When you’re trying to determine how much to offer on a distressed property, you need to know what its fair market value will be once it is all fixed up and ready for that sold sign. In my next post, I’ll follow up with another formula that will help you determine your maximum offer amount on an investment deal.
Step 1: Get Reliable Comps
One of the best ways to get comps for your target property is through an investor-friendly realtor. You can do a search online or on sites like realtor.com (see the link below). Use the filters to narrow down your search criteria, such as those who specialize in working with buyers or those who specialize in short sales and foreclosures. I was able to find a local realtor who not only does short sales and foreclosures but is also a Certified Distressed Property Expert.
However, if you’re a new investor and just learning how to run numbers, don’t waste the time and energy of a realtor unless that person presented you with the target property or you’re really ready to buy. There are many resources online you can use to find comparable property values. But be sure to follow these guidelines by setting as many filters as you can:
- Only use sold listings within the last 90 days (if possible), not active listings
- Look within a mile or two of your target property; the closer, the better
- Compare homes with the same number of bedrooms and bathrooms
- Choose homes with similar square footage, a similar lot size and of similar age
I’ve been running comps on a software program that is built-in to my home study course on real estate at Response.com. It is called Real Estate Pro and while it has a lot of cool features, I’m frustrated by what I’ve found when running comp reports. Many of the homes with a sold date show $0 by the date and only reflect the listing price. I’m not sure if that means it sold for the listing price but I will update here when I find this out. Here is a screen shot
Here is an example of one home’s sold price showing $0 and the next showing the actual $ amount.
Other Free Resources for Comps
Zillow publishes sold home prices for the area I live in here in North Las Vegas, Las Vegas and Henderson. When I posed a question about Zillow’s accuracy in regards to running comps for fair market value or after repair value (AVR), on one of my Facebook investor groups, I was strongly cautioned to check those figures against property valuations at some of these sites as well:
You need a minimum of at least three comps to do a fair market value but try to get a few more. I like to work with five comps when I’m running numbers. That way, once I’ve determined the cost per square foot of all five properties, I throw out the highest and lowest number and figure out my average from the three remaining figures.
Step 2: Determine the Cost per Square Foot
In the last paragraph, I basically summarized the next two steps for calculating fair market value. First you need to determine the cost per square foot for each of your comp properties. Do this by dividing the total sale price of the house by the number of square feet it has. So, if the home sold for $250,000 and it has 1675 sq. feet, your equation will look like:
$250,000/1675 = $149.25 per sq. foot.
Do this for all of your comparable properties. If you have at least five, feel free to throw out the highest and lowest number.
Step 3: Determine the Average Cost per Square Foot
Now add together all the costs per sq. foot of the comps you’re using. You should have a minimum of three but you might have more depending on how many properties you decided to use. Write down the sum you come up with.
Divide the sum you wrote down by the number of properties you’re using. If you went with three properties, divide the sum by three. This will give you the average cost per square foot of homes selling in your target area.
Step 4: Determine your Target Property’s Fair Market Value
Multiply the average cost per square foot of your comp properties by the total number of square feet in your target property. This number reflects what the home will be worth when it is fixed up and ready to sell.
The formula itself is straightforward and easy. The challenge is to make sure you’re comparing apples to apples when picking properties and to double check your sold home prices. I’ll update this post if I discover more good resources for running comp reports. Please leave a comment if you have additional resources you’d like to share or if you found this post helpful.