What is it worth

The most important question to ask, when you are serious about a property, is "What is it worth?" You can ask that question in several different ways, to several different people. In order to protect yourself, you want to get the answer from different sources?

The seller:

The seller thinks that the house is worth retail/retail. This means that the seller is always the least reliable source of information. Ask anyway. The seller might value the property less than you do. If they are a motivated seller they might not value the property at all. (Remember that in a dreadful alternative situation the sellers' equity disappears. They place no value on it at all, compared to the stress relief that they receive.) Whatever value they place on the property is the highest value. You negotiate the price down from that point.

Example: "What do you think the house is worth?" Seller, " Well, I bought it for 100,000 five years ago. I guess it's worth that much now." That is a seller that has no clue, or is very crafty. The property might have depreciated in value through deferred maintenance and neighborhood blight. Verify through other sources.

Tax assessor's site:

This is a great resource; if you use it correctly. You want to glance at the tax-assessed value, and move on to the more important information.

1) Sale information: When did they buy it? What was the purchase price? As a general rule, take the purchase price; multiply it by 1.065 for every year that they have owned it. That will give you an indication of its value.

2) Comparable sale information: What are similar houses selling for in the area. If similar houses, (same year, same square feet, same type) are selling for between 150,000 and 160,000 and the subject house is projected at 190,000 there is a reality disconnect. Get real. If similar houses are selling for a set price range…that is what it's worth.

3) Residential information: Is it a double- wide wobbledy box or a modular? (Modular houses are considered finance-able. Manufactured housing (double- wide wobbledy boxes) are more difficult.) Is it a singlewide? (RUN!!! Run fast, run far, and don't look back. It is VERY difficult to get financing)? Is it less than 700 square feet (Besides being difficult to find buyers, it is very difficult to find financing)? Is it older than 1946 (different building codes before that time period affect the financing of the homes)? All of these questions determine a property value.

Appraisals:

There are three general types of appraisals.

1) Purchase appraisals: These are based upon what homes have sold for in the area. This is what a retail buyer would pay for the home, with standard financing, no personal property, and no concessions. If the seller is making concessions of $10,000 to the buyer, that reduces the value by $10,000. (Don't tell FHA). If the seller is selling for cash, that reduces the value by between 10 to 50%. The most important document needed is the contract to determine what the buyer is willing to pay for it. The appraisers then stretch the value to fit the price. These are highly accurate, to within 50% of the actual value.

2) Refinance appraisals: These are based upon what homes have sold for in the area. We call them "spandex appraisals." They can usually stretch to accommodate the LTV needed for the loan. In the bad old days, appraisers stretched the spandex appraisals to the breaking point. HUD revisions have toned down the stretch factor. These are highly accurate, to within 50% of the actual value.

3) REO appraisals: These are based upon what the appraiser thinks that THIS home, in current condition, would sell for within 30 to 60 days in the current market conditions. This is highly accurate, to within 50% of the actual value.

In other words, nobody knows anything. If a seller is willing to sell at a price, and the buyer is willing to buy at a price, that is the value of the home. I can have three homes, identical, sitting side by side in a subdivision. One sells for $100,000 cash, closing within three days. The next sells for $150,000 with conventional financing and no seller concessions, closing within 60 days. The last sells for $200,000 on a lease option, the option is to be executed within five years. Those are all valid valuations on a property. Those are all REAL values. Think outside of the box.

I talked with a member of FRAREI yesterday. She has a lease option on a property for $60,000. The property has an appraisal on it of $77,000. She wants to purchase the property. What is the house worth?

I asked her a very simple question. "If you wanted to sell it in the next 30 to 60 days, what price could you get?" The answer is…$60,000.

The area is Oswego, Michigan. There is no industry, the area is depressed. The house sits on a former Air Force Base and it is impossible to get financing through conventional means. She was approved for the financing to purchase the property, but the bank didn't want to touch officer housing on a former Air Force base. The best that she could do would be to get her option price for the home. That $77,000 appraisal is not accurate. It didn't take into account the area, the demand, or the financing. (That is a pretty bad appraisal.)

CMA's:

CMA stands for Comparable Market Analysis. It could also stand for "Couldn't make it as an appraiser". Realtors do CMA's for prospective listings so that they have a good indication of what it will sell for.

A good agent will do a CMA that shows the prospect what they can reasonably expect, and prices the property so that it will sell between 30 to 90 days. This is called being a professional. If the property is priced reasonably, it will sell.

A desperate agent will tell the prospect anything in order to get the listing, and then try to reduce the price down to reality later. When they do this, they have poisoned the listing. If a property is worth $150,000 and the realtor tells the seller to list it at $190,000 the agent has done two things. 1) They have told all prospective buyers that the seller is going to be unrealistic, and it would be useless to present a reasonable offer. 2) The agent is going to be unrealistic and it would be useless to present a reasonable offer. These agents usually last until their savings run out, and then they move on to another profession. Avoid agents like this at all costs.

If you have established a relationship with an agent, and they are realistic, it is an invaluable resource. CMA's are very valuable and should be treated as such. Don't ask for a CMA until you have given your real estate agent team member at LEAST five listing prospects. (Remember the host/parasite relationship? If you are a parasite, you will soon not have your calls returned.)

BPO:

A Broker Price Opinion is usually done with an REO property. The BPO is what the broker thinks that the house will sell for in its current condition within a reasonable time period. A BPO is usually paid for by the REO company and it is as accurate as the broker's opinion. Some BPO's are more accurate than appraisals.

Farm area:

If you are a real estate professional investor, you will have started to consider the wisdom of knowing your farm area like the back of your hand. If so, you will KNOW what housing values are in your area. If you don't know them, learn them.

The Five How's:

Another way to get a feel for what houses are worth in your area is to go to the subject property. Drive around the house in concentric circles out to about five or six blocks. Every house that is for sale and has a sign with a phone number on it is a potential information source. Write down the address and the phone number. Stop your car and take a look at the house and take some notes. (How does it look from the front? Is it attractive? Well maintained? Is it a multi-story or rancher? What is the address? What do houses around it look like?) Then pick up your cell phone and call the number. Ask the five "How" questions:

1) How old? (What is the age of the house?)

2) How big? (How many square feet? Lot size?)

3) How many beds and baths?

4) How long has it been on the market? How many price reductions? How much?

5) How much is the price?

If you get a good feel for the area, you will know what people are asking for houses in that area. As Butterfly Mcqueen said in "Gone with the Wind" "Asking ain't getting." It does give you an indication. Take 4.5% off of the asking price and you have a good indication as to the value of the homes. Adjust for size and condition.

Area:

I had a house down in Brownsville Station, Texas. It was an REO house and it was located two blocks away from the sewage treatment plant. On days when the wind blew from the West, it was unbearable to live there. We had to discount the house thousands of dollars to sell it.

Know your area. Don't rely upon the integrity of someone else to tell you the conditions of the neighborhood. Do your research.

What's it worth?

Nobody knows anything. The best way to limit your ignorance is to have several different sources of information, and know enough to know enough. It sounds difficult, but after a short time, you will get a feel for the property values. Remember one thing. You want to acquire a house for less than what you can sell it for. It is that simple.