The Complete Fix & Flippers Guide to Valuing Properties
I’ve always said there are four main skills you must master in order to be a successful fix & flipper:
- Finding Deals
- Valuing the Property
- Planning/Estimating/Hiring for Rehab
- Doing the Rehab
In my mind, the most overlooked is how to properly value properties. New investors find a deal that looks awesome, and then only do cursory research (or worse, fudge the numbers a bit) so they can move on to the rehab part of the deal!
I see this all the time. But this step is the “eat your vegetables” part of the deal – the step that isn’t as fun, but is incredibly important.
If you can’t value properties correctly, you will lose money on deals. It’s that simple. There’s a reason that the deals I fund fail 60% less than industry average. It’s because I follow my own rules for valuing properties correctly.
So, before you get too excited about planning the rehab, here’s my quick guide to valuing properties correctly.
1. Find 3 Recently Sold Comparable Properties
First, I’m not interested in comps that are still on the market – you don’t know if they’re actually going to sell for that amount. You need properties that have fetched that amount of money to make a proper assessment.
A comparable property is one within a mile, has the same number of beds/baths, and has roughly the same square footage. Ideally, the features will be roughly the same as well – such as quality of materials and construction.
2. Use the Cheapest of the Three
Now that you have the three, disregard the two more expensive ones! Yes, it’s conservative, but it also keeps our deals profitable a huge percentage of the time!
For example, let’s say you find $300k, $315k, and a $330k recently sold comps in the area. Instead of using the cheapest one, you use the average. That’s a difference of $15k, and often can be the difference between walking away with a nice profit and walking away with nothing.
3. Make Sure There Aren’t Any Natural Barriers Between Your Comps
My favorite example of this is a street here in Salt Lake.
Houses on one side of the street are worth $25k to $50k more than the properties literally on the other side of the road… for the same size and layout!
It’s crazy, and it’s a real estate investor’s nightmare. You can’t use comparables from properties literally across the street – you have to use ones on the same side of that road or else you could lose massively on your deal.
What other natural barriers could affect the value?
4. Factor in any Deductions
My loans team has a list of issues that result in automatic deductions from the property value, such as:
- High percentage of rentals in area
- Boarded up homes
- Close proximity to commercial areas
- Railroad tracks
Those are just a few examples, but people often want to make the deal work so bad they’ll overlook obvious reasons to devalue the property.
Do you really think that property next to Arby’s will sell for as much as the one 6 blocks away from any commercial property? Not a chance!
5. Avoid Deal-Killing Issues
There are also issues with properties that have us walk away from it altogether. Some of those include a nearby murder, expensive structural issues, awful crime rate, or other problems that complicate the deal to such a level that we can’t possibly predict how much the rehabbed property will sell for.
One of the reasons we’re so conservative with our values is that we offer the lowest cash-to-close options in the industry – including our flagship 100% financing options.
Other lenders mitigate risk by requiring you to put a lot of money down up front – often $30k – $50k (or more).
We mitigate risk by being conservative in our values.
By being as sure as possible that you’ve got a great deal, we’ll happily lend you a much higher percentage of the total cost – even up to 100%. That could potentially include ALL your costs – property, rehab, title, closing fees, origination fees, and anything else.
We frequently have borrowers bring $0 cash to the table and flip a deal with tens of thousands in profit.
Would you like to learn how to find deals that qualify for 100% financing?