Property fair market value is determined by recent sale prices of similar properties in the same area. The sales assume a fully informed willing seller and a fully informed willing buyer.
Let's say you are interested in 123 Main St. and want to know the current market value. First step (using your Thomas guide or other detailed map) is to define the neighborhood this property is located in and any likely impacts or amenities. You can do this because you followed the procedures in Section 1.
Next, you need a source for comparable sales (comps) from the last six months. Realtors can provide Multiple Listing Service (MLS) comps for a given area, title companies can provide comps from tax records and there are a few on-line services that can do the same. Taking your list of comps, you drive by each comp noting condition, size, appeal and location. While you drive each one, look for properties that are listed for sale and take the same information for them also. Keep in mind that comps might have had work done since the property sold, look for signs of recent work, especially on very low sale prices.
Your last stop will be 123 Main St., the subject property. How does it compare to your
comps in condition?
Is it bigger in square footage or smaller than most? Is the lot bigger or smaller? Does it have the same number of bedrooms and bathrooms? Are there impacts or amenities close by that will affect the sale price in relationship to the comps? This is why comping a property is more an art than a science.
From your comps, you want at least three neighborhood properties that closely match the square footage, bed/bath count and lot size of 123 Main St., your subject property. If those three are all pretty close in condition and there are no outside factors, the sale prices should be close together. Making any adjustments for size and/or room counts, the subject property market value will be in the range of the 3 closest comps. If there are a lot of properties listed for sale and they are all listed at a lower price, you'll need to look at the listings stronger, they could define the current top market value. But, if there aren't any current listings or just a few and those few are listed at a higher price, you might be able to support a higher value upon resale.
But wait, you say, my subject property needs a new roof, there is no landscaping and the house hasn't been painted since it was built. Market value is going to be determined by the area the property is located in. Rehabilitation (Rehab) is often a requirement to bring a property to it's Fair Market Value. Obviously, no one is going to pay finished market value for a property that needs significant rehab. That's where you, as an investor, come in with the knowledge and capability to accomplish a rehab allowing for the property to be sold at it's fair market value. Your objective is to acquire the property at a price low enough to allow for rehab and holding costs until the property can be sold at market value earning you a profit.
|Previous Section 2 Next|