Make money by investing in real estate really starts with determining the value of the property. It is generally a lot of confusion, especially for new or budding real estate investors, on the determination of the actual value of a property for resale. This is especially true for single-family houses. The maximum amount we could expect to receive for a given property, is considered as the ARV or After Repair Value. As you embark on your real estate investing career, you will find that the inaccuracy of the values of property can have multiple repercussions, nothing that is desirable for the long-term success. The over-valuation of a property makes you look inexperienced and eventually could lead to a loss of credibility with your buyers. Worse, your buyers could take advantage of your inexperience and exploit it, or even worse yet, you could undervalue your deals as long as you leave huge profits on the table.
As an example, my first big deal was an old brick detached house in Columbia, SC. They have lived outside of the state, had been taken advantage of by several local contractors and decided to cut their losses. The sellers wanted $10,000 for the house, and has agreed to pay the back taxes and closing costs also. Sure sounded like a great and thought that if I could not make this work, maybe investing in real estate was not for me. Immediately after obtaining the signature of the contract, I called an investor who makes a lot of rehabs in the area. Now, I had enjoyed the house of$ 115,000, based on a few houses nearby sold for $120,000 each. They were a little bigger in size and I find their sales price on the Zillow.com I felt pretty confident in my ARV. My house took a lot of work in the kitchen and on the outside, but was in good shape for its age (old!).
My asking price was $45,000 for the operations and this investor immediately began to negotiate the price down. Since another investor had already made contact with me (there were quite a few after I’ve put a few ads), we went to the house together. The second investor asked how I had determined the value of the house, and I showed him the other two houses on the same street. At this point, this investor informed me that they are new houses, built in an ancient style in harmony with the community. Oops, it quickly became apparent that the more realistic ARV for my house was around 95 000$. Fortunately, my case was so good that I really couldn’t lose money. I ended up selling the house for the sum of $ 27,000 – and, as investors sold for an amount of$ 33,000. However, I quickly learned a valuable lesson.
In my next article, we’ll look at more precise and reliable methods to determine the approximate retail value or After Repair Value of Residential real Estate. It is a must if you are going to become a successful RE investor.