By Tod Snodgrass
It is vitally important that Real Estate Investors (REIers) know, with as much certainty as possible, how much a particular property is worth, in real time. The REIer needs accurate information to determine the listing price for a property they wish to sell. Conversely, when a REIer is in the market to buy an investment property, knowing local prices is vitally important as well.
There are different available tools that a REIer can use to establish the FMV or Fair Market Value of any given property, i.e. how much the property is worth, as is, in its current condition, today. Four different ways to establish FMVs, from least to most expensive, include:
Do It Yourself: Gathering & Evaluating Comparable Properties (Current Comps)
DIF takes some time and effort to get the numbers you need. For example, there are several online resources you can use to determine the FMV of any particular property, including Realtor.com, Trulia.com, Zillow.com, among others. Finding comps can be as easy as entering an address into a form. Beware though that many of these services are not as accurate or timely as using a Real Estate Professional (realtor), i.e. REPro. However, the online services are pretty good at providing some “ballpark value estimates”, within the price range you are seeking to buy or sell at.
Comparative Market Analysis (CMA)
A REPro you are working with can do what is known as a CMA. They select recently sold properties that are similar to the subject property, and in the same geographical area. These are sometimes referred to as “3/3/3 CMAs”: At least three comparable properties, within in a three mile radius, sold within the past three months. None of the “3s” are chiseled in stone, but are pretty good gauges of current market value. A second method to determine FMVs is to pay close attention to currently listed (vs. sold) properties. Including listed properties in the evaluation mix allows for an assessment of the most current competition and can lead to a decrease or increase in how much the “buy” or “sell” price for a property might be, compared to only sold properties.
Broker’s Price Opinion (BPO)
A BPO is performed by a licensed appraiser, real estate broker or agent. Similar to a CMA, here the REPro goes into more detail, usually (but not always) gets paid for their effort, and attaches their signature to the BPO. A BPO can be either a full interior report or an exterior drive-by. The BPO should include taking pictures, garnering six comps (3 sold and 3 listed properties), as well as a drive-by of the neighborhood. The final BPO is used to support the REPros FMV opinion.
This is the process of developing an opinion of current fair market value, for real property, by a licensed professional appraiser. Real estate transactions involving a loan usually require an appraisal because every property is unique and sales occur infrequently. Typically, the appraiser will issue a Uniform Residential Appraisal Report or URAR for standard residences (Fannie Mae Form 1004). The report requires four elements be included: clear, descriptive photos of the property and comparable sales used; exterior and interior inspection of the subject property; an exterior building sketch of the improvements that indicates the dimensions; a street map that shows the location of the subject property and of all comparable properties that the appraiser used.
By whatever means at your disposal, or that you can afford, as a REIer you must have accurate and timely info about FMVs for properties that you buy and sell. There is an old truism in the real estate business, which states that: you earn your profit when you buy a property, not when you sell it. That is because market conditions dictate the selling price for most anything, including real estate. In other words, to be able to sell it right, you have to buy it right in the first place. Caveat Emptor: Let the buyer beware.
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