 

3 – Now do the same with pending/contingent properties.   These are homes that often have an accepted offer and are waiting to close the deal.  Meaning, they’ve just about proven that buyers are willing to pay some form of their price. 

In each category, 1 – 3, for many mid-sized to larger markets, you should have between 15-20 comparables.  So let’s pretend you have a total of 60 comparables now.  

4 – Add up the prices listed for each category.  For example, take category #1 and get all the sold prices added up.  Put your total aside for now. 

Do the same for categories #2 and #3. 

5 – It’s time to get averages for each category.  Compute averages for categories 1, 2, and 3.  You will now have three ‘average prices’ for sold properties, active properties, and contingent/pending properties.

6 – Average out the three.  Take the average that you just calculated for sold, active, and pending, add them together and divide by three.  Get the overall average. 

7 – Now take the overall average and add 3-4 percent. Last step, subtract 3-4%.  You now have a lower number and a higher number.  That’s your price range.  

Got it?  Good.

If you’re still not convinced, let me fill you in on the outcomes of some touchy situations and how this approach put me on top!

Real Scenarios Using This Approach When Funding Real Estate Properties

Fact is, I’ve never had a real estate agent, real estate appraiser, or even a real estate investor question my numbers after laying it all out in this way. 

I remember years ago, we were days from closing on a property for a client.  It just so happened that the appraiser got us his appraisal just 2 days from the date of closing. 

You guessed it, the appraisal was $10k short.  

If you know anything about real estate investing in Huntsville, you know that short appraisals can be good or bad. 

In this case, the short appraisal would mean that the investor would have to come up with the difference and he didn’t want to do that. 

The appraiser used 3 sold properties, came up with just a few adjustments, and put his price right in the middle of the range. 

I went ahead and ran my own numbers using the 7 steps we’ve covered. 

After my own calculations, my price range was 12% ABOVE his price range!

I got on a call with the nice fellow and disclosed my findings.  Naturally, he asked how I came up with my numbers. 

I said, “Hank, I used 50 comparables… all with similar size, age, and location… How many comparables did YOU use?”  You already know his answer.

I then said, “Hank, since this is your area of expertise, I took it upon myself to go the extra mile and also used active listings and contingent properties aside from the sold properties I found.  Did you happen to look at contingent and active listings? I used 22 of those”

Needless to say, we had the price adjusted and my real estate investor client still got what he originally wanted. 

Here’s another real scenario.

This time we were entering negotiations.  My client was a real estate investor selling her property with the intent to use those proceed toward a new investment property.  

This just means that I would have come into the picture once she sold that property and wanted to buy the next one.  

They got an offer on her home which was way less than their list price. 

This client informed me that her agent said to just reject the offer. 

I never want to step on the toes of real estate agents and I also never want to put them in an inferior position in front of their clients.  I love agents and we highly lean on them for help. 

So, in this case, the agent called me to inform me that the deal was probably off.  I asked the Realtor if i could put in my two cents. 

We both came up with a new evaluation using my 7-step procedure. 

After we quickly completed our calculations, our price was on the low end of our range which was $4K HIGHER than the listing price!

What did we do?  We got on the phone with the buyer’s agent and said, “Sheila, I used 50 comparables… all with similar size, age, and location… How many comparables did YOU use?” 

We then said, “Sheila, since this market is your area of expertise, we took it upon ourselves to go the extra mile and also used active listings and contingent properties aside from the sold properties we found.  Did you happen to look at contingent and active listings

I think you know the rest of the story, don’t you?

That investor got top dollar for her property and moved on with us to the next. 

For Investment Property Funding, Reach Out!

I hope you found this post valuable. Who knows… maybe it will help you save a deal or two in the future.

Btw, if you want preliminary terms for Funding for your next real estate property, we cover 30 states, so reach out! We’re always thrilled to hear from you.  

The post A Strange (But VERY Effective) Way To Value A Property? appeared first on My Blog.