How to increase and determine market value of purchase and rehab investment – Mortgage Professional
There should always be some initial questions taken into consideration
The following article was provided by RCN Capital.
When a real estate investor has their sights set on a specific property, there should always be some initial questions taken into consideration. For investors, a lot of these questions are centered around the value of the property. Am I buying the property at a good value? Is the property in an area where the value can easily increase? Most importantly, for those investors in the fix and flip industry, what will the market value of my investment property be after repairs are complete?
Tracking and calculating the market value of your fix and flip property is not an easy task but there are tools and practices available for investors to ensure they are valuing the property at the right amount and making a profit that aligns with a sustainable business model. At the end of the day, an investor’s portfolio and their profit margin are the two best indicators of whether they can expect to be successful in this business.
As for the market itself, the fix and flip industry is firing on all cylinders in recent years. This method is a great way for new investors to get into the industry and be successful on a small scale right off the bat.
In Q1 of 2022, there are a few stats that support investors who want to get involved in real estate investment properties and complete fix and flips. According to an article titled “The House Flipping Statistics Investors Should Know in 2022” written by Jack Caporal, almost 10% of all home sales were the direct result of a fix and flip in Q1 this year. Additionally for investors, the average gross profit from a fix and flip in Q1 of this year was $67k. In 2021, over 320,000 homes were flipped by real estate investors. Numbers like this can attract anyone to the industry who has some business savvy and is ready to capitalize on the opportunity at hand.
When investors are researching which home improvements to make to increase the value of their property, there are a few different avenues they can go. One of the strategies that will always resonate with prospective buyers and positively impact the ROI is going with the remodel of the kitchen and or bathrooms. These two rooms are always crucial when it comes to grabbing the attention of people who are interested in the home. Countertops, sinks and faucets, light fixtures and even shower heads are all things to consider when remodeling the kitchen and bathroom. Appliances are also a must for the kitchen, and most are energy efficient these days which allows the buyer to save money on utility bills. Refrigerators, stoves, and microwaves are all opportunities to impress buyers and can allow investors to raise the listing price when all the updates are made, and the appliances are installed.
Some of the more intensive renovations include finishing a basement or adding usable square footage to the house. This is not the easiest or quickest way to increase the after-repair value (ARV) of a home, but the effort can be well worth it. These improvements or additions can be labeled as nonessential, but they are noticed and appreciated by those prospective tenants when the home is completed. Everyone has those visions of what finishing their basement would look like or how nice it would be to add a dining room to their home to have more space in the kitchen. However, executing those ideas is another thing entirely. The investor taking the time and effort to complete those additions or finish previously unfinished areas of the home should take that into consideration when deciding what to increase the market value of your investment too.
Once renovations are done, the most essential part of this process can begin. By no means is the rehab work not vital but assessing how much value you have added to your real estate investment property is crucial. For real estate investors, the easiest way to do this is to head to Zillow.com (or similar real estate websites) and perform a search of the area based on zip code. Zillow and sites that do the same thing are great assets for investors to be able to use because of the attention to detail that these websites can provide. You can easily find comparable properties in the zip code and find out what you should be pricing your improved real estate investment property at. Aspects of the property that investors should be focusing on are square footage, room count (bed and bath), and property amenities. Also, checking what houses have recently sold for in the area, rather than what houses are currently listed on the market for is a smart practice.
If you’re an investor that wants a little more certainty or a professional opinion, ordering an appraisal is a surefire way to be a lot more confident in your property’s valuation. The drawback of an appraisal is that it costs money to perform, but with a little more assurance in your back pocket, you can zero in on what exactly your property now costs. Also, researching appraisal management companies can be just as important as the appraisal itself. These AMCs vary in quality, so it is important to do due diligence and research these appraisal companies, so you are not wasting your money on a company that won’t give you a proper valuation. However, once you find the right AMC and are willing to spend the money, an appraisal can offer peace of mind that your typical real estate listing website cannot. Appraisers and appraisals are used by private and conventional lenders as well as banks so investors can be confident that their valuation is solid and can back it up with official documentation. When it comes to the as-is value, purchase price, or monthly rent charges, the investor can stand their ground and be certain that their investment property is accurately valued when handling negotiations or push back.
Another popular yet accurate route to finding your investment property’s valuation is to enlist a real estate agent’s help to perform what is called a comparative market analysis. Few people are more qualified to give you a valuation of your real estate investment property than a real estate agent actively working in the area where your property is located. What the comparative market analysis (CMA) will do for investors is provide an estimate of a home's price used to help sellers and investors set listing prices and gauge what rehab work can do to impact the after-repair value. The analysis considers the location, age, size, construction, style, and condition of the property. Sometimes these CMAs can be free, but at worst an investor can expect to pay a small fee. In an article posted on homelight.com, a top real estate agent in the Dallas area named George Herring is quoted saying, “Some agents charge anywhere from $100 to $200 for a CMA.” The article goes on to state that most of the time these CMAs are free, and agents generally provide them for free as a marketing tool to boost their reputation.
When it comes to finding that correct valuation for an investment property, it is reassuring for investors to know that they have options at their disposal. Ranging from free to a couple of hundred dollars, investors have the resources to properly set a value for the hard work they put into a property and to ensure they are seeing an ROI that aligns with that. As for any potential strategy it is smart to use a variety of these when investors are first starting out. Get a sense of what works for you and what ends up being the most profitable. If investors are always ordering appraisals but consistently seeing the property valued at the correct amount, then that may be the best route to assure accuracy. If an investor is friendly with a local real estate agent that will perform CMAs for free, then that is probably the strategy that can consistently work. Be sure to explore options but remember private lenders such as RCN Capital are always there to provide insights or strategies should investors need the help!