Single Family Homes - The No Risk Investment! - Part 6 Let’s say it again - when you are buying property it is very important
to know what it is worth in the current market.
Comparable Values - The first place to get comparable values is from
shopping the area yourself. If you know that 3 bedrooms and 2 bathrooms
homes often sell for a certain figure, you'll have a good idea of where a
particular home fits into the price range.
There are places on the Internet that do comparable price searches.
Some are free, some have a small fee.
Homeprice.net: About $25. This service gives an accurate, detailed report
with meaningful comparable sales, a map pinpointing each comp's location,
info about surrounding neighbors and shopping in the area.
SmartHomeBuy.com: $4.50 per report or $14.95 for 10 reports during a 90
day period.
What about Homegain.com? Test results appeared to be simple "radius"
searches. Reports also appeared to give a great deal of weight to the last
price the home sold for; that can be highly inaccurate. Free is nice, but
spending a few dollars might save a few thousand.
Warning! These services are only accurate if target home is in an area of
very similar homes, and turnover is frequent enough to make the
"comparables" recent and numerous.
Always:
A) Use only comparables that have sold within the past 6 months. The most
recent sales are best.
B) Use only similar homes in nearby neighborhoods. Stay as close as
possible to the target house.
C) Try to use houses built within 5 years of the target house and within
about 300 square feet of the size of the target house. Also check the lot size
for any large variations.
Cost Per Square Foot - For each comparable sale house that qualifies
under the above rules make one simple calculation. Calculate the cost per
square foot for each house by dividing the sale price of the house by the
number of square feet:
$100,000 sale price divided by 1700 square feet = $58.82 per square foot.
Do that for each of your "comp" homes and you will get a good idea
of what the average cost per square foot is in the area. A home with a larger
lot, swimming pool and tennis court will throw your average out of whack.
Just drop the highest and lowest cost per square foot homes and you will
have a very nice fair market value range.
Here’s a list of other places on the Internet where you can find
comparable sales numbers (all were active when this was written):
http://yahoo.iplace.com/sales_search.asp
http://yahoo.iplace.com/value_search.asp
http://www.homevaluehunt.com/
http://www.azcentral.com/business/homevalues02/homevalues02.html
http://homeowners.homepricecheck.com/
http://www.domania.com/homepricecheck/index.jsp
http://www.domania.com/propertytax/index.jsp (estimate property tax)
http://housevalues.com/
http://www.harmonhomes.com/serviceselecappr.html
All of these Web sites were active when this page was written, but
things can change rapidly on the Web. If you want to learn what current
sources for property values might be available do a Google search for:
“home values” or “real estate comparables”.
After you have used all of the resources listed to this point and you
still have doubts about the true, fair market value of the home you could
engage a fee appraiser to give you his opinion. If you explain to the
appraiser that you are considering purchasing the house for a rental and you
want him to provide you with a verbal opinion of value, the cost should be
very reasonable.
The appraiser will do a quick search of sales records, drive by the
home and then call you with his idea of the value. Look under Real Estate
Appraisers in the yellow pages.
Never confuse asking prices with sale prices. Homes often sell for
thousands of dollars below an owner’s asking price so asking prices are
meaningless.
The ultimate responsibility for establishing the fair market value of a
property is yours. It will be your money and your commitment. Because
single-family homes are so easy to value you should never make a mistake
and over pay. Just take some time, do the research and then act.
Property Inspection
Before you make an offer on a property it is important to make a
detailed inspection. From your inspection report you can calculate the cost
of any repairs that will be necessary and deduct their cost from the value of
the property. The needed repairs will also be bargaining points when you
are negotiating a purchase.
It is not difficult to inspect a single family home and you will soon
learn what to watch for. A property inspection form will prevent you from
overlooking important points on your inspection tour. You will find one on
the following page. As you gain experience you may want to add items to
the report that are important in your area.
4-
7
PROPERTY INSPECTION REPORT
Property address___________________________________ Date__________
Condition Cost of Repair
1. Grounds
Landscaping/sprinklers
Pool
Other
2. Structure
Roof/chimney
Foundation
Exteriors
Other
3. HeatingAC
Furnace/heat pump
Air Conditioning
Water heater
4. Appliances /Equipment
Range
Microwave (built-in)
Dishwasher
Disposal
Smoke Detectors
Garage Door Opener
Other
5. Electrical
Interior lights/outlets
Exterior lights/outlets
Other
6. Plumbing
Bathrooms
Kitchen
Laundry ________________
7. Glass
Windows/screens
Mirrors/shower/tub enclosures
8. Miscellaneous
Carpets
Drapes
Floors
Water damage
Total
Remarks:
4-8
When you walk around the outside of a home look for evidence of termites,
dry rot on any exposed wood, cracked foundations, settling foundations (carry a
pocket knife and flashlight), large trees planted near the house where roots may be
growing under and lifting the foundation, roofing that needs replacing.
When inside the house watch for any water stains on floors, walls and
ceilings. Look for cracks in walls and baseboards that may indicate foundation is
shifting. Are there water leaks around windows; do all windows and doors freely
open and close? Flush toilets and turn on a few water faucets to check for leaks
and water pressure. Check for leaks and water stains under sinks. Is there new
paint on sections of a wall that might be hiding stains from water leaks?
Water damage can be the most expensive repair in a house. Check carefully
for signs of water and the leaks where it may have come from. If there are carpets
over wood floors lift the carpet and check underneath. Warped boards in the
flooring can mean water accumulates in the crawl space beneath the house.
Don’t panic if you do find some problems with the homes. Most flaws can
be corrected at reasonable cost. The key is to identify any damage and find out
how much it will cost to fix it. Deduct that cost, plus 20% from the value of the
house. The 20% is for your expertise in finding the problems and arranging
repairs.
Over time you will find a reliable handyman or two who can perform most
repairs in a timely manner and at reasonable cost. We have found that many
handymen are just not reliable. You won’t be able to count on them to get at the
job when they say they will. They may do good work, but when you have a
purchase pending or a renter demanding repairs you want someone who will get
the job done quickly and on time.
When you find a reliable repairman treat him well. Pay him promptly
without quibbling and praise him for a job well done. He will save you a lot of
worry and wasted time.
Now that you have gathered comparable sales figures, deducted the cost of
any repairs and establish a value for the home, you are almost ready to formulate
your best offer.
Before you can make an offer you must determine the monthly rent you will
be able to charge for the property. You do this by spending some time learning
what other; similar homes are renting for. Read the Houses for Rent section in
your newspaper’s classified advertising section. Start calling the ads and asking
about the rent, the amount of the deposit, how much is required in cash before
move-in and the address of the property. Drive by some of the homes and
establish in your own mind what the market rent is for good 3-bedroom, 2-bath
homes similar to yours.
Let’s say that you find that you will be able to rent a home for $850 per
month. Then it is clear that you cannot purchase the house if it requires more than
$850 in monthly payments on a mortgage or lease. Yes, you may want a lower
monthly payment on debt, but under no circumstances more than $850. More
would be negative cash flow. You must never do that kind of deal!
Here is a form to help you calculate the profit potential of a property:
CASH FLOW
Gross Income
Estimated annual income (rent) 1._______________
Less vacancy allowance (4% of above) 2.______________
Gross income (Subtract 1. from 2.) 3._______________
Expenses
Taxes 4._______________
Insurance 5._______________
Business license (If required) 6._______________
Advertising 7._______________
Miscellaneous 8._______________
Monthly Payments
Lease 9._______________
1st Mortgage 10.______________
2nd Mortgage 11.______________
Total of #9 thru #11 X 12 12.______________
Total from #3 a.____________
Total of #4 thru # 12 b.____________
Cash Flow (Subtract b. from a.) _________________
4-10
All of the above numbers should be annual figures.
Line #2 is the amount you will accumulate each month to carry you through
any periods when the house is vacant. You can fudge on this figure if you have
other resources to carry you over any period when the property is not producing
rent.
Line #4 is taxes. Property taxes are usually part of any mortgage payment,
if so don’t enter them here. Many cities charge property owners a rental tax
calculated as a percentage of the rent collected. Enter that tax and any other local
taxes on income property on this line.
Line #5 is for insurance. The fire policy payments are usually included with
the payment on the first mortgage just like property taxes. The extra cost of a
liability umbrella policy could go here. Talk to your insurance agent about adding
that to the homeowner’s policy covering the home you live in.
In some cities a business license is required if you are renting property. Put
that cost on Line #6.
Plan on finding a new tenant for your property once each year. That means
you will have to advertise. Call your newspaper and learn the cost of a four line
classified “Home for Rent” ad for two weekends. You can cancel the ad if you
rent after the first weekend. Place the cost of the ad on line #7.
Depending on how you buy the property you will have at least one mortgage
or lease payment each month. Multiple those monthly payments by twelve and
enter them on Line #12. That is called your debt service.
When you get down to the bottom line you will have either a positive or
negative number. If it is negative you either must restructure the deal or move on
to another property. Be realistic about the numbers. Don’t hope you can get an
extra $50 per month in rent when other properties are renting for less.
Remember, you make your profit when you buy! This is the moment of
truth. Be brutally honest about the numbers and walk away if they don’t show at
least a small amount of positive cash flow or large profit within a reasonable
amount of time. A property that sucks cash out of your pocket every month can
make your life very uncomfortable.
FIVE
Buy Homes!
Perhaps the number one secret of success when investing in single-
family homes is to buy homes! Does that seem like a silly statement? Well
trust me when I tell you that from my experience most people who set out to
be real estate investors never buy a rental property! In my opinion that is
because they have been mislead.
Most people learn about real estate investing from a high priced
seminar or through the purchase of a “success” package offered through a
TV infomercial. The promoters of these seminars and programs are
masterful marketers. They know that greed is one of the great human
motivators. They stimulate people’s greed to the point where it overcomes
their good judgment.
These programs promise to reveal the secrets of buying real estate at
far below market value and quickly converting the property into cash. Can
that be done? Yes. Can most people do it regularly? No. Most people can’t
do it at all and that’s why they never really get started as real estate
investors. They have been indoctrinated with unreasonable expectations.
They have been setup to fail!
The purpose of this manual is to present a practical plan for profitable
investing that can be achieved by the ordinary person as part of his/her every
day busy life. I am an ordinary person and I have done it. Time is precious
in modern life and we can’t afford to waste it chasing the unlikely or the
near impossible.
Over the years I have learned that the real opportunities come to those
who are active in the game. People who are out there striving to get ahead,
working toward financial freedom. Investors with a plan who aren’t afraid
to expend the effort it takes to achieve their goals. If you are doing that,
every once in a while, you will uncover a remarkable deal. But get this;
your financial progress does not depend on those super deals. You are
steadily moving ahead with or without them. You are building your wealth
on the conventional type of profitable, sensible deals that can be found on a
consistent basis.
Here is the proof of the effectiveness of the plan in this manual. Go to
any real estate broker who has been working in your area for 10 or more
years. Choose any middle class neighborhood and ask him/her what those
homes were selling for 10 years ago. Without fail you will find those homes
have appreciated at least 50% to 100% in value. Many have gone up even
more in price.
What if you had started buying one or two homes every year for the
last 10 to 15 years? I’ll tell you what. You would now be at a point now
where you would be as wealthy as you would ever need to be.
It is while you are out there working your plan every week that you
uncover a super deal now and again. But your plan does not depend on
those unusual deals. If you never find one you will still reach financial
freedom doing “ordinary” deals. That’s why I shout that you cannot fail if
you will just learn the plan and then work the plan, work the plan and work
the plan.
The Four Step Plan
It just occurred to me that I should call this the “Can’t Fail Four Step
Plan.” Here are the four steps:
1. Learn the plan.
2. Work the plan,
3. Work the plan,
4. Work the plan!
A few years ago I was speaking with a man who had been investing in
single-family homes for twenty or thirty years. He had more money than he
could ever spend and was expert in every facet of real estate buying and
financing. He said that even as successful as he was he could see that he
would have gotten there a lot sooner if he had just spent his time buying
every house that made sense rather than searching for super deals only.
Yet another successful investor has all of the single-family homes he
cares to manage. Now he only buys the very best super deals and only if the
deals come to him. Really? Yes, he has built a reputation in his area as a
seasoned investor who knows how to put creative deals together. He can
solve problems. Real estate brokers and other investors bring problem deals
to him. If it is a situation where he can make a generous profit by helping a
homeowner out of a distressing situation he does the deal.
Good things happen to people who are striving for success. Now you
know what to do - BUY HOMES!
Becoming a Successful Investor
In earlier parts of this manual we explained prospecting methods for
finding motivated homeowners. You also found a list of questions that
would reveal if the seller is motivated enough to help you buy his home.
Now how do you make a deal?
Many people want to become real estate investors, but they have no
money, bad credit and not much of an income. I hope that is not your
position. If it is you need to take a hard look at yourself and determine why
you’ve reached this point in your life and have nothing. If you ever expect
to be successful you need to change your habits and your thinking. Yes it is
difficult to accept the fact that you have been making the wrong choices all
of these years, but unless you have the determination to change you will
continue to fail. It’s time for an attitude adjustment!
Choose to start your life over again on a positive track. Read “The
Power of Positive Thinking” and “Think and Grow Rich”. Follow those
books with “How to Win Friends and Influence People”. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
