Buying homes below market value is the key to success in real estate investment, but how do you know what is market value? If you are not a real estate agent it is very difficult to determine fair market value, but it is still possible. If you are just beginning to invest in real estate it is wise to use multiple ways to find market value. One of the most important factors when determining what a good investment property is, is the market value.
When you are fix and flipping homes it is pretty obvious that market value is the most important factor to determine a profit. Actually ARV (after repaired value) is the most important factor, because you want to know what the home will sell for when it is fixed up. When you are buying long-term rental properties the market value may not be as important as it is on a fix and flip. However, you still need to know the market value of a long-term rental for many reasons.
What is the easiest way to determine market value?
The easiest way to determine market value is to hire a professional. I am a Realtor and provide comparative market evaluations for sellers all the time. I also provide values for investors and buyers as well. The trick for the new investor is convincing the owner or the agent that you are a serious investor and they aren’t wasting their time.
My advice is to be perfectly honest with agents, tell them you are new and you are trying to figure market values. It helps if you have done some work first and can ask them if the value you came up with seems accurate.
How to come up with a house value on when you’re not a Realtor
I mentioned that it would be good to have your own value in mind when talking to an agent. But how do you come up with a value yourself? First of all you have to make your own search using real estate websites as Idealista or Fotocasa. These websites are amazing tools. You can make your search, choosing the location, square meter and number of rooms, then you will get all the properties than match with your needs, check the information provided of all of them and discard those that does not fit. Now you will have the first sample to calculate the average price.
Be aware that values from these websites are asking prices so I would not trust the information provided although you can get some great information from them. In order to have an accurate price you should correct the average price by 10-20%. Now you will have you first approach.
Then it is the right time to have a chat with the agents, tell them exactly what are you looking for, you should be very specific at this point. They will tell you what they have at their portfolio, then you should ask them what are the prices of similar properties they have sold in the last six months. You should do this work with many agents, write down all the information provided and insert it into a spreadsheet to calculate average value.
Adjusting for values on an investment property
When you have made up your list with actives that are similar to your subject, your work is not done. You then have to decide if you need to make adjustments for the differences between the comparables and the property you are valuing. If you have a home you are valuing with a one car garage and the ones you are comparing it to have a two car garage, you have to make an adjustment. If the bedroom, bathroom or room count is different, if square meter is different, views, location or anything else is different you need to make adjustments. Coming up with how much to adjust is the tricky part. More expensive homes have different adjustments than less expensive homes.
Again, a real estate agent can help you figure out the how much different amenities add in value. When you look at enough homes and comparables you should start to get an idea on how much features and size add in value. It will take time to get to know your market and be able to accurately figure values and adjustments.
It is not easy to come up with a value when you are not a real estate agent. If you can hire a property finder it will save you a lot of time and trouble trying to figure values out. I have an article here on more benefits of hiring a real estate personal shopper when you want to be a real estate investor. I think the best way to determine values is to get an idea of values by looking at homes, checking out sold comps and then comparing what you came up to what a real estate agent comes up with.