An Easier Approach to Property Analysis

An Easier Approach to Property Analysis
By Larry Goins

If you need an accounting degree to crunch the numbers when evaluating a property, then you need a new formula. Property analysis doesn’t have to be a mathematical challenge. If you will stick with me, you will see that simplified property analysis is an integral part of being an ultimate buying and selling machine.
Sure, it doesn’t hurt to have an idea what a property will cost you in the long run if you plan to renovate and then rent it out. But if the whole idea is to flip the house or build a real estate portfolio, then the big picture is how little you can invest and how much house you can get, right? If you find a deal, or negotiate a deal, it should be a pretty simple number game to crack. Either there is immediate value above and beyond your investment or there is not. You won’t need an elaborate mathematical formula to know if you can win or not. And you probably won’t need anyone else to tell you whether or not it’s a deal.
Side note here. You are a student of mine because you want to learn to be an ultimate buying and selling machine. However, if you use the simplified property analysis below you won’t need me to confirm whether you’ve found a deal or not. I’ll coach and mentor you along the way, but the only phone call you will need to make to me is to strike up the band and launch the cheering squad. You will know when you’ve found a deal or a steal.
There are plenty of reasons that a deal needs to have a high profit margin. Least of which is that without one there is too much margin for error. If something goes wrong, you might not make any money at all. Plus, let’s face it. We are all in this real estate game to make money. If you get caught up in a cycle of doing $2000 profit deals and just bringing home another marginal paycheck every month, you just have another job. Come on! You really want to be an ultimate buying and selling machine, right? Putting money in the bank and building net worth and honing your real estate investing craft. Not crunching numbers on some hard-to-handle property analysis spreadsheet. That’s what God made accountants for. I’m taking His creations and making real estate kings and queens.
With a simple property analysis you can crunch numbers and make an offer during your first contact with the owner. Okay, so you probably won’t buy the house on the first call. But once you make that first offer you are in a better position to negotiate and the owner is liking you because you are possibly the only one who has made an offer on his property. Don’t get hampered down in the discomfort of making an offer on a property that you’ve never set foot on. It doesn’t matter. If you have an appraisal, and you know the cost of the repairs, you are well on the way to closing the deal. It doesn’t help to see it, if you aren’t planning on owning it for any length of time or doing the repair work yourself. That’s a little bit like my wife insisting on looking under the hood of a car before we buy it. Okay, so now she knows it has an engine, but she isn’t going to like it any more or any less for what she sees under the hood. And you aren’t going to like the house any more or any less just because you look at it.
If this is your first deal, I still hope that you will look at the house. It’s a part of the whole real estate investing education process. If you haven’t seen a house yet, grab a copy of our Rehab Bus Tour CD so that you can see what we are looking for when we look at a house. But remember that the ultimate goal for my ultimate buying and selling machine students is that they use the phone, fax, and internet to do the deals without ever leaving their own homes.
Property Search Criteria
When you are looking at a house, whether its online or in person, there are only two or three questions you have to know the answer to before you know if it’s a deal, a steal, or a “get real and run away” opportunity.
You have to know the answers to these questions before you dare make an offer.
1. After Repair Value: It doesn’t matter what the current value of the house is or what it would appraise for in its current condition. We don’t care. The value that we care about is the after repair value of the property in question. Sometimes you will see this as ARV. Whether or not you have a potential deal depends upon the value of the property after the necessary repairs. There is a reason that people look for handy-man’s specials and fixer uppers. There are savings to be had. We utilize the savings to make sure that our deal really is a deal.
2. Amount of Repairs: What is it going to cost to get this property to appraise at the ARV? Its important that this is accurate and includes all necessary repairs. I have great luck telling realtors or owners that I need “just a ballpark figure”. Of course the number isn’t written in stone. It really is just a ballpark figure. But it’s the second number that you must have to utilize my easy property analysis.
3. Potential Rent: This is the optional question. It doesn’t matter if you don’t intend to keep the property for any length of time. But even if you plan to sell the property, its not bad information to have for your own sales pitch. If the property is For Sale By Owner you will also need to know what their loan balance is and how far if at all they are behind on their payments. Remember these are the people who are really keen to have you purchase their properties. They have a pain level associated with their property ownership. A good way to address this question is to ask, “How far behind are you on your payments?” It gives the owner permission to tell you how serious things are AND it let’s them know that you assume that is the case. So they aren’t embarrassed to discuss this with you. Don’t worry if this seems tricky. In my course there is a whole section on scripts for realtors and owners to help you get through these questions without stumbling. You will also learn how to make low offers without getting laughed at or hung up on. You will be amazed at how many really great deals you can generate following my steps.
Now let’s look at my simple approach to property analysis. You don’t want to waste time on properties that are “get real and run away” when you could be focusing your time on deals and steals.
In my market, I primarily wholesale my properties on to investors. That means I need to be able to resell the property for about 70% of its ARV after purchase, closing costs, and repairs. Its safe to say that 60-65% of ARV is all I can afford to pay on a deal and have it still be a deal. So I need a quick and easy way to analyze the property and see if I can stay within my numbers. Of course the numbers are a little bit different if I am buying to rent or buying to retail. But you get the general idea.
I highly suggest you work with worst case scenario numbers. That means if the customer says a house is with $70,000 to $75,000 you look at an ARV of $70,000. If they further ballpark the repairs to be $5,000 to $10,000 I always go with the $10,000. If I plan to wholesale the house, I also have to allow for closing costs. So that leaves me with a number like this.
Property ARV $70,000Repairs $ 10,000Closing Costs $ 5,300
This leaves you with $54,700 in value. So let’s assume you can get the deal for $44,000. Then you have a $10,000 deal on your hands and you are off to the races!
This property analysis is so simple, it enables you to do deals super fast without breaking out your calculator and spreadsheet. And the faster you can do deals, the more money you can make!