Deal Evaluation

This is more of an art than a science so don't overthink it.  The goal is to be close as there is no perfect method.

When evaluating investment properties you will be looking at them from a couple different perspectives. 
 

Type of Deal to Evaluate

Is this property meant to be a rental or is it going to be resold retail. 

Retail Evaluation

When you are sourcing properties to flip, resale retail or sell to other flippers you are most likely trying to figure out how much you can sell the house for as is or how much you can sell it for once fixed up.  

Rental Evaluation

Valuing properties that you will hold or sell to landlords is done a little differently.  Although its nice to have equity after purchasing a rental, its more important for the buyer to have cash flow.   You are looking for properties that rent for a high percentage of the money invested in them.

Next we will break down each and walk you through evaluating each type as well as help you to understand who your buyers will be.  This will help you get more deals and or make more money on each deal.

Evaluating for a Flip or Wholesale

When evaluating a property that will be listed, sold retail, or sold to a flipper your goal is to find similar properties that have sold in the area in a somewhat recent time frame.  That is pretty much it.  This almost always gets over complicated and it doesn't need to be.

MAO

Mao is max allowable offer, in other words its the most you will allow yourself to offer on a property. This formula can be calculated in different ways. The most common is below under "finding the arv" but there are other useful ways to get MAO, so read on.

Finding the ARV

If you are looking for Fix and Flip properties for yourself, you will be dealing with the ARV.  This is the after repair value.  It's important to start here so that you know what your property will sell for once its fixed up.   This can also be used if you are a realtor or wholesaler catering to flippers specifically. 

Using propstream (which you should have from an earlier module) you will input your subject property in the search.  Select it and look at comparable and nearby listings tab.  Open this video in another tab and read on for a few tips.

Make sure to select properties that are in great shape and get rid of the fixers.  Choose properties that are within 10 percent of the same square footage, within .5 miles, and a similar bed and bath count.  You are looking for similar properties in great shape or even better that have been rehabbed.  This will get you your ARV.  Now you will work backwards to figure out what you can offer on the property.  

When you work the numbers backwards your goal is to come up with your MAO or max allowable offer.  This is the most you should be willing to pay for a particular property.  The formula is simple.  ARV * discount percent - repairs - profit (if wholesaling) = MAO. The discount percent is going to be different in every market, it is a percent of the value that investors are willing to pay in the area.  Years ago the standard seemed to be 70 percent, but this constantly changes by market demand.   Repairs is dollar amount that it will take to fix this house up to meet the standards of your comps.   Profit is how much money you want to make for your effort as a wholesaler, but if you are keeping the property for your own flip you could eliminate this number, although leaving it in isn't a bad idea especially when you are starting out. 

Example: you find a house thats arv is 200k and you think it needs about 20k in work to get it to that level.  You will take 200k * 70% - 20k in repairs - 10k profit.   Your MAO on this property would be 110k.  and yes there are sellers willing to sell for that big of a discount.  Ill go over how to figure out repair costs soon but the formula is whats important memorize for quick calculations.

Discount Rate

The discount rate is the average discount cash buyers are buying at in your area.  As with ARV this isn't a perfect science as different investors pay different numbers.  There are a few ways to get this but its just a rule of thumb.

1. Ask your investors - yep see what kind of percentage off they need to buy.  Do expect them to say a percent lower than what they will actual pay though.  Some will be forthcoming but many will want to give you a lower number or say as low as possible. At least it should give you an idea.
2. Ask around in your new meetups or on bigger pockets.  Also ask in your facebook groups.
3. Do some rough math and estimates.  Log into propstream, look up cash sales and work the math backwards.  You will need to guess on rehab estimates from pictures but it should get you close.  See what they paid cash, what you think its worth fixed and what you think the rehab would cost.  Then do a little reverse math.   Instead of ARV * Discount Rate - Repairs - profit = Offer   Use  the buyers offer which is the cash sale price to do the math. Cash sale + repairs + profit / ARV = discount rate

Recent Cash Sales and -As is- Sales

This method doesn't get taught as much but it can work well and is much simpler.   That being said it is always a good idea to run the numbers more than one way in the beginning.  

This method is much easier but will leave you with less data and in the end a less complete picture of potential profit.  Especially if you intend to flip the property yourself.  This is because you will be bypassing the step that figures out rehab costs.

Instead of finding fixed up comps you will be looking for comps that sold cash or private money and are in the same condition as the property you are evaluating.   Doing this you can simply find the average cash sales around your property and assuming the properties are similar and in the same condition, the average of the cash sales in that area is your MAO.   If you want to wholesale it you will want to subtract your profit.

Example:  You find a property that is 1400 sq ft and is in good shape but dated.  You look on propstream and find 6 properties nearby within 10 percent plus or minus of that square footage.  3 of those properties look like tear downs and 3 of them look just dated.  You will take those 3 properties that are just dated, average them and that is your MAO, if you are going to wholesale make sure to also subtract your profit. Remember these numbers are what the property sold for as is to the end buyer.  

This method works great, especially for wholesalers, but if you are planning on keeping the property it is probably better to use the ARV formula.  This will ensure it meets your minimum margins and not some other cash buyers. 

Rental Property Evaluation

To make this easy I've linked to a video created by Brandon Turner of Bigger Pockets.  He's the host of the Bigger Pockets podcast as well an investor himself.  I've personally talked to him on a few occasions as he lived in my area and used to go to some of the local meetups.  Hes a got a lot of great information and always seems to be an open book.  Check out the video here.

There's a few things that he doesn't go into great detail about at the end, (he briefly mentions them).  Don't get too caught up in them.  Things like potential appreciation and rent increases will obviously affect your total return but they aren't guaranteed to occur. 

A couple other notes.

1. Your roi can be greatly affected by your ability to get financing. Picture the same property as in Brandon's video but instead less down payment used and the ability to wrap the repair costs into the loan.  This isn't always the best idea but if possible it can often allow you to keep more money (which can be reinvested or kept for emergencies) and it can create a higher cash on cash return.
2. Getting larger discounts on properties will help create enough gap to be able to do note 1 without over leveraging the property.  This also creates instant equity which gives you a higher long term return which would add to any long term equity gains. (again this is speculative so avoid using it for a purchase decision, but its still great info).  Discounted properties is what you are looking for and in the marketing module coming very shortly we will dive into finding them.

Estimating Repairs Quick and Easy

Estimating repairs is a crucial part of real estate investing.  It's important no matter what method of investing you choose.  There are several ways to go about it and as with picking an ARV, there is no one right way.  Whatever method you choose will depend on your experience as well as what strategy you are using to invest.

Simple sq ft method and property class method

Wholesalers will not need to be as accurate as someone buying a property to flip themselves.  They aren't the ones that will have to deal with the time or cost of construction. In general they should get used to having some general numbers for items and use rule of thumb estimates.  There is no way they can accurately tell an investor rehabber what it will cost "them" to fix up the house.  The wholesaler doesn't know who the investor is using to do the work, or the level of rehab the buyer will do, so how could they know what it will cost. 

It's also possible that the buyer might own their on construction company which can keep their prices down on flips.  With this in mind there is no reason to be exact. In fact it can often be a bad thing.  You don't want to build relationships with buyers by giving them detailed breakdowns only to find out you were off and that investor used your numbers. Even though your intentions good it can end badly.  Just a note, buyers should be running their own numbers anyways and the next email will explain how you can avoid estimating rehab altogether when wholesaling.  (it's still a good skill to develop)

This video gives you some rule of thumbs based off square footage and this one will give you a way to classify properties as types, both will help get you a quick idea on rehab costs so you can easily figure out how much you can offer.

Bidding - For the Most Accurate Estimates

The most accurate way to estimate repairs is to bring in a contractor that you will be working with or several and get bids. The issue with this is that bringing a contractor through your potential projects is not very efficient and you won't get a contractor to go on very many of these unless you for sure are buying the house or already own it.  It takes them time to work out real bids, its not just them driving over to the project and throwing out numbers.  This is why it's important for you to have a decent idea of costs prior to putting a house under contract to buy, especially if you are fixing it up.

Scope of work

Use your rough estimates (guess a little high hopefully)  then once you have a contract to purchase, use your inspection time to get your contractor or a few in to get bids.  Prior to having them walk the project you need to create a detailed scope of work.  This is an action plan for what you want done on the property. Every item needs included.  This helps the contractor to keep his bid more detailed and can even keep their prices lower.  When a trade doesn't know exact details of what they are bidding they tend to bid high to cover their you know.  If they bid low and you have no detailed scope of what they are bidding you will be in for a surprise when they get into the project and tell you this wasn't in the bid, that wasn't in the bid and they start adding changes and costs.  Most of this gets eliminated with a detailed scope of work. If you can it also helps to have prints or sketches but this isn't always critical.  Ex:  Replace kitchen flooring with lvp. - contractor supplied.

Specifications

Along with a scope you will want specifications or specs.  This is listing of materials and manufacturers of the products that will be allowed.  The specs can be separate from the scope or included in the scope or prints (if you use prints-plans).  They will be something like:  Kitchen Faucets to be moen model xxxx or approved.    This takes a little time so its not a bad idea to create a list of all items, trim, roofing, faucets etc etc that you keep specs for and just change the items on each house that you want to be different.  It can be your standard specs.  

We will have much more detail in our contractor course to come but this will get you what you need in order to get better estimates for your flips.

Unit Pricing - Quick and Accurate Estimation

Another very accurate method for great estimates is to use unit pricing or a mix of unit pricing and bids.  Unit pricing is using specific numbers to price each item in the property that you want to have work done on.  You will still need a scope and spec document but its a way for you to get detailed estimates prior to buying a property without having to have contractors do full bids.  You will still want official bids or a unit price agreement with a contractor but it helps speed up the process.  There is more upfront work here and it's not always easy to pull these numbers out of contractors you haven't worked with before, but it's doable if you approach them in a manner that helps them save time.  

In order to get unit pricing you will need to interview contractors and ask them to give you labor or labor and material pricing for items they do work on.  Example:  Trim cost per linear foot install.  The contractor can give you a number like 1.00 per linear foot.    Once you have this number you can add the material cost.  You need to measure the amount of trim you will be installing in the house then you can figure the entire cost of that project.  Of course there are some items that are harder to get unit pricing on than others.  Example would be demolition.  For the items you can't get unit pricing you can get bids for those.  Check out this video on using unit prices and bids to estimate a rehab.  If you like what you see you can pay to use this software, it works great and gives you most the line items in any house to easily create estimates.  He also has an extremely robust spreadsheet that is linked to on the site that has a free version. I used the paid version of the spreadsheet for years.

That being said we have incorporated unit pricing into bitrix for free.  It takes a lot of time since you need to add each unit into the system.  There is also 2 pretty good ways to do this.  Using lists or products.  Our system uses the product catalogs in bitrix to create catalogs of different products used every flip.  You can do this too for free, it just takes time.