The road to a profitable real estate investment begins with proper property valuation (estimating property value based on condition, location and other factors). In our 20+ years of making substantially profitable real estate deals, we have identified some essential processes when estimating a property’s value.
Knowing these real estate valuation methods can mean the difference between a good deal, a great deal and a bust. Before you buy that property, make sure you have these tips in mind.
Knowing your Exit Strategy on the Property
Your exit strategy will be determined by the type of rehab you will conduct. There are only two types of rehabs to consider when conducting a real estate property valuation: Ready to Sell and Ready to Rent.
Making your exit strategy decision before you start is crucial to creating the best profit margin, preventing you from making an expensive rookie mistake.
Ready to Sell
Selling the property means you're looking to turn the property into someone's "forever home." The potential buyer is looking to raise their family in this property. That means you will be looking at a more thorough - and costlier - rehab.
Buyers want to be impressed with the sparkly, new look of a property that feels like home. Inspections are more thorough with selling properties, which means the house must be in tip-top shape.
With a ready-to-sell property, you are most likely addressing issues including:
- Fixing the foundation
- Cosmetic fixes like carpets, paint, and bathrooms
- Plumbing repair
- Electrical repair
- Roof and paneling
Getting a property ready to sell takes more effort and work if the property is in rough shape, but you can get even more out of your flip if you dig a little deeper.
Look for opportunities to add value to the home. Adding square footage, re-designing floor plans, and adding additional structures to the property are great ways to increase the home's value and maximize potential profits.
Ready to Rent
Renting a property requires a less intensive fix. Cosmetic rehabs are sufficient for a rental property. Typically, you would not fix the foundation of a house you will rent.
Rental property rehabs will be less expensive at the start, but if you purchase a rough property, you will, at some point, be forced to face those problems. At that point, it would be wise to shape up the property properly and look to sell it for a complete flip.
Grading Properties Like a Mean Teacher
We use an ABC system to estimate property values. This simple grading system helps us estimate the potential cost of our rehabs, and it is a good guideline to keep in mind as you begin to research properties, visit them, and start formulating pricing.
A : The property is in good shape. There is not much rehabbing to do, just minor cosmetic fixes.
A- : A little remodeling and some fixes. Although this isn't the most you will spend on rehab, you must put some money and effort into these homes.
B : A good, hefty rehab. These properties need a lot of work, but you're probably not gutting the entire property. You will need more than cosmetic fixes like replacing the carpets and counters, but the electrical, plumbing, and roofing may be in good condition.
C : This is a full gut job. New plumbing and electricity are needed. You are fixing the foundation of this property and completely renovating it.
It's always better to overestimate your rehab needs. That way, you are more likely to fall under budget. So be a mean grader, like the teacher from high school you'll never forget.
Estimating Your Rehab and Home Renovation Costs
Identifying what type of rehab we have helps our team estimate its cost. We break down our cost to the dollar amount per square foot of the property. A total gut rehab will be the most expensive, while a "Half Hab" will cost half as much. Cosmetic renovations and remodels will be the cheapest rehabs.
Here are some of our best tips to help you estimate you rehab costs:
- Allot for a minimum of $15K budget for the rehab. It would help if you always give yourself a cushion for the unexpected.
- Budget more for rehab based on the age of the house.
- Different markets have different labor prices. For example, Philadelphia has higher labor prices than Southern California.
- More square footage does not always guarantee more profit. home values have thresholds, and properties under $150K don't typically appreciate past this value. In this situation, less square footage is better. This cuts down costs on paint, flooring, and other things, giving you more money in your pocket.
- If you cannot examine the inside of the house, always default to the worst-case scenario when estimating. Whatever the worst possible rehab is, budget that in your examination. The last thin you want to be is surprised and short on your estimate.
Getting the Complete Property Valuation
We use a top-down property evaluation process that our team perfected from evaluating thousands of properties. This system helps us get a complete idea of what the property looks like, and we follow this evaluation process for every prospective property we find.
Top-down
Start from the roof down to the ground. Examining the roof with a drone or another aerial shot will help you see damage that you otherwise couldn't see without going into the house.
Inside-out
If you can look inside the house, examine the walls first. Look for issues with the foundation. You can find plumbing and electrical issues here. Then, move outward toward the walls, floors, and doors of the home.
There are a lot of things to look for when examining the house. Some of the key aspects to examine are:
- Roofs
- Yards
- Paneling
- Concrete
- Side yards and walls
- Streets of the neighborhood
- Foundation issues (Plumbing and Electrical included)
Take account of the area's climate. Knowing whether there are earthquakes, heavy rain, or cold winters is key to examining properties. Knowing the market's climate can help you anticipate potential problems.
Maximize Your Profit Like an Expert
These elements form the foundation of our rehab evaluation process. This process has helped us close thousands of deals and save pennies on the dollar every time (and they add up)!
By following this guideline, you can evaluate properties like a pro while eliminating any surprises and securing your potential profits for every property you buy.
Dutch Mendenhall represents RADD Companies, yet his expressed views are his own and may not necessarily align with the company's perspectives, promise outcomes, or indicate future results. The content provided is for informational purposes only and should not be considered professional advice. For more information, visit https://dutchmendenhall.com/disclosures/.
