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Investment Property Buying Tips

What the pros know

Beginning property investors often ask me for advice on how to obtain the best “deal” on any piece of real estate investment. The problem is that this assumes there actually is such a thing as a “deal” on investment property. In reality, there are smart moves one can take to place yourself in the position of acquiring a specific piece of investment property at below its current market value. That is all that you can hope for…since there is no magic formula for making an investment property “deal.” So step one – forget about trying to find such a thing as a “bargain.”

No substitute for numbers crunching

I always suggest that there truly is no substitute for doing your due diligence on any given property – and simply crunching accurate (and not estimated) numbers on the actual income and expenses on the property. If you do have to estimate (for example, if you have a vacant apartment in the building, and need to input a number for estimated rent), you damn well better have done your research and checked out rents for like apartments in the area. Otherwise, you’ll just be deluding yourself into a “hoped-for” number that may not be realistic. The same theory goes for all expense items as well. Everything needs to be verified.

Once you have your accurate numbers, and you run a simple cash flow analysis (see prior articles here on how to achieve this), you’ll be able back into a number that you’re comfortable with for acquiring the property. In essence, you determine what is a good “deal.” And what’s good to you may not be good to me, and vice-versa. That’s why the concept of a bargain is bogus. I always say that your top limit on what you should offer should not be affected by even a dollar. So, if you think you should only go as high as one hundred thousand dollars on a property, your line in the sand is one hundred thousand and one dollars. Let someone else buy it for that. You’ve already made your decision not to crack your upper limit. Setting limits is terribly important in property investing. It’s called having buying discipline.

Throw out emotionality

Closely aligned with buying discipline, is the ability not to get emotionally attached to any given property. Once you bend your rules, especially your upper limit rule, you’ll be overspending. While it’s definitely OK to re-run your numbers to double check your upper limit, it is not OK to fudge some of the numbers during the re-check process in order to make the upper limit soar…just so you can actually acquire some kind of “trophy” property. That’s called being emotional – and a great way to eventually lose money.

Find a buyer’s agent to work with exclusively

Who do you think is going to hear about properties that are just being placed on the market for sale? Real estate agents, of course. As a crucial member of your “crew” (see my articles here on crew formation), you’ll need to work with one exclusively, preferably acting as your buyer’s agent. In this way, you’ll get calls, emails, texts, etc. as soon as your agent hears about anything that hits the market that he or she thinks would be a great fit for you. The more you work together, the more opportunities will be sent your way. In addition, they will offer their expertise in research and negotiating that will prove invaluable over time.

Using time to your advantage

In any competitive bidding situation, let time be your ally. You can make better “deals” by having done your research and numbers crunching well before your competition. A seller that receives a lower offer from you today may not want to wait for a hoped-for buyer’s offer tomorrow that he thinks might be higher. He’d rather agree to your offer today. The adage “a bird in the hand” definitely applies here. When you can act fast to place an offer, you tend to make acquisitions happen – faster…and at a better price.

Consider attending property auctions

Auctions have the potential to allow you to purchase investment property at below market values. However, I suggest you attend a few without the intention of buying anything first. Just observe the process. There’s a lot to take in. And your competition will be fierce. The expert property investor really knows how to work an auction. In addition, you’ll usually need a cashier’s check for some minimum amount just to gain entry into most real estate auctions. And, as mentioned above, you’ll really need your numbers crunching to be exceedingly accurate, and your discipline (especially for that upper limit) has to be well-honed. With auctions, the best attitude is: let this one go, there’s always the next one to bid on. If you have this disciplined approach to auction buying, you should never get burned financially.

photos courtesy of anchoragehomesearch.com, thelastembassy.blogspot.com, yaerd.org, quickenloans.com, ericksonsdrying.com, thomsonlawplc.com

Quick Property Investment Tips

Advice for the beginner investor

Novice property investors should be cognizant of these quick and simple property investment tips. They will keep you pointed in the right direction. Always refer back to them when you hit a snag in the process… (It also makes sense to try to memorize them, and recall them as you begin searching for new investments to acquire.) In this way, you too, can become a savvy, experienced property investor.

Purchase for retention

Make sure you always purchase rental properties for retention purposes. The longer you hold, the better equipped you’ll be to take advantage of long term appreciation in the property. You’ll also concurrently be writing down any mortgage note you’re paying off, thus increasing your equity valuation in the property. If you make a plan for purchasing a property at set intervals (for example, every couple of years – or yearly, even better), then you’ll be able to slowly accumulate a portfolio of properties (your “stable”) that will continue to throw off ever-increasing amounts of cash flow, as well as capital appreciation.

The power of leverage

Make sure you take advantage of leverage, when possible. While making all cash offers on properties may be advantageous to netting the best price on any one property, it is not advantageous to utilizing other people’s money to grow your investments through the concept of leverage. If you can obtain a mortgage, by all means do so. The greater the loan to value ratio the lender will allow, the better. Just make sure you don’t overextend yourself, and that you’ve double-checked your expense numbers properly. You want to ensure you have a comfortable positive cash flow on any property you’re thinking of acquiring.

Beware the bargain basement

While the concept of “stealing” a house in an auction or other competitive bid situation sounds really appealing, always be wary of the cost of a “steal.” Finding a great bargain in a poor location is like finding fool’s gold: you’ll end up paying for it down the road. Long term difficulties with obtaining market rent, high vacancy rates, and terrible capital appreciation tend to make that “steal” a steal for the seller! So be very, very careful when a deal feels too god to be true. It probably is.

The location axiom

Naturally, more desirable neighborhoods will yield greater upside potential in terms of capital appreciation. This does not mean buying a property in a rundown area is bad. Just be aware that a cheaper price for a lesser neighborhood will require you to understand the vagaries of dealing with the neighborhood…which will probably be run down in five or ten years, or whenever you will be selling the property. Keep your sights set realistically. If a bad neighborhood is all you can afford, make sure you don’t expect much from the property n terms of its capital appreciation over time. Or, at the very least, buy in a changing neighborhood – one that’s experiencing the start of some gentrification. (Hint: let the changing face of local stores be your guide here.)

Cash flow is great, but…

Make sure you always keep an eye on the capital appreciation rate in any given area you’re searching in. It’s the holding and growth of the marketplace of houses surrounding your building that will add value to your property in the long run. Be very mindful of this fact. Your year-to-year cash flow is obviously important to paying the bills and allowing yourself a profit on a regular basis. But it’s when you are ready to sell the building that most of your profit should be made…

Create an individualized investment strategy, and stick to it

Critical to this concept is that you’ll need discipline. In addition, you’ll need a plan. And most importantly, you can’t have discipline and a plan without also being scrupulously devoted to research and numbers-crunching for any potential property you are looking at. Simple math errors, not doing total due diligence on a property, accepting seller information only – these are like death to a property investor. You cannot tolerate mathematical mistakes. If you know this is not your strong point, then enlist the aid of a partner – or at the very least, seek the outside help of a trusted, math-oriented friend. Either way, this is the simplest way to mess up. So don’t.

photos courtesy of worldpropertychannel.com, images.cisdata.netmlsNY, pooboy.com, dminotes.com

Appraisal Approaches of Investment Property Valuation

Three different appraisal methods

Any licensed state real estate appraiser will utilize three different approaches when analyzing investment property valuation. Since it’s a different animal than a standard home appraisal, the melding of the three approaches helps unify an appraiser’s valuation, giving it more weight. While appraising is more an art than science, and no two appraisers will value a property exactly the same way, they will (or in theory, should be) very close in analyzed market value for any given investment property.

Of course, the more specialized the property (a specific-use manufacturing plant, for example) the more rigorous and difficult the analysis will be. The three approaches most often used are the market value approach, the cost approach, and finally, the income approach. Naturally, each type of approach requires different methodology and information for the appraiser’s analysis. They then determine what weight to place on each individual approach, based on what data is available to them, and then they pull all three approaches together in one last analysis to come up with an investment property valuation amount.

Income approach

With residential rental property, the income approach tends to be weighted the greatest. When rents and expenses are completely known, this approach works best. Even when a rental property is vacant, or only partially rented, this approach works well, since there is usually plenty of data to show what market rents in the same area will throw off in terms of likely income for the building.

Cost approach

The cost approach would then be used to determine what a like building would actually cost to build to create the same amount of rent. Another part of both approaches takes into account the time necessary to build from scratch, as well as the time to expand to full capacity rentals.

Market approach

The market approach is used as another qualifying way of determining an investment property valuation, or the real market value. It helps the appraiser see just how in line the other two approach valuations truly are. Market approaches (also known as comparative market values) are commonly done for home appraisals. With residential multi-family properties, the market approach may still be weighted highly if there are enough good, recent sales data available of like properties for comparison’s sake. However, this approach is usually weighted less than the other two approaches when non-residential real estate is being appraised.

Reconciling the approaches

Once the three approaches are reconciled, one market value is arrived at by the appraiser for the income producing property. This is known as the appraiser’s “opinion of value.” The appraiser’s report not only contains all three approaches, but details how he has weighted them, as well as his analysis of how he related each to the other.

Commonly, lenders rely on the appraisal to help qualify the purchase price of a property they are considering offering a mortgage on. If the appraisal comes in below the purchase price, some lenders will allow a second appraisal to be done. But others will simply not make the loan – or will require the buyer and seller to “re-negotiate” the purchase price, based on what the lender will allow for a mortgage. In some cases, the buyer may make up the difference in appraised value and purchase price with their own cash, just to make the deal happen.

photos courtesy of thorequities.com, thealternativeinvestor.net, haleycustomhomes.com, rohdeappraisal.com, giulioruffini.ifunnyblog.com

How To Bring Your Investment Property To Market

When you know it’s time…

Let’s say you’ve decided it’s time to put one of your properties on the market. Maybe you need the cash to finance a new deal…maybe you need it for a financial emergency…or maybe you’re (God forbid) in the throes of a divorce and own property jointly, and now must place it on the market. Regardless, these times are definitely still a buyer’s market. So how best do you maximize your sales price when attempting to sell? Well, consider this investment property advice before you place your building on the market…

Do your asking price homework

Always remember that setting your intial asking price is everything. Don’t try to dissuade yourself that other variables matter even close to price. They don’t. That’s because all roads lead back to price. Got a great rent roll and low expenses on your property? Great. What’s your “standard” multiplier for rental property in your area? This will lead you back to price. Got a tremendous location near shopping, employment and transportation? Great. That should be reflected in your rent roll. And here we go back to price again. Willing to offer some amount of owner-financing? That’s definitely going to be reflected in your asking price, since you can certainly place a dollar amount on the lost opportunity cost of not receiving all cash for your property. And that too will have a large impact on the price you should be setting.

Obtain price opinions from the pros

With price being such a huge determinant of the success or failure of marketing your investment real estate in anything approaching a timely manner, it makes good sense, and is basic investment property advice, to obtain other informed, professional opinions as to the current market value of your property. Unless you’re already a real estate appraiser, a licensed real estate agent or broker, or someone who has done numerous comparative market analyses before, you should seek out at least three opinions other than yourself as to the market value. It would then be an OK practice to average these value opinions. Also keep in mind, while an appraisal is costly, it is also prepared with the greatest care and attention to detail. Real estate agent comparative market analyses (CMA’s) are good – just not nearly as involved as a full appraisal. However, you can ask several real estate agents for a CMA, and they will usually provide them at no charge in order to obtain your business.

Do not take the highest CMA opinion because it happens to be closest to your valuation. That’s because, with your subjective eye, you can’t help but render a value that will be the highest. Try to stand back a little in order to get a greater view – and a more honest value opinion. Look at all the comparable properties the pros were using to “comp out” your property (also known as the subject property). Look at the comparables that were common between these disparate, individualized properties, and how they related to yours. Note all the major similarities each common comparable property has to yours. Those common properties are the ones that will most help you in ultimately deciding on a realistic asking price for your own investment property.

Remember too, what every good real estate agent is taught: when asked if an owner’s (usually unrealistic) asking price can be gotten, the good agent will always respond, “Of course I can find a buyer for you at that price. In 5 years or so…” Always understand the relationship between obtaining “your” price and the amount of time it will take to find that one particular buyer. The higher the price, the longer the time span. The lower the price, the shorter amount of time required.

Should you sell it yourself?

Ah, the great debate…While I am a real estate broker, I can make a case for doing it yourself. And here ‘tis: there’s simply no way to accurately quantify that real estate agents obtain higher prices than sellers who sell on their own. Agents may say they can, but data they use can’t possibly be accurate, since sales data for FSBO’s (for sale by owner’s) can’t possibly reflect what a seller would have taken for a sales price if they had utilized the services of an agent, and paid out a commission.

On the other hand, the de facto monopoly that real estate agencies have through the use of their local Board of Realtor’s own multiple listing services (whereby individual FSBO’s are precluded from listing their houses) means that in order to be exposed to the majority of the real estate buying public, you must list with an agency. While inroads have been made in recent years with many online FSBO networks, they pale in comparison to the broad reach of exposure that any multiple listing service (MLS) can offer. And the greater the reach, the greater the exposure of your product. And the greater the exposure, the greater the likelihood that more than one buyer might be making an offer on your property at the same time. And when you only have one item to sell, increasing the odds for obtaining multiple offers yields the key to obtaining the greatest price for your property. And an agency’s commission may be only a small cost relative to the realized monetary benefit of the increased exposure leading to competition for buyers. So put that one in the “case for utilizing an agent” column.

Prepping your property for sale

Once you’ve decided to sell your property, and if you’ll be doing the marketing yourself, or hiring an agent to represent you, you’ll still need to prep you investment prior to bringing it to market. Here’s some simple investment property advice: with rental units, you’ll want to brief each of your tenants well in advance of placing the building up for sale. You’ll need to allay any fears they may have about the running of the property during the transition. This would be a good time to remind them that any lease you have with them will remain in effect with any new owner.

In addition, you’ll want to make sure you’re on good terms with each and every tenant before placing your building on the market. Just one bad tenant can easily sabotage and blow a sale for you to any prospective buyer. (Think along the lines of their not allowing easy access to their unit, or worse – their deliberately not maintaining, or even damaging their unit just to get back at you.) You’ll also want to make sure the exterior, common areas and especially the front of the building are all in good repair, look attractive, are well-lit and have been properly maintained. (In the case of a single family house flip situation, you’ll obviously want to make it shine, since you’ll be appealing to a much greater market niche – homebuyers, as opposed to other property investors.)

Prepare a current income statement

You’ll also want to make bring your financials up to date on any rental property you’re about to sell. Good investment property advice dictates that you prepare a simple income statement on the building, complete with current rent roll, itemized expenses, as well as vacancy rate you’ve had with it. Be sure to add this income statement to your marketing flyers and descriptions about the building.

Once you’ve decided who will be doing the actual selling of your property, carefully researched and selected your asking price, made the necessary improvements to make your “product” shine, spoken with your tenants about the situation and all are on board, and you’ve created all your marketing brochures and flyers, then you will finally be ready to bring your building to market to realize the highest and best price you can possibly obtain.

photos courtesy of catalog.flatworldknowledge.com, joelane.com, cordianosells.com, newdenverrealestate.com, activerain.com, lindafurtado.com, mcclurepropertymgmt.com, nathalykolp.com

The Most Cost-Effective Projects When Property Investing

The top ten projects for property investing…

When evaluating any investment property that requires work to realize it’s full market value, consider these proven cost-effective investment property projects. They’ll return the most on every dollar spent.

According to Remodeling Magazine’s 2011-2012 Cost vs. Value Report, here are the top ten projects that will yield you the most bang for your buck in your property investment. These are mainly basic projects, most of which are exterior-related. But all have the highest return on investment, relative to all renovation projects.

1 – Exterior siding replacement with high-end fiber cement. This type of siding is one of the most cost-effective measures you can do for your property.

2 – Replacing an entry door with a mid-level steel door. It’s a relatively inexpensive upgrade that really helps improve the exterior look of your investment property.

3 – Adding an attic bedroom. An attic remodel is the least expensive way of adding space and/or a bathroom inside the four walls of an existing house. (A basement remodel would be the next most cost-effective way to add living space.) In both scenarios, make sure you check with your local building department for feasibility.

4 – A minor kitchen remodel job. This may involve simply adding new laminate countertops, new sink, faucets and appliances. Cabinets are usually resurfaced, not necessarily ripped out and replaced. And the floor remains untouched.

5 – A mid-range garage door replacement. New garage doors really add to the overall first impression when prospective tenants drive up for the first time.

6 – Next best is a high-end garage door replacement, for the same reason as above.

7 – Adding a new wood deck, since the space and openness is so highly valued by tenants.

8 – Foam-backed vinyl siding replacement improves the look of the house, and saves in heating costs, allowing you to attract more potential tenants, especially if they are paying for their own heat.

9 – Adding mid-range vinyl siding replacement. While not as expensive as foam-backed, and yielding less in terms of heat savings, the overall exterior look is improved greatly.

10 – Replacing old windows with new vinyl replacement windows that have low-emissive glass and high insulation values.

The bottom line for property investors…

Remember to spend your renovation dollars on the most desirable features for tenants, as well as those items that are standard maintenance items. Whenever you improve the look and feel of the exterior of your investment property, you’re naturally going to attract better qualified, and increasingly more potential tenants.

photos courtesy of brokersbestmtg.com, lifestylingsells.com, housebeautiful.com, eliteconstructionva.com, massrealestatelawblog.com

Top 10 Property Investing Mistakes To Avoid

#1 -Not researching your area market values properly

Getting to know what houses are selling for in your geographic area where you’ll be doing your property investing is crucial to success. Work with a Realtor, study your local Multiple Listing service listings daily, check local Pennysaver listings, and of course, make a habit of visiting properties regularly – even if you‘re not considering them for purchase. It‘s imperative that you get a strong feel for housing values in your area at any given time. That way, you’ll be able to easily spot properties that are below market value – and you’ll be much less apt to overpay for any house.

#2 – Skipping meeting with a mortgage banker, and not obtaining a pre-approval letter before searching for a property

Before you can actively look for investment opportunities, you must have a financial starting point that’s grounded in reality. And the mortgage professional you choose will ground you better than anyone else can. He’s in the business of making loans – not trying to make loans. So he will be brutally honest with you about what you can afford. And once you have those numbers, you’ll be able to obtain that all-important pre-approval letter to show to all prospective sellers – your entry pass for being taken seriously when making offers.

#3 – Not researching and exploring all the possible ways to leverage a property prior to purchase

Really, when you think about it, the number of ways you can finance your investment property are almost limitless. It just depends how creative you’re able to get… While a mortgage banker is the standard way of financing properties, you can also try asking sellers if they’ll offer you some form of owner financing. In addition, you can try and obtain a home equity line on your home to help finance investment property. Already own other rental property? You can take cash out by refinancing them, and re-investing your equity in them. Family members? Another great source of other people’s money (OPM)…Credit cards with short term promotional offer balance transfer? Why not – as long as you’re fully cognizant of the financial dangers involved when they convert to their regular interest rates. There are also “hard money” lenders that investors can use. Of course, as their name implies, their interest rates and points charged on their loans will be the most exorbitant way to finance a property. It’s up to you to determine the optimum, most cost-effective and affordable way to finance your next investment property.

#4 – Not setting a time horizon for the property before you buy it (including when you intend to sell, as well as a conservative estimate for the time it will take to sell it)

When you spot a property that makes sense to go after purchasing, you’ll want to also set up a time line of how long you intend to hold the asset. This will help crystalize your thinking of your time horizon for the property. You’ll need to determine if you intend to turn it over quickly, or hold it until you’ve fixed it up and then sell it, or if you intend to hold it as a rental for a medium time frame (one to five years), or a long time frame (five years and over). Once you’ve set your time horizon, you’ll be able to plan how best to finance and utilize your asset.

# 5 – Failing to crunch your numbers – and re-check them before making an offer

This would appear obvious. However, too many beginning investors fail to properly crunch and re-check all their numbers – and unfortunately end up overpaying for the property.

# 6 – Falling In Love With a Property

Always stay disinterested in any investment property you’re considering purchasing. It’s not going to be your home, so creating an emotional attachment to it will end up blinding you to how much you should be paying for the property, as well as any improvements you will be budgeting for the investment.

# 7 – Not using a home inspector prior to purchase

Unless you’re an expert at home construction, you must protect yourself by hiring a home inspector once you’ve gotten an accepted offer on your investment property. Not using one to save several hundred dollars is simply foolish – you need to know everything that’s wrong (or potentially wrong) with such an expensive investment. With this knowledge, you’ll best be able to financially plan on current and future repairs. And without it, you can’t…which could be inviting a financial disaster.

# 8 – Not setting a realistic budget for rehab work

As mentioned in previous articles on finding a contractor and their role in any rehab project, you’ve got to have agreed on some basic budget prior to purchasing an investment property that requires renovation. While it is common to go over-budget for unforeseen construction issues that usually may arise, that base starting budget is critical. Otherwise, you’ll be bleeding money faster than you can imagine.

#9 – Not setting a proper and defined time frame for rehab work

Like the importance of setting a realistic budget, setting a defined time frame for any renovation is also imperative. Otherwise, your project will drag on – and go way off your time horizon you originally set. Time is, indeed, money.

#10 – Undercapitalization (Overspending – going way over budget and not having enough back-up reserves)

Undercapitalization is one of the major issues for any business – especially start-ups. Relating to having crunched your numbers properly, you must make sure, and feel comfortable, that you have planned for (and created contingency plans) for properly capitalizing your property investment project. In creating any budget, make sure you have a line item for the expense of cost overruns (usually 10% of the renovation cost). What other funding sources can you plan on to stay afloat until you either sell the property, or make it cash positive (if it’s a rental property)? Always plan on that rainy day being tomorrow…

photos courtesy of growingseattle.com, personalloanportfolio.com, 123rf.com, iheartbacon. maritzalive.com, cutcaster.com

Buying Your First Rental Property – Part 7

Create a pro forma income statement for each rental property you plan to own before you make any offer

OK – so you’ve located what you feel is a great rental property. You feel it’s being offered at below market value, you live close by to it, the building is in a desirable spot, close to transportation, shopping and schools. Now it’s time to crunch the numbers to see what kind of offer you should be making.

Here are a few items you’ll need to either research or guesstimate in order to come up with a rudimentary pro forma income statement. As an example, it will look something like this (I prefer yearly amounts – you can break it down into a monthly statement if you so desire):

Pro Forma Income Statement

Total Yearly Income $ 36,000

Yearly Expenses

Mortgage $ 12,000

Taxes 2,000

Insurance 1,000

Maintenance 1,500

Repairs 1,000

Advertising 300

Vacancy (@10% of gross rent) 3,600

_______

21,400

Net income (before depreciation) 14,600

You can certainly ask the seller for his current figures for income and expenses. You’ll also want to speak with your mortgage broker to discuss those figures, and see if the lender agrees and feels they’re in line. Most banks will only offer loans based on 75% of the actual rent-roll of the building. If there are vacancies, the bank may impute a far lower number for projected rents.

I will leave discussion of depreciation to a later segment. (I would not use it in the valuation process prior to making an offer, since it represents a paper loss.)

Once you have a net income figure, you can guesstimate a market valuation for the property using multipliers for your area. Most value multipliers for rental investment property represent what’s going on in a specific geographic area. In general, real estate multipliers tend to run between 8 and 12 times gross income for the property. In hot markets and top geographic locales, the multiplier will tend to be at the higher end of the multiplier spectrum. And likewise, in soft markets, and/or very depressed or blighted areas, the multipliers will be at the lower end of this range. You can use this approach to come up with a ballpark estimate of valuation prior to making an offer. You’ll also want to compare this figure with your anticipated profit level and return on investment (ROI) for the property. Once you’ve done your homework, go on and make your initial offer on the property.

photos courtesy of aerocontrast.com, asofiduciarias.org.co, myccknowledge.com

The Appraiser’s Role In Property Investing

Key Component in Property Investing

Most property investors tend to think they have a good idea of the value of a potential house, but appraising is one of the key components in the investment process.

Recent mortgage industry failures notwithstanding, appraisers act as part of a rather complex “safety net” built into the real estate, mortgage and banking industries. It’s a safety net that has become extremely tight in recent years…In an effort to protect buyer, seller and lender alike, appraisers are very strictly regulated by state and federal guidelines.

An appraisal is ordered perfunctorily as part of the mortgage loan process on most houses. When a lender orders an appraisal for a house buyer, the lender simply requires a totally impartial expert opinion as to the fair market value of the property they’re going to offer you, the investor, a loan on.

The key words here are “impartial” and “expert.” Common sense dictates that lenders base their loans on valuation information that comes from someone who has no stake in the real estate transaction.

Valuation estimate

The formal appraisal that is generated by a licensed appraiser is a valuation estimate of a property – basically, a reasonable expectation of what price the typical buyer would be willing to pay for the property in its current state, under fair market conditions.

Appraising involves not only inspecting a property, but analyzing the community where that house is located as well. The appraiser will gather information about any given neighborhood, and will note in his appraisal report items such as the general conditions in the area, overall market stability, as well as what range of prices there are within that community.

When it comes time to go out and inspect a particular house (known as the subject” property), the appraiser will first measure the house to determine its gross living area. He’ll also check on room counts, layout and overall condition of the house. (If you’re the house seller, it’s helpful to point out any renovations you’ve made to the house recently.)

After the inspection…

After the completion of the inspection, the appraiser goes to his data sources to find recent sales of similar houses nearby. Ideally, these would be a minimum of three properties as close to the subject’s size, age, lot size, location style and amenities as possible, which have passed title within the past six months.

The appraiser would then use these “comparable” properties to relate to the subject property on an item by item basis.

For any significant differences between these properties, value adjustments are made. It is in this comparison process that the artistry of the appraiser is brought out. The appraiser uses his best judgment and experience to determine what value figures to use to adjust between parcel sizes. For instance, houses with or without central air conditioning, or houses of different architectural styles or ages.

Since there is no exact equation that’s used in the appraisal process, lenders obviously place a great deal of faith in the “best judgment” an appraiser can supply.

photos courtesy of prawnik-online.eu, allocated.com, growingseattle.com

Under Valued Appraisers (fflop.wordpress.com)

Selling Your Investment Property: Renovations and Property Taxes

The property tax trigger

When it comes time to sell your investment property, any renovations you completed with a building permit will always trigger an increase in property value – and taxes. And your potential buyer will want to know how much more those taxes will be since you did the renovations.

The tax raising process

So let’s review the process by which taxes will be raised. Remember, you are helping to improve the overall quality of the community – and the community gets to share in this improvement as well – by increasing taxes on the increased value of the property.

When you obtain a building permit for any house renovation or addition, your town assessor will be notified by the building department. Assessors will want to see the work that’s being done, and will make a determination as to how much value is being added to your investment property.

After the town assessor determines the value added in any improvement to a house, he then must “equalize” the assessment value. Basically, this means he has to re-align the value relative to other neighboring communities within your state.

As an example, some communities will have equalization ratios that run about 20% of the real market value of the work that was done. (In a truly simplified world, all homes would be assessed at 100% of their market value, and no equalization ratios would need to be employed – but this is a rarity.) In this example, with the equalization ratio of 20% of real market value, a newly added deck that adds $10,000 of value to a property will be assessed at roughly $2,000. And if taxes were running, as an example, about $100 per $1,000 of assessed valuation, that $2,000 increase in assessed value would add roughly $200 to the annual property taxes on the property.

Construction cost is irrelevant

It’s very important to note that your exact cost for building that deck is not a salient point in determining your increase in assessment. Rather, the assessor only looks at the real market value as the base determining factor. Since assessors must be equitable, the assessor will treat two identical decks as equal – regardless if one was built by a contractor at a cost of $10,000, while the other was erected by your brother-in-law for half that amount!

The assessor will always look at how much value that addition is adding to your property, and he’ll always strive to assess equally.

Renovations like decks, extra rooms and baths are all relatively simple to determine valuation, since the assessor can use special valuation tables based on these basic types of house improvements. Square footage measurements are taken, and multiplied by a set amount per square foot for similar style homes. In essence, these types of renovations are easy to quantify as to value added.

House alterations

What makes an assessor’s job harder however, are more subjective alterations to a house. For example, a total kitchen remodeling job is much more difficult to assess.

In those cases, it’s a real judgment call on the increase in value. Decks, garages and square foot increases are more tangible and easier to assess. When in doubt, the assessor will refer to the building permit to see if the dollar amount of the work to be done seems reasonable.

If not, your assessor may adjust the added value accordingly. Most assessors would agree that assessing alterations is not an exact science, but assessments are equitable.

photos courtesy of activerain.com, exomatiakaivlepo.blogspot.com, westmainworldchangers.com

How To Locate The Best Areas For A Single Family Investment Property

Locating 101

In a perfect investing world, you would have unlimited cash to sprinkle liberally over all your numerous property projects. Of course you don’t, so you’ll have to create a pecking order of the best opportunities to grow your investment dollars.

Absolute versus relative property values

Like any form of real estate, the more stable the neighborhood, the more stable the home values will be. It’s certainly easy enough to check with the local police precinct to pull local crime figures for a given geographic area. But if you’re concentrating on property investments in areas close to where you live, you already probably have a good idea which areas are safer, and therefore more stable in value than others.

Problem is, the safer and more desirable the area, the greater the absolute prices for homes will be fetching. So if, after determining that your cash available for investment (including financing options) falls short of being able to approach making a deal on a house in the best neighborhood in your area, then you’ll have to consider making offers on homes in the next best neighborhood. If you can’t afford that, you have to go on down to the next best neighborhood – and so on, to other less desirable areas.

Theory of relativity, the real estate version

As an example, if you can only afford a $200,000 property and your immediate area is surrounded by homes in the $500,000 range, you’ll have to look outwards to other neighborhoods that are probably not as nice as yours, where crime may be a major negative factor, as well as the overall look and feel of the neighborhood may also be less desirable. That doesn’t mean that a great deal can’t be made there – it simply means that you’ll have to evaluate your potential investment in a completely different light than if it were in the area of $500,000 homes.

The key problem when investing in less desirable neighborhoods, is that home appreciation relative to better neighborhoods is substantially reduced. So, that area of $500,000 homes may have a 4% appreciation rate, but the $200,000 area may be flat, at 0%, or worse, going down. Thus, not only is the absolute value of the more desirable neighborhood greater than the less desirable area, the relative value (of how much you can profit off of a home located in the better area) is also usually greater.

Degrees of difficulty

Ultimately, it will translate into a greater degree of difficulty when it comes time to place the property in the less desirable neighborhood on the market for sale. All things being equal, with both area homes renovated to appeal to the market for their respective areas, and both priced properly when first placed on the market, the home in the more affluent area should sell much faster than the one in the less desirable area.

However, if you have purchased at sufficiently below market value, and renovated within the style representative of the area, in relative terms, both of these house investments should create about the same return on investment (ROI) – provided you’ve crunched your numbers properly, and have set the proper asking price for each house.

photos courtesy of flickriver.com, jeffhallrealty.com, photographersgallery.com, nysdot.gov