How do Investors Calculate Offer Value?
Hey, this is Mike from Mike Buys Houses and I just finished a walk through with a homeowner who owns a rental property and she was asking me how do you determine the value of the property? How exactly are you determining the number that you are going to pay me for the property?
She had spoken to a couple other investors, and she was feeling like all of the offers were too low, and she was wondering how are they coming up with these numbers and what’s going on here?
How We Estimate Home Value
So the first thing that we discussed was that we’re going to take a look at the houses in her neighborhood that are somewhat similar to your house. Therefore, the best place for her to start would be to look at the recently sold properties in your area. What you should be looking for is the same number of bedrooms, bathrooms, similar square footage, sold within the last few months, preferably 3 months but could be as far out as 6 months. Depending on your neighborhood, you might need to look back a year to get enough data.
From there, we are going to go as close as we can to your house and as similar to your house to determine what those houses have sold for, and especially what those houses that have been rehabbed have sold for. A lot of times this is referred to as repair value of the home. That’s going to tell us what the property is worth once it’s all fixed up.
New kitchen, new bathroom, hardwood floors, fresh paint, all the good stuff.
So, what we’re going to do in summary is take a look at the recently sold properties in your area. After determining what the repair value of the home is, the next thing I will do is try to estimate what the rehab costs are going to be in order to make your property look like some of those fixed up properties that you have seen on HGTV. Something that will really knock the socks off of a potential buyer.
How I’m going to do that is by either working directly with one of our contractors. We have a great group of contractors all over this area, and as such, we have great connections to help inform us on a lot of renovations saving us tons of money that any homeowner can do. It really is just another great reason why it is so easy and beneficial to work with us, our connections are top notch.
If we don’t want to go that route, we will look at Nailed-It, which is a rehab calculator that I built to help us estimate costs as we walk through the property on the spot. Check it out for yourself, it is completely free!
Between those two things, we are going to get a pretty good estimate of how much rehab is needed in order to make the property look in tip top condition. Then, we subtract out some of our other costs, things like taxes, insurance, holding costs, closing costs, financing costs. There’s a lot that go into that, but once we pull those factors out from the ARV (value of property in it’s ideal condition, we get our number for the offer.
Everything we do is based on the numbers. We try everything we can to help out the homeowners and we work really hard to pay out the most money we can to you.
What to Do if Your Offers are Still too Low?
However, in our conversation, I realized that she had heard all of this before. Investors told her they would be straightforward and would offer her a fair cash offer, but those offers always came in so ridiculously low that she was sure she was missing something. What options did she have to push back on some of these low offers?
Therefore, we got right to the specifics. Her house was in good to great condition and she had a good idea of what some of the properties near her sold for recently. However, she was still getting offers well below her expectations.
The issue is that most investors are one trick ponies in that they pay cash and they work fast – they want to close quickly and turn over the property. So, they aren’t really taking any real conditions into consideration, they are simply running a quick calculation, using the factors we discussed before, and adding in their own margin.
We can offer cash in this manner as well, see our form above, but we also have other strategies that we use. The concept is implementing creative financing to complete deals in a more advantageous way for the homeowner.
One of those methods is for the homeowner to collect her equity in installation payments. Via this method, we are able to provide numbers where we are paying her 85-95% of the value of the home after it is fixed up!
If your home is in good condition and you are tired of getting low ball offers, then reach out to me to learn more about creative financing to see if this option might work out for you.