Determining market value - Posted by Julie W

Real Estate Investing Retail
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Posted by Redline on June 10, 1999 at 13:24:30:

This solar orientation thing could have merit. I could move to the Great Lakes region and search the MLS for houses facing the wrong way. Then I make lowball offers on all of them (pointing out their obvious flaw) and soon I will own the whole area.

Then I can either:

  1. Jack up market rents and make tenants pay my exhorbitant utility bills. (Good)
  2. Form an alliance (don’t forget - strength in numbers!) and force the utility company to lower their regional rates. (Better).
  3. Form a class action suit for owners of homes with “INCORRECT SOLAR ORIENTATION”, hire Johnny Cochran and sue the builders, towns, counties, states and anyone ELSE I can think of for positional discrimination and score a fat settlement (Best).

RL

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Determining market value - Posted by Julie W

Posted by Julie W on June 08, 1999 at 17:49:38:

I’m having a problem finding FMV of houses in my area. In CS’s course you would simply do a market sales analysis for homes in the area. Simple enough. Problem is sales prices are not public information, only the county’s appraisal values are. I was told the appraisal value was roughly 80% of market value by a RE agent. But I need better than a rough estimate. And I hate to ask RE agent (a friend) to pull comps for me any time I look at a house. Any suggestions would be greatly appreciated.

Thanks,

Julie W

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100 house rule - Posted by Bud Branstetter

Posted by Bud Branstetter on June 09, 1999 at 17:08:32:

Back in the old days some guru said to go look at 100 houses in the area. That would be great if I restricted myself to a small area. With large metro areas like DFW I would be spending weeks looking at houses to meet the 100 house rule. What I will do is find a house for sale in the area of my prospective property. I will call the listing agent and ask the size and features along with the price. I don’t have to be precise just approximate. No, I don’t like tax values because there is to much deviation both ways an a house by house basis. I say approximate because I am not trying to sell just yet. Since I plan on offering much less than FMV I can be approximate. If he wants too close to FMV them I would switch to the L/O, owner finance or other mode.

If I end up in a L/O then it is as important to know what the rents are as it is on what the FMV is. Once I have a contract to buy I will do more research on value to find out what I can expect to get. Always remembering that 1. appraisals tend to come in at sales price, 2. I can ask a little more because of the time the person is getting to clear things up.

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Re: Determining market value - Posted by JPiper

Posted by JPiper on June 09, 1999 at 03:37:20:

Julie:

You’ve gotten some good suggestions below (with the exception of Karl’s idea). You MIGHT be able to get comps from a title company, you might be able to get them at the county recorder. There are also services that you pay for like Experian and others with which you might be able to run comps.

Here’s one other way. When you look at the subject property?.drive the area. Drive several blocks in all directions. During this drive write down all the FSBO’s for sale. Call them, ask what they’re selling for. Who knows, you might find a deal. Write down all the Realtor signs. Call them. Ask what they’re selling for. BUT, tell them you’re interested in the area?..ask them if you could get some comps on sales in the area. Ask each one other them. Once you have a few lists you’ll be able to get an idea of the property value.

As you call the Realtors try to develop some rapport. When you need comps in the future ask. All they can do is say no. Maybe you could do some business through them at some point. Take them to lunch. Perhaps even offer to pay a little for comps.

Why not ask your friend to pull comps in return for a small payment?

JPiper

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Re: Determining market value - Posted by Barbara

Posted by Barbara on June 08, 1999 at 22:08:11:

It was posted before for free comps go to www.octitle.com/is.htm. I did and got great comps–I’m not sure how often their info is updated, but you can get a lot of info from their site.

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Re: Determining market value - Posted by Andrew Graham

Posted by Andrew Graham on June 08, 1999 at 20:05:35:

Just find someone in your county, preferably an investor, who subscribes to PACE or TRW, and ask them to run you comps, mortgage amounts, or whatever else you need. If you don’t want to do this subscribe yourself, you don’t have to be a realtor or anything.

As far as sale prices not being public info, someone gave you bad info.

Good Luck

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ASK A BUILDER - Posted by Karl Grube

Posted by Karl Grube on June 08, 1999 at 19:43:34:

I would suggest that you have a builder provide a replacement cost estimate of the house and site improvements. Add the estimate building site land value and you have an accurate price for a new residential property. Estimate the age of the house and depreciate accordingly to a 15 year schedule. I use a 15 year schedule because most housing wears out in 15 years … ei. roof.

YOU can also use the Marshall-Swift price estimator. The figures are a little high on average but believable by owners because the data is printed out on computer paper. (It must be right if a computer did it? Right!)

If YOU calculate the IRR (Internal Rate of Return) on your investment, YOU will come up with an offering price. YOU are buying a property wholesale not retail. Market values estimated by similer or comparable house sales are a flawed market technique developed to a simple art by real estate brokers for bankers. Tract housing or nearly identical blueprint houses in a subdivisions lend themselves to this technique; however, older and different architectural styles of urban housing units are another story!

YOU can’t make money buying on comparable sales prices! Ask yourself this question: How many real estate agents do you know that have built a house and sold it? Building a house and selling the property should be the final exam for a brokers license!

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Re: Determining market value - Posted by Redline

Posted by Redline on June 08, 1999 at 18:22:57:

Julie,

  1. By ‘county appraisal values’ I’m assuming you mean tax assessment values. I would ignore these as they have little or no bearing on FMV.

  2. Who says sales prices aren’t public? Sure they are. The recorders office will have the mortgages recorded and they tell you how much was borrowed and how much was put down. (hence, sales price).

  3. I’m afraid from #2, comps are the only other way to determine value. You need to get a feel for what sold at what prices. Comps will accomplish this.

RL

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Re: Determining market value - Posted by Redline

Posted by Redline on June 09, 1999 at 09:57:41:

I checked this data out and found it to be not very accurate at all. I found things over a year old that were incorrect. I wouldn’t use it.

RL

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Holy Cow! - Posted by K.I.S.S.

Posted by K.I.S.S. on June 09, 1999 at 10:46:01:

WOW!

Estimating FMV and cost of repairs has proven to be difficult enough for a newbie without a clue to do.

There are houses around here that could probably be replaced for the cost of a 6-pack to the crew that replaces the toothepicks that hold them up. BUT these same houses will sell for a whole lot more. (Maybe a 1/2 case??)

Anyway, seems to me you are making things very difficult. By the time you have had a chance to get your builder to the house and run his analysis, and then run your own… another investor that took a few minutes to see what the houses down the street sold for, has the deal locked up.

Just my thoughts - remind me not to ask you why we have day and night. I don’t have time for the answer.

Keep It Simple, Silly

K.I.S.S.

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Re: ASK A BUILDER - Posted by BRnBA

Posted by BRnBA on June 09, 1999 at 06:27:50:

Karl, you are probably the only person in the civilized world doing “SFR” comps in this manner. Like Jim says, why complicate the issue? There is already enough confusion and mis information out there. If you will read Jim’s post with an open mind you might learn that there is a much simpler approach. That is how I did it before learning about First American Real Estate Solutions.

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ASK YOUR PSYCHIC - Posted by JPiper

Posted by JPiper on June 09, 1999 at 03:25:19:

Karl:

A friend of mine suggested that I read your post tonight, and so being a man of my word I followed through and read it. I can now honestly say that reading your post was both humorous and a complete waste of time.

Just to set the record straight?.fair market value for single family homes is determined by looking at recent sales of comparable properties in close proximity to the subject property.

Here are a few ways NOT to determine the fair market value of a single family home?..replacement cost coupled with depreciation, the income approach, IRR, URR, tax assessor value, calling your builder, calling your psychic, or throwing salt over your left shoulder while you guess at the value.

To determine the wholesale value of the property, you start with the fair market value, and then back out the cost of buying and selling, the carrying cost, the cost of repairs, and your profit.

Ways NOT to determine wholesale value would include picking up your calculator to determine IRR, URR, the cap rate, or the gross rent multiplier.

Karl, no one really cares how YOU determine the market value. If you want to use this ridiculous method you have set forth then that’s your right. But next time you feel the need to try to “enlighten” all of us lost souls who only care what folks buy and sell for when we determine value, please lay down quickly, or alternately, take a cold shower and let the feeling pass. This is a confusing business to get started in for most new people, without having to read this type of BUNK masquerading as expertise.

By the way, I got a good laugh out of depreciating the house over 15 years. The thought that occurred to me was how worthless all those houses were that were over 15 years old. (Read this with heavy sarcasm).

JPiper

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I agree - be careful with OCTitle - Posted by Brandi_TX

Posted by Brandi_TX on June 09, 1999 at 10:22:50:

I was very excited to learn about OCTitle, after all my county does not have ANY appraisal info online (let alone comps).

In my search on OCTitle - I found completely false info. This is not to say that this is true for every location they service, but it is enough to say BE CAREFUL and verify all info you get from their site.

To show just how wrong the info was, here are a few examples:

  1. 3/2 house was shown to be a 2/1
  2. Home owned by same people for 23 yrs - according to OCTitle, didn’t even exist.
  3. 4/3 house shown as a 0/0 (?) and was shown to still be owned by the builder (3 yr old house).

These are just a few, but you get the idea.

Brandi_TX

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COMPARABLE HOUSING - FOR PSYCHIC BANKERS - Posted by Karl Grube

Posted by Karl Grube on June 09, 1999 at 05:45:01:

Your post has more humor than mine! The determination of Fair Market Value of residential housing using comparable housing sales in most locales of this country is difficult if not impossible to accurately calculate. Most bank appraisers will only use three samples for the lender plus a low builders replacement cost … too small of sample by any measurement. Age, architecture, site size, site dimensions, solar orientation, bldg. additions, street crossings, school sites, school buildings, parkland, shopping, landscaping, swimming pools are variables that must be factored into the mix. It is simply not location, location, location!

If YOU are serious about landlording and investment and want positive cash flow, then use an INCOME APPROACH to buying your properties in determining the offering price for the residential property.

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Boy did I Screw Up - Posted by JohnAz

Posted by JohnAz on June 10, 1999 at 24:57:07:

Hmm,

You say if your serious …“and want positive cash flow then use an INCOME APPROACH to buying your properties in determining the offering price for the residential property.”

I don’t know what you would figure for a deal I did a few years back, maybe you can tell me where I screwed up.

Houses that rent for $500 sell for about $50k, those that rent for $650 sell for about $65k. I found a lot with two houses, one would rent for $550, one would rent for $350. Going on an income approach I suppose you would have arrived at a value of $90k. Now I guess you would have discounted that a bit for your profit and cash flow and maybe offered $70k.

Me, I’m was just a beginner, didn’t know anything about IRR’s, NOI’s, heck, I’m lucky to remember my ABC’s somedays. So I did what I thought was best. I figured out how much cash I could pull out of a refi of my own residence, knowing that wouldn’t be enough I cleaned out my bank account and got a loan on the van I owned. With every nickel I could get my hands on I made my offer. $20k all cash right now!

You know what? They took the offer.
Since I didn’t use an income approach I guess I wasn’t very serious about landlording, my investing, or cash flow. Darn. Should I see if I can sell it for what I’ve got into it since it must have been a bad deal?
Maybe I should figure out what IRR’s, ROI’s, NOI’s all stand for, or go back and double check the Solar Orientation. Nah. I’ll stick with Lonnie’s favorite line for evaluating that one…“Good Enough!”

John

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Re: COMPARABLE HOUSING - FOR PSYCHIC BANKERS - Posted by David Alexander

Posted by David Alexander on June 09, 1999 at 16:42:24:

Karl,

everyone has a different way to build there wealth and and investment philosophies differ. Your assuming everyones Investment philosophy is buy and hold, when in reality a lot of people just buy and sell, or Buy and pretend to Sell(L/O) to beat taxes. I know from experience your method of getting replacement costs doesn’t work. Have a note on a house where the replacement costs are 70k plus, but the comps, what you can sell the house for are only 30-35k. The people simply made to many additions to the house, the biggest house on the block so to speak. Now, I can’t sell that note or the house and get anywhere near the 70k mark because of comps. So, what does that mean, it means paople have to learn to play the rules by what the market dictates first and have to make their money(income) based on that. If I was into this note for 70k, I wouldn’t ever be able to resale in the event of default. You make your money going in and the sunny side of the house may cause your expenses to go up, but the market decides how much you pay for a house and you decide how much you pay by deducting your expenses and seeing if you can make a profit. I would also suggest making that profit on the way in not waiting on time.

Jim- sorry, not jumping in on your behalf(LOL) cause I know you don’t need a defense, but the title caught my attention and looked like a good argument to jump in on.

Good day all

David Alexander

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Secret Real Estate Wisdom - Posted by JPiper

Posted by JPiper on June 09, 1999 at 11:40:34:

Karl:

Here’s one of your statements?. “Age, architecture, site size, site dimensions, solar orientation, bldg. additions, street crossings, school sites, school buildings, parkland, shopping, landscaping, swimming pools are variables that must be factored into the mix.”

I was particularly struck by SOLAR ORIENTATION, a little known but vastly important appraisal technique. Few realize how far out of whack the sun can get just one street over, and a proper adjustment MUST be made to account for a “low laying” sun on one street versus a “high” sun on another. One should ALWAYS take care to make their evaluation on a sunny day, so that proper observation of the sun may take place. Thanks Karl for revealing this important piece of secret real estate wisdom.

Of course I am wondering just how solar orientation fits into the cost approach. I suppose I’ll just ask my builder.

As far as the income approach goes as it applies to single family homes, this is more BUNK?.and of course fails to account for solar orientation, a major flaw. By far and away the VAST majority of single family homes are bought and sold by people who are going to live in them?.NOT rent them. Therefore the value of a single family home has little to do with it’s rental value?.unlike apartment buildings, shopping centers, etc. Obviously if YOUR idea is to rent houses out, you should pencil the numbers out to see if that will be a profitable activity. But this has NOTHING to do with the value of the property for a homeowner?.the VAST majority of the buyers of single family homes. It only determines whether the value of the home would be a profitable rental property for you Karl.

You say “The determination of Fair Market Value of residential housing using comparable housing sales in most locales of this country is difficult if not impossible to accurately calculate.” Karl, I’ve been doing just that for about 19 years at this point, in order to establish a beginning point to determine my offering price. It’s worked amazingly well Karl?..although it isn’t rocket science, and therefore it isn’t precise like you might like it to be. My guess is that it’s you Karl that has difficulty with this method. NOT ONE investor that I know uses ANY method to determine value other than COMPARABLE SALES for single family homes, other than YOU Karl.

My suggestion to you Karl is to get out in the field, take a look at some properties, it’s easier than you think. Quit trying to come up with numerical methods to establish value. And Karl, PLEASE send me YOUR method for evaluating SOLAR ORIENTATION.

JPiper

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Re: COMPARABLE HOUSING - Posted by David S

Posted by David S on June 09, 1999 at 08:30:40:

I have to agree 100% with JPiper. In areas of high rents, you would be foolish to use the income approach to justify offering price.

In addition, don’t forget about manufactured homes. If you use your system, you will always pay about 7-10 times the ‘actual’ value.

David S

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Apples & Oranges… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on June 09, 1999 at 07:21:01:

I work with property taxes among other things and therefore deal with appraisers. Their take: FMV is, by definition, what a reasonable (i.e.- normal) buyer in as good a bargaining position as the seller would pay. In other words, FMV is what you are likely to get if you sell. If everyone pays $200,000 per pink flamingo in the yard, that’s the standard no matter how daft others think it (e.g.- inacurate, small sample size, etc.). Income approach on residential properties gives an idea if the return from a rental standpoint is accaptable given the dollars paid. If that number is greater than what a homebuyer would pay, maybe it’s a decent income property- but you still won’t be able to sell for more than what the market (i.e.- homeowners) will bear. Homeowners rarely look at RoR or any similar numbers when they make purchase decisons. If you ever think you or your progeny or someone will sell a residential property, anything but a homeowner/FMV-based approach is flawed. No matter how good your intentions, I wouldn’t be advising people to take such an approach because it simply does not reflect PROBABLE resale value.

You are correct in that if for a given FMV, the numbers don’t come out well for renting (e.g.

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Re: COMPARABLE HOUSING - FOR PSYCHIC BANKERS - Posted by Jay

Posted by Jay on June 09, 1999 at 06:47:21:

How many deals have you done ?
How many houses have you bought and sold ?
How much profit did you make per deal ?
Just curious ?