1. real estate

2
Module
DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Table of Contents
Introduction ............................................................................. 3
The Anatomy of Value............................................................. 4
Determining the Worth Value of a Property .......................... 8
Determining the Money Value of a Property ....................... 28
Disclaimer
The information in the Course is meant as a guide for improving one’s success and it
should not be construed as legal advice in any way. Real estate investing may have statespecific laws for operating such a business. It is highly recommended that you seek
professional legal advice before applying any of the information offered in this work.
Anyone involved in the creation and distribution of this work shall not be held
accountable in any way for any adverse effects that may stem from the application or
misapplication of this work’s philosophies, procedures and/or concepts and ideas. Anyone
who applies any information from this work, whether having read it by oneself or received
such information from another person or other means, agrees to hold harmless those
involved with the creation and/or distribution of this work.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Introduction
NOTE: This module, Property Valuation – The Price For Success, is an essential part of the overall
REI strategy and practice covered by this series of modules. The underlying strategic concept is
“knowing HOW to… and with efficiency.”
In real estate investing, buying houses that return no profits, or even worse, losses, is the
quickest route to failure. One or two houses is all it might take to strangle your finances for
years to come. On the flip side, knowing how to selectively buy houses for the greatest profit
potential is your ticket to making it in this industry and earning as much income as you desire.
Therefore, being able to evaluate the value of property is another key element to your
success as a real estate investor (REI).
This module will open your eyes to a new way of thinking about real estate value and
show you how to be sure you are getting the greatest possible return for the value of the
time, money and energy that you put into a deal. Realize that every $5,000 you don’t make
that you could have made on a deal is $5,000 lost—forever. Start multiplying those losses by
10 to 12 houses a year and they add up very quickly.
Let’s Get Started!
Once you have made an appointment with a prospective seller using your inbound
telephone script, which is available at RealtyDataPro, you need to act fast in determining the
price you’re going to pay for the house. Ideally you’ve made your appointment in just a few
hours from the time you spoke with the prospect, before someone else beats you to it. Doing
your research doesn’t have to take long, and it isn’t some kind of process that only certain
people can do. The fact is, YOU can figure out the value of homes in about an hour if you
follow my easy and efficient procedures.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
The following pages will take you from the first steps of understanding valuation, through
the actual steps and procedures, all the way to using the results of your valuation in closing
the deal. Take your time to understand it all and you will be a step ahead of the crowd.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
The Anatomy of Value
What is Value?
If you have an extra loaf of bread that will get moldy before you have a chance to eat it,
that loaf has little value to you. It’s extra, and you really don’t need it, but to a starving man,
that loaf has great value. Right away, you can see that value differs from person to person, and
situation to situation. Value can be measured in any number of ways, from personal pleasure,
to usefulness for a particular purpose, to satisfaction of accomplishment, to pride of
ownership.
When talking about business transactions, value is measured by money. You invest
money, time and energy in hopes of getting more money back in return. Naturally, you want
the greatest return on your investment. Your time and energy are valuable as well as limited,
and you may not have an infinite amount of money available, either; not yet, anyway. The
secret – and I call it a secret because I have found that most people are not aware this – is the
fact that there are two types of value: “Worth Value” and “Money Value,” and there is a
difference between the two.
Worth Value is the generally agreed-upon value, measured in money, of something for
sale. A painting going up for auction is sold by the auction house for a million dollars. That is
its Worth Value. This painting is “worth” a million dollars. As another example, a purebred
golden retriever, six months old, may be worth $450 on average. Worth Value is the starting
price, or a narrow range around that starting price, that someone would expect to pay for
something.
What’s important here is that Worth Value is determined by buyers, not by sellers. It is
what a buyer expects to pay, not what a seller hopes to be paid. Worth Value, ultimately, is
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
based on supply and demand, as of today, and has nothing to do with future expectations. If
you think a house will be worth more in the future, that does not change its current Worth
Value. It is worth what someone will pay today, not what someone will pay five years from
now.
Money Value is what something is worth to you; You, not some other real estate
investor, appraiser, final occupant or some computer analysis, but to you. How much are you
willing to pay for a piece of property? Or better yet, how much should you be willing to pay?
Before you can determine Money Value you must first determine what your business
model is. Are you:
•
investing to quickly resell the houses (known as flipping)
•
investing for long-term property appreciation and depreciation on income taxes
(being a landlord)
•
intending to buy and sell using seller financing?
All three business models have their place in every real estate purchase opportunity, and
although in the beginning of your career you will want to become proficient in one and then
move to another, once you master all three methods you will earn considerable financial
freedom.
Property Value
Before we investigate Money Value in detail, we need to look at how to determine
Worth Value in property. It will be important for you to learn how to value property within
about an hour of finding a lead. Remember this: the first person to solve the seller’s problem
wins. And I want you to win.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Property Appraisers
Property appraisers are the industry elite of property valuators. However, they are not
perfect and they are only supplying you with their “opinion,” not a carved-in-stone
determination of value. It is important to realize that appraisers undervalue and overvalue
property all the time, for many reasons. They have guidelines to go by, and as long as they stay
within those guidelines, they cannot be faulted by the standards of their industry. Those
guidelines define an acceptable range of appraisal for any property.
An appraiser might deliberately undervalue a property, still keeping within the guidelines,
to reduce the property tax for a friend. One might be close to a specific broker, and
overvalue a house to help him out. Or he might just not be very good at his job, or lazy, or be
purely mechanical and not take into account the intangible pluses and minuses.
Let me tell you a story.
Back in the early 1980’s I built a 2 bedroom 1 bath duplex and needed to refinance it so I
could move on to my next project. All of my money was tied up in this project and the
amount of loan to value, which was industry common at the time and still is with most lenders
today, allowed me to pull out 80% of the appraised value. As this was some time ago and I was
still a little wet behind the ears, I went to the first lender who would listen to someone just
starting out and began the refinance process, during which they hired an appraiser to appraise
my duplex that I was refinancing. I wasn’t completely green. I had done my own assessment of
the Worth Value and figured the appraisal should come back at about $100,000. When it
came back at $90,000, I was, let’s just say, not happy. I had just spent $300 for an appraisal I
couldn’t use. I had planned to pull 80% of the equity out, figuring I would have $80,000 to use
on another deal. At $90,000, I could only pull out $72,000. That $10,000 difference in the
appraisal, therefore, would actually cost me $8,000 of my money. I had two choices: I could
suck it up and eat the $8,000 loss, or I could order a new appraisal and take my chances.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
What was I going to do? Since I had faith in my own estimate of the Worth Value
($100,000) of the property, and also believed, as I still do today, that $8,000 is a lot of money,
I ordered a new appraisal – but not just from anyone. This time though, I did what I should
have done in the first place. I did some research.
Side note: most lenders will present you with their “list” of acceptable appraisers. If the
appraiser you would like to use is not on their list, that is fine. You will just ask the appraiser
to send to your lender their qualifications and licensing documentation. It is not a difficult
issue to overcome and, as you will see, very economically beneficial.
When I calculated my Worth Value, I had pulled the records on comparable properties
(comps) that had recently sold in the neighborhood. In my research, I also looked to find who
had done the appraisals on those properties; in particular, a duplex around the corner from
mine that had sold two months prior for $105,000. Instantly, I understood the problem and
task at hand. The problem wasn’t the value of my duplex but that the lender hired the wrong
appraiser. My task was to hire that appraiser, and guess what? My duplex was appraised at
$110,000! So instead of losing $8,000 in working capital, I actually gained $8,000 or $16,000
more than the original appraiser’s claim!
What I learned, and use as a lesson to this day, is that on a refinance deal, always find
the appraiser yourself. Never let the lender pick the appraiser. The lender has influence
over the appraisers they use. After all, the lender is their bread and butter. So the appraiser
takes into account not only the “value” of the house, but the borrower’s credit worthiness.
Remember, in the early 1980’s I was new to the world of investing and the lender knew
this. They wanted additional security in the property to relieve any possible loss; therefore
they hired a conservative appraiser that would bring back a lower value in case I was not a
good credit risk. This happens all of the time; don’t let it happen to you.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Also realize that if you have a buyer of a property you’re buying who has marginal credit,
be prepared to get a conservative appraisal. This is, in part, because if a borrower defaults and
the property goes into foreclosure, the appraiser’s appraisal will be given heavy scrutiny,
especially if the value of the property is not sufficient to cover the mortgage. With a low
credit score or 100% financing, you can be sure the appraisal will be very low. Even so,
choosing your own appraiser can greatly influence your house’s appraisal figure to your favor.
Research
All right, you can’t get a property appraisal within a half hour of finding a lead, nor do you
want the expense of an appraisal on every prospect’s house. That’s okay, because you should
form an opinion of the Worth Value of a property before you make an offer to purchase the
property – so you may never even call in an appraiser on many of the houses you look at. You
might find, through your own research, that the house isn’t worth pursuing.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Notes:
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© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Determining the
Worth Value of a Property
To most REIs, determining worth value seems like the largest, most difficult process to
overcome; however, it is actually one of the easiest processes in the business. And I have
found that it will separate you from your competition and give you immense confidence when
communicating with the sellers. Most new investors fear determining worth value so much
that they hire real estate agents to show and sell MLS listings to them. This is fine if you have a
very good real estate agent, but what if your agent is just as new as you are? You have heard
the expression “the blind leading the blind,”–well, I am going to turn the lights on so you can
see clearly. It is always better to know how to do something than to put all of your “faith”
into someone else. And once you, yourself, know how, then it is safe to delegate tasks to
others and know they’re doing a good job. Case in point—if I hadn’t known how to evaluate
the worth value of my house in the story above, I would have been at the mercy, and
incorrect speculation of, that appraiser.
You can gain the confidence to value any residential single-family residence like a
professional. Here’s how to properly evaluate a property:
STEP ONE – View Property Profiles
Gather information on the property. Do not take the seller’s word for the square
footage, the number of bedrooms and bathrooms or the amenities. A seller may call a room
without a closet a bedroom if he thinks it will strengthen his initial bargaining position. One
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
and a half baths become two. After you discover the deception, you adjust the seller down
from a higher position than he should have been starting from.
Call your title company and order a complete property profile or go online and search
their database. Having this resource at your fingertips is going to make decision-making much
easier and ultimately faster… remember, the faster you can determine the value of property,
the faster you can purchase the property. The more deals you can close equates to more
money in your pocket.
Here is an example of a property profile with fictitious names:
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Notice the items circled in red. Three bedrooms, 2 baths, 1364 square feet, last sale date
and price sold for. The other information on the report is valuable, but not as important when
comparing one property to another. This brings us to the next step of determining Worth
Value.
STEP TWO – View Comparable Properties (Comps)
When you request a property profile, you should also request comps. Be specific when
asking for comps, so they will be meaningful. You do not want to compare a mobile home to a
wood frame house, even if they are similar in square feet and number of bedrooms and baths.
I also believe that you should have fresh comparable sales comps three times during the
ownership process of an investment property. The three times include: when you decide to
purchase a property, before you close the purchase escrow, and before you decide to sell the
property. In a highly changing marketplace you need to confirm at every step of the way that
you’re not leaving money on the table or paying too much for a property. Fresh sales comps
with help you with your research and help you make good decisions.
When looking at comparable sales records follow the following parameters:
•
Built Within Five Years of the Subject Property
•
Located within One-Half Mile of the Subject Property (the closer the
better)
•
Similar Square Footage, within Fifteen Percent at the Most, Either
Higher or Lower – So if the subject property is 1,000 square feet, look for
properties between 850 and 1,150 square feet.
•
SOLD within the Last Six Months – The closer to the current date, the
better, to most closely reflect the market value. This factor is extremely important.
Understand that certain months create higher values than other months. The rule
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
of thumb will be that the months between May and September will afford the
highest value and between Thanksgiving and Valentine’s Day, the lowest value. If
you’re in a market where you have had a sudden downturn in pricing, shorten your
time to three months or less.
•
Same Number of Bedrooms and Bathrooms – If this is too limiting—no
comps come up in the search—go plus or minus one bedroom and plus or minus
one-half bath, and mentally adjust the sale price a few percent higher or lower to
account for the difference. The other amenities, like a fireplace, garage or a pool,
will vary so much from property to property that exact comparisons are unlikely,
so you have to mentally adjust the sale price a bit for these as well.
•
Similar Type of Structure – Some property profiles will show a structure type
and some won’t. If you cannot tell the structure type, make a note on the profile
to find out later, probably by visual inspection. If two seemingly comparable
properties have wildly different sale prices, the structure type could be the reason.
Here is an example of comps on the subject property profile shown above:
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Between the property profile and the comps, you have enough information to make a
rough estimate of the Worth Value of the property. This will only be a rough estimate at this
point, but you need it in order to get the most from the next step.
STEP THREE – Comparative Market Analysis (CMA)
A Comparative Market Analysis comes from MLS (Multiple Listing Service) data. The
CMA shows more than the Property Profiles do. Among other things, it shows the asking
price on properties. This is not public information, so you have to get it from a real estate
agent who subscribes to MLS. If you have not yet established a close relationship with one or
more real estate brokers, this alone is a good reason to. If you have, ask the broker to run a
CMA using the MLS comps on the subject property.
If you have not established a working relationship with a qualified Realtor, read my
module, “How to Buy and Sell a House a Month”, and it will take you through the steps
necessary in making this relationship and what to expect from the Realtor.
When you ask your Realtor for the CMA, tell her to make sure it includes the following:
•
Current Listed Properties
•
Sale Pending Properties
•
Expired Listings
•
SOLD Properties
The following is an example of a CMA:
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
CMA Report
Page 1
Listings as of 01/25/06 at 1:06pm Page 1
ACTIVE Properties
Address
City
Map
Bed Bth
SqFt
Lot Size Year
Date $/SqFt
DOM Orig Price List Price
416 Ohio Dr
Bakersfield 2482, H1
4
1
832
1941
11/12/05
192.31
74
175,000 160,000
901 Smith Rd
Bakersfield 2482, J1
3
1
939
1961
01/19/06
207.67
6
195,000 195,000
200 Hoover St Bakersfield 2442, H7
3
1
0
1957
12/01/05
14
195,000 199,900
1203 Padre St Bakersfield 2482, J1
3
2
1233
2004
01/03/06
227 Clifton St
Bakersfield 2442, J7
3
2
0
2005
09/01/05
1020 McNew Ct Bakersfield 2482, J1
3
1
792
1930
01/06/06
241 Hoover St Bakersfield 2442, H7
4
2
0
8840sf 2005
12/06/05
1200 Padre St Bakersfield 2482, J1
4
1959
01/16/06
Listing Count
8
1.7 1394
Averages
1038
High
Low
284, 950
186.54
22
230,000 230,000
146
249,000 249,000
19
250,000 250,000
50
265,000 265,000
204.41
9
284,950 284,950
221.32
43
230.494 229,231
315.66
Median
160,000
239,500
PENDING Properties
Address
City
Map
Bed Bth
SqFt
Lot Size Year
Date $/SqFt
DOM Orig Price List Price
217 Clyde St
Bakersfield 2442, J7
3
1
822
1944
02/10/05
125.30
9
103,000
103,000
128 Augusta St
Bakersfield 2442, J7
3
1
1066
1960
09/30/05
140.67
4
149,950
149,950
23 Milham Dr
Bakersfield 2442, H7
3
1
0
10000sf 1958
11/10/05
3
150,000
150,000
112 Clifton St
Bakersfield 2442, J7
3
1.7
0
7000sf
1991
01/11/06
55
169,950
155,950
322 Madison St
Bakersfield 2482, H1
3
1.7
1008
1981
09/19/05
11
175,000
175,000
239 Clyde St
Bakersfield 2442, J7
4
2
0
2005
11/21/05
25
259,000
259,000
Listing Count
6
Averages
High
1965
259, 000
173.61
146.53
Low
103,000
© 2006 by Michael Quarles. All Rights Reserved.
18
167,817
Median
165,483
152,975
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
SOLD Properties
Address
City
Map
SLot Size
Bed
Bth
SqFt
230 Clyde St
Bakersfield 2442, J7
3
2
0
121 Clyde St
Bakersfield 2442, J7
3
1
1117 Feliz Dr
Bakersfield 2483, A1
3
205 Rodman St Bakersfield 2442, H7
123 Owens St
140 Clyde St
Year
Date
$/SqFt
Orig Price List
DOM
9375sf
Sale
Price
SP%LP
Price
1900 09/22/05
3
119,900 119,900 119,900 100.00
0
1946 08/06/05
7
149,900 145,900 140,000 96.00
1
0
1958 07/29/05
12
149,950 149,950 140,000 93.40
3
1
1028
1958 08/01/05 136.19
0
140,000 140,000 140,000 100.00
Bakersfield 2442, J7
3
1
742
1935 09/09/05 219.68 22
153,000 153,000 163,000 106.50
Bakersfield 2442, J1
3
1
988
1962 12/05/05 167.00
155,000 155,000 165,000 106.50
0
201 Kincaid St
Bakersfield 2442, J7
3
1.5
776
1944 11/23/05 212.63 31
179,950 169,000 165,000 97.60
225 Clifton St
Bakersfield 2442, J7
3
1.5 1283
1952 08/05/05 131.72 32
179,000 175,000 169,000 96.60
1200 Padre St
Bakersfield 2482, J1
4
1.7 1394 0.155ac 1959 12/09/05 131.99 15
189,000 189,000 184,000 97.40
119 Owens St
Bakersfield 2442, J7
3
35 Northrup St
Bakersfield 2442, J7
4
1211 Padre St
Bakersfield 2482, J1
3
Listing Count
1
High
180,000 180,000 187,000 103.90
1947 10/20/05 163.93 19
210,000 210,000 200,000 95.20
1233
2004 10/06/05 178.43 19
210,000 210,000 220,000 104.80
1102
165.59 14
167,975 166,075 166,075 99.81
1.5 1220
2
Averages
12
6
1257 9375sf
1944 09/01/05 148.77
Low
220, 000
Median
119,900
165,000
EXPIRED Properties
Address
City
Map
SqFt
Lot Size Year
Date
$/SqFt
Bed Bth
213 S Kincaid St Bakersfield 2482, J1
3
1128 Derrell
Bakersfield 2482, J1
3
1
960
47 Madison
Bakersfield 2482, J1
3
1
1107
Listing Count
3
Averages
High
Orig Price List Price
DOM
1.7 1436 8022sf 1952
12/04/05
150.35
83
215,900 215,900
1940
10/27/05
228.13
91
220,000 219,000
1979
10/27/05
216.71
92
239,900 239,900
198.40
89
225,267 224,933
1168
239, 900
Low
215,900
Median
219,000
Data is Copyright 2005 BAOR INFORMATION DEEMED RELIABLE, BUT NOT VERIFIED OR
GUARANTEED.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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Notice on the above CMA that there are only two properties that “fit” the criteria listed
above:
•
Built within five years of the subject property.
•
Located within one-half mile of the subject property.
•
Similar square footage.
•
SOLD within the last six months
•
Same number of bedrooms and bathrooms.
•
Similar type of structure.
One is an active property (Current Listed), at 1203 Padre Street in Bakersfield. This is
listed at an asking price of $230,000.
The other is a SOLD property at 1121 Padre Street in Bakersfield. This was listed for
$210,000 and sold for $220,000.
STEP FOUR – Analysis
You have a lot of information now: property profiles, comps and CMAs. I am going to
walk you through the analysis process to show you what to look for and what it means. Let’s
start with the comps and the CMAs by taking notice of six particular things:
First, notice that the average price from the title company’s comps, on the two
properties located on Padre Street listed above, is $165,000. The average price on the same
two properties on the MLS CMA is $166,075. You can usually expect that MLS CMA prices
will be higher than title company prices.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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Second, notice that the price per square foot on the title company comps is $131.00
(average) and on the MLS CMA it is $165.59. Clearly, if you depended on the MLS CMA data
to find a Worth Value on your subject property, you would significantly overvalue the
property and probably end up paying too much.
Third, notice that there is a Current Listed property that is only 30 square feet larger
than your subject property, but it is listed at $284,950. If you base the Worth Value for your
subject property on this property, you are inviting failure. When you see a price that is
completely out of line from the others, you probably are not looking at a truly comparable
property, or you are looking at a very greedy and unrealistic seller or someone who has been
given bad advice by his real estate broker or “know-it-all” friend. You could spend valuable
time trying to find out where the difference came from, but why bother when you have two
perfectly good, reasonably close comps to work from?
Fourth, notice that your subject property is larger than either of your comp properties. In
fact, it is the third largest among all of your comp properties, including both the title company
comps and the MLS CMA. In a case where all or most of the comp properties are smaller
than your subject property, if you go by those average prices, you will be overvaluing your
subject property. If your property is larger than your average comp property by only 10
percent or less, don’t bother adding any percentage to the average comp price. This is only a
rule of thumb, but will be helpful in keeping you close to an actual Worth Value. The reason
why you wouldn’t add any percentage value is, keep in mind, that a 3-bedroom, 2-bath house
also has a kitchen and garage as well as front and back yards and other items similar to your
comp properties. A few extra square feet do not add a tremendous value to the property.
Also understand that the buyer who is willing to live in this neighborhood may not be able to
afford or qualify for a higher priced house; therefore, just because it’s a little bigger doesn’t
make it worth more.
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Fifth, notice that the average size on your two MLS CMA properties is 1102 square feet,
while on the comps it is 1269 square feet. This is a significant difference (which also explains
the large discrepancy in the price per square foot between the two). Knowing the actual
square footage of the house is paramount in your value determination. In the beginning you
will want to check and verify the information, which is posted to you on the property profile
by measuring the structure yourself. It is easy to do and will keep you out of harm’s way. You
will be able to find out square footages from the property profile or, when further research is
required, visit the Tax Assessor of the city or town in which the properties are located, or
possibly from the County Recorder’s office (if they are online) and you can find a deed or plan
of the house.
Sixth, notice that the unit on 1211 Padre Street sold for $220,000, which is $10,000 more
than its listing price on the MLS. Also notice that it was on the market for 19 days, which in
this case was five days over average. When the average number of days on the market is only
14 days, you know it is a “seller’s market.” In a seller’s market, the seller doesn’t have to give
away concessions, like helping with buyer closing costs, which typically will run around 4% 6% of the sales price. Sometimes the buyers will want to finance new floor coverings and will
ask the seller to add those costs to the price of the house and then give back to the buyer
that same amount of money as a seller cost. These concessions are perfectly legal as long as
they are disclosed and approved by the lender. A word of caution: never give money to a
buyer of your properties without the lender’s approval. So remember that any concessions
are added to the price. You can bet, in this case that we’re using as an example, the buyer
needed help covering the closing costs, and the seller offered to cover them by just adding
them to the overall price.
This unit was also the highest priced SOLD property on the MLS CMA. Take a look and
see why: it is 45 years newer than the other properties. This is not always a positive,
depending on the neighborhood and surrounding houses. But in this case it was a positive.
And since the subject property we are looking at (the property on Augusta Street that we
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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have the property profile for) was built at around the same time, we have to take this higher
price into account when we determine Worth Value.
Wait! Look again. This property didn’t sell for $220,000! If you look at the comps, you
will see that the escrow company reported to the County Assessor that the property sold for
$210,000. Not noticing this could have cost me $10,000 in my Worth Value! The lesson here
is to compare your information from different sources. Be thorough.
STEP FIVE – Calculation
When I am looking for comps I pick three properties to determine the Worth Value of
my subject property. I like using only SOLD properties, although I will include a Sale Pending
property if: (a) its sale price is at least as much as its appraised price, and (b) the sale will be
closing within a week or two.
The three properties we will be using in my Worth Value calculations are the following:
1211 Padre Street
1200 Padre Street
119 Owens Street
They are the most similar to my subject property and all have been SOLD within the last
six months.
The chart at the top of the next page compares the subject property with these three
comparable properties. Using this chart, and what we have already discussed above, we are
ready to come very close to a final Worth Value. There is only one more STEP after this.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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Subject
1200
Padre
119
Owens
1211
Padre
Use
Sfr
Sfr
Sfr
Sfr
Bedrooms
3
4
3
3
Bathrooms
2
1.75
1
2
#Rooms
Pool/Spa
N
N
N
N
Stories
1
1
1
1
Year Built
2003
1959
1944
2004
Average
Average
Average
Average
1364
1394
1257
1233
Lot Size
Quality
Air
Improvements
Sq. Feet
# of units
Fireplace
Heating
Style
Parking
Garage
Price
Per Sq ft
Combined
Average
Garage
$
184,000.00
$
131.99
Garage
$
187,000.00
$
148.77
Garage
$
210,000.00
$
170.32
$
150.36
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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What we are looking at now is the price per square foot figures. You can see from the
“Per Sq ft” line that 1211 Padre is higher than the other two by over $20/square foot. That is
too big a jump to be explained just by age. Still, it is a comparable house and that is what it
sold for, so we have to include it in the calculations.
Remember that 1200 Padre is on the market at $284,950, just a few months after it was
sold for $184,000. Our Worth Value calculations have to be based on what it sold for a few
months ago, not on what the present owner hopes to get for it.
Right now, I am confident that the possible Worth Value of the property is between $150
per square foot (the average of my three comps) and $166 per square foot (the average of all
the comps). Multiply these figures by 1,364 square feet in the subject property, and the basic
Worth Value comes out to between $204,600 and $226,424. I don’t like it being over
$210,000 (the sale price of the closest comp).
By the way, I don’t mind that the MLS CMA mentions a $220,000 sale price on 1211
Padre. This may help when I sell the property, unless a later appraiser catches the mistake.
STEP SIX – Go for a Drive
During your drive to these appointments look around the neighborhood and take note of
the various characteristics of the area that can either add to or detract from the value of
properties in the neighborhood.
Here are some key things to look for:
10 signs that add to value:
1. well cared for lawns with trimmed trees
2. few if any For Sale signs
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3. children playing without fear
4. close to newer shopping centers
5. close to desirable schools
6. close to bus route
7. maintenance vehicles in the neighborhood:
i. pool cleaners
ii. pest control
iii. gardeners
8. well maintained houses
i. exterior paint
ii. roof
iii. driveways
iv. landscaping
9. new cars in driveways
10. renovations going on
10 signs that detract from value:
1. chain link fencing in front yards
2. bars on the windows
3. graffiti
4. junky/broken down cars
5. deteriorating housing
6. a lot of For Sale signs
7. boarded up houses
8. un-mowed lawns and overgrown trees
9. no curb or gutter or sidewalks
10. high rental occupancy
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By the way, when you are driving through the neighborhood and come across a house
that is deteriorating faster than the rest of the neighborhood, you should make note of it.
Contact the owner later and try to buy it from him, as they obviously can’t afford to maintain
it. This could produce some large rewards for you.
We are going to go on a slight tangent here, to talk about negative neighborhoods. The
neighborhood does affect Worth Value, so you should understand a couple of things about
negative neighborhoods.
I am by no means saying not to buy houses in negative neighborhoods. What I am saying
is that you have to take into consideration the role that economic and functional
obsolescence play in Worth Value. When you do, you will be able to use this information to
buy houses at the appropriate price.
In fact, I would rather buy houses in an average-income neighborhood, especially if the
houses are kind of beat up, than in a high-end, no-work-required neighborhood. There is a
ton of money in “ugly” houses.
Let’s start with a couple of definitions.
Functional Obsolescence:
A loss of value due to adverse factors within the structure that affect the utility (usability)
of the structure, its value and its marketability.
An example of functional obsolescence would be a lack of central air conditioning. This
lack is not due to wear and tear, but from original design and construction. Another example
may be a sealed-up fireplace. The fireplace was originally functional, but some later owner
decided to seal it up rather than maintain it. It would be very expensive to make it functional
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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again. Also, this brings up an important point: a fireplace is not as valuable as a “working”
fireplace. You need to be aware of these kinds of differences.
Economic Obsolescence:
A loss of value due to factors external to the property, such as economic or
environmental. This is different from deterioration or damage from natural causes or
functional obsolescence.
Examples of economic obsolescence could include the construction of an airport nearby
or the closing of a major employer’s factory, throwing hundreds of families out of work. They
are outside the control of the property owner.
That’s the end of the tangent. I just wanted you to be able to make this distinction
between functional and economic obsolescence when you are driving through a negative
neighborhood. When you know why the houses in a neighborhood are deteriorating, you can
more easily spot the opportunities for profitable deals.
Driving Your Comps
What you see on paper is only part of the story. In order to really understand the figures,
you should see the houses you are comparing to your subject property. When your comps
are SOLD houses, chances are you won’t be able to see the insides, but you can still tell a lot
just by looking. This one is higher-priced because it has a new roof, and the landscaping is
beautiful. That one is lower because the houses on either side are wrecks, and it needs work
also.
On the other hand, you might be able to get a look at the insides. At least, you should
try. Go up to each house and knock on the door. When the person answers, say these words
to whomever answers, male or female: “Hi, my name is <your name> and my family and I are
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thinking about buying a house in the neighborhood. I noticed that you just bought your house.
Would you mind if I asked a few questions?”
Most people will be willing to talk to you. Why not? You might be a new neighbor!
Here are the questions to ask, and why to ask them:
1. Is this a safe neighborhood for young families, children and older people?
You want to get a feel for how secure the neighborhood is. Always remember that just
because you don’t feel it’s safe doesn’t mean the people who live there feel the same way.
Never assume anything in real estate, and don’t let your personal biases affect your decisions.
2. Have you found anything negative about the neighborhood that you weren’t
aware of before you moved in?
You want to find out what isn’t being talked about by the seller of your subject property.
Are there noisy neighbors, a bully on the block, or drug dealers hanging out on the corner...?
Do they now think they paid too much?
3. Was there a lot of work done by the seller on the house, which was included in
the sale price?
This will tell you who financed any needed repairs, which will directly affect your estimate
of Worth Value. If the $185,000 they paid for the house included $35,000 of repairs done by
the seller, the actual Worth Value of the comp is $150,000, which changes the calculation of
the Worth Value of your subject house.
4. What about this house made you buy it?
You want to know this because it will tell you what buyers are looking for and why this
house stood out. Maybe your subject property has some of the same features, and you can
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push those when you turn it around and want to sell it. You may want to up your Worth
Value a bit on your subject property if it includes these desirable features.
5. Do you know of anyone looking to sell their house now?
This will give you free leads to call on. Don’t assume that because they are new to the
neighborhood they haven’t had a chance to meet people. You can only gain from asking this
question.
Naturally, if they offer to show you around the house, take them up on it. Be ready to
write information down about the house. And if there are exceptional items that were
included in the purchase price, like a beautiful new kitchen or beautifully landscaped backyard,
ask to take a few pictures. This is so that when you’re on your purchase presentation and the
sellers says their house is just as nice as that one, you then can show them the indisputable
difference.
When you do look around, make mental notes of the same kinds of things you will do in
any home inspection (later in this book we will go over this in more detail) and write down
your notes afterwards. They will come in very handy later as you prepare to make an offer to
the seller of your subject property.
While looking around, ask them if the house was in “this” (its current) condition when
they purchased. You will want to know what new repairs or rehab work the new owners
have done since they purchased the property so that you don’t take those items into
consideration when comparing values.
When you are done, thank them, and try to “leave the door open” in case you have more
questions later. Ask them if it is okay for you to drop by or call them in the next few days if
you think of more questions that could help you make your decision on whether or not to
buy.
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Driving through a neighborhood to look at your three comps may take an hour, or more
if you get a chance to talk to the new owners, but it is time well spent because you should be
able to refine your Worth Value to a pretty close figure. Instead of a wide range of $204,600
to $226,424, you can probably zero in to a very narrow range – say, $200,000 to $205,000 if
your property is in similar condition to the lower-priced comps, or $205,000 to $215,000 if
more similar to the higher-priced comp.
When you go in for the actual deal, you want all the ammunition you can get. You want
to be able to explain the figures to the seller using concrete examples of other similar houses.
You want to not only appear knowledgeable, but to be knowledgeable.
This leads us to the next two or three houses, which you will be visiting. As I stated
earlier, you will only use “SOLD” and possibly “Sale Pended” as comparables; the exception
would be that if the market has taken a down turn, you will also want to view active listings.
You want a reasonable knowledge of the houses in the area that the sellers are basing their
information on. You’ll gather this knowledge by viewing the two or three active “For Sale”
houses within your search criteria.
Where this step fits in is up to you, but you should do it sometime in the process of
preparing to buy your subject property. The purpose of this step is to take a look at some of
the other properties for sale in the neighborhood in which you are buying. The reason this is
important is to get a feel for your competition as well as to get a feel for the demographics of
the neighborhood. What is an acceptable level of maintenance, home improvement,
landscaping, etc. in this neighborhood?
Call your real estate agent and make an appointment to see two or three listed houses
that are based loosely on the same guidelines as your comp properties, but not necessarily as
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strict. Ask for houses as near (distance-wise) to your subject property as possible, even if they
are not the closest fits to your comp guidelines. You will not be using these houses to help
build a Worth Value on your subject property.
If you don’t want to waste your agent’s time, just ask him if you can call and make the
appointments with the listing offices yourself under his name. If that’s okay, call the listing
office and make an appointment so that the seller will be there to open and show their house.
You will be able to find the listing office’s phone number from the For Sale sign posted on the
property or from the MLS listing.
You can also bypass the agent altogether and just go knock on the door of the listed
houses, but you will be much more successful and efficient by consulting with the agent and
making appointments.
Also, while touring the neighborhood, if you see a FSBO (For Sale by Owner) sign, by all
means go knock on the door and ask to preview the house. When previewing the house,
besides price and condition, you will be looking for both motivation of the seller and whether
their house fits inside of your business model. It is perfectly acceptable to say to them that
you are buying a home in the area and try and buy their house too.
Word of caution: no matter what you do, it is extremely important not to be late to the
appointment that you have scheduled. The only time you should consider being late or missing
your appointment is if you can purchase this FSBO now at the price point that fits your
business model. If a seller wants to sign a contract, by all means put them under contract. This
is a good reason to carry multiple purchase agreements with you. I always do.
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Again, most people will be willing to talk to you. Ask the sellers of the “active” houses for
sale a few questions:
1. Is this a safe neighborhood for young families, children and older
people?
You want to get a feel for how secure the neighborhood is. Always remember that just
because you don’t feel it’s safe doesn’t mean the people who live there feel the same way.
Never assume anything in real estate, and don’t let your personal biases affect your decisions.
2. Has the neighborhood changed recently?
You want to find out what isn’t being talked about by the seller of your subject property.
Are there noisy neighbors, a bully on the block or drug dealers hanging out on the corner...?
Do they now think they paid too much?
3. Will you be offering any concessions to the buyer?
This will tell you who is going to finance any needed repairs, which as we mentioned
earlier, will directly affect your estimate of Worth Value. Or maybe they are willing to help
the buyer with their closing costs. You are looking for anything that reduces the Worth Value.
4. How did you set this sales price and are you offering any special
terms?
You want to know this because it will tell you how motivated the seller is and whether or
not this house is something you may have the opportunity to purchase. Understanding the
seller’s motivation is crucial in determining Worth Value. Some sellers just put a price on a
house and hope they win the lottery. You will want to know if the competition is in fantasy
land or reality land.
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5. Why are you selling?
If during the last four questions this question wasn’t answered by the seller, it will be
important to ask so you have a clear picture of the motivation. I ask it last because by then I
have built enough rapport with the seller that they tend to be freer with the truth.
Help Yourself to a “Six-Pack”
If you have time, you should also do a “six-pack” on the subject property. A six-pack is
not six cans of beer. It is knocking on the two doors on either side of a property and the two
houses across the street from the property. A six-pack will reward you handsomely with
determining the motivation of the seller, as well as giving you possible leads.
Here are the questions and script for this mini-interview:
Hi, my name is <your name>. I’m thinking of buying the house <next door/two doors
down/across the street> and was wondering if you could answer a few questions for me.
1. What is the neighborhood like?
This will tell you if they love living there or hate living there, and either response is okay.
If they say they hate living there, ask them if they are renting or are the owners. IF THEY ARE
THE OWNERS AND HATE LIVING THERE, TALK TO THEM ABOUT SELLING YOU
THEIR HOUSE!
2. Is there anything about the owners of the house that I may need to know before
I buy it?
They will spill the beans if they don’t like the neighbors and won’t say a word if they love
them. It is worth asking. You are looking for the reason they are selling: divorce, job transfer,
money problems, whatever it is. Out of the six-pack, chances are at least one “can” will be full
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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of gossip. The more you can know about the seller, the better prepared you will be when
dealing with him and negotiating.
3. What kind of repairs do you think ought to be done to that house?
You might be surprised at how much the neighbors know about the house, and their
opinions of it. You will probably hear more than you could possibly find out by visual
inspection from things like what’s buried in the backyard to the fence being propped up by
sticks.
4. Have the sellers lived there long?
You will already have this information from your property profile, but you are setting the
neighbor up for your next question. Plus, you may find out information the profile doesn’t
show. Maybe the family has lived there for years, but the profile shows a sale a year ago.
Turns out it was a sale from one son to another and they both still live there. You can bet the
sale price for that house isn’t a good one to base a Worth Value on.
5. Do you have any intention of selling soon? (or moving soon, if they are renters)
When you are ready to sell the subject property, after you buy it, you want to know if
there will be another house right next door also for sale. If there will be, you probably want
to be selling that one as well. Also, if the neighbor will be selling soon, that gives you some
ammunition when making your offer on the subject property – it’s not like his is the only
house you could buy.
You now have everything you need to do an exact Worth Value calculation. You’ve
already narrowed it down pretty closely. Now just plug in what you have found out from the
comp owners to adjust the comp values up or down slightly, and fit the subject property into
the higher or lower end of the new range, depending on what the neighbors said about the
house.
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Let me go over that again, as it is a three-step process.
First, based on the information you got from the new owners of the comps, take the sale
prices from your comp properties and adjust them downward if they included seller repairs,
and upward if there was some special deal (like a family member to family member sale) you
discovered that artificially lowered the price. Use these adjusted prices to come up with a
new average price per square foot, and apply that to your subject property’s square footage
to come up with a new Worth Value range. It probably won’t be all that different from your
original one, but it will be more accurate, i.e. you can have more confidence in it.
Second, based on your viewing of the “active” houses for sale, come to know the other
houses being sold if you want to buy this property. You will be able to handle the objections
about unreasonably priced houses. You will not use these houses to determine your purchase
price; only as an example of what “this amount of money” will buy.
Third, take what your six-pack neighbors said about the subject property and use it to
mark the Worth Value within the new range you just calculated. If it needs a lot of repairs, it
falls at the low end of the range. If it has been lovingly maintained by a long-term owner, it will
be at the high end of the range.
What the neighbors said about the sellers themselves does not affect the Worth Value.
That information will affect your negotiations, but has nothing to do with the house itself. You
are trying to come up with an answer to the questions, “What is the house worth? How
much would it sell for on the open market, as is, right now?”
Now let’s look at Money Value in my two-sided view of value so we can see the
difference between it and Worth Value.
© 2006 by Michael Quarles. All Rights Reserved.
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Notes:
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© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
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Determining the
Money Value of a Property
Up to this point you have put together all your factors and research, and come up with a
Worth Value. Just so we have a figure to refer to, let’s say it came out to $204,600. This is
still subject to change based on seeing the actual subject property, but this is the figure you
are working with for now rather than working with a range. Any adjustments you see that
need to be made based on your property inspection will be made to this figure.
The Inspection
It is time to keep your appointment with the owner of your subject property. Ideally, you
will have done the six-pack last, just before the appointment. That way, the owner might very
well have seen you talking to all his neighbors and is very eager to find out what they were
telling you.
Introduce yourself and make a point of mentioning that you have just had some very
interesting talks about the neighborhood. And that’s all you say. You want to give the
impression that you were just told that this neighborhood is the worst one in town and that
now you understand why he wants to sell.
As you walk around the house with the seller, you will be using the Ugly Uglier Ugliest
repair worksheet to determine any repairs that will be necessary. (The full use of this
worksheet is covered in a different module.
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You must have the seller accompany you so you can indicate how ugly his house is. You
are not there to tell the seller what a wonderful home he has. You are there to determine the
final Worth Value AND to reduce the seller’s idea of the Worth Value. You want to embed
ideas in his mind like “Once I buy this house I will have to fix this and that,” or “This is going
to be an expensive rehab,” or “It’s going to cost a fortune to get that fireplace working again,
but it’s gotta be done.”
It is very important that they have an idea of how much it is going to cost for the repairs.
As you are adding up your cost of repairs, compare the types of repairs with the types of
repairs your three comp properties had, just to make sure you are comparing apples with
apples.
There are three major items to consider when evaluating the property:
1. Type of Roof
What type of material is the roof made of? Tile is better than wood shake. Depending on
age, wood shake is better than 3-dimensional composition shingle until about five years old;
after five years, it is worse. 3-dimensional composition is better than 3-tap asphalt shingle,
and a flat roof is the worst of all types of roofs.
On a wood roof, always figure $1,000 in minor roof repairs in order to purchase a twoyear roof certification, which is a guarantee from a licensed roofing contractor that the
roof will not leak for two years.
2. Air Conditioning / Heating
Any central air conditioner and heat unit is better than a wall heater and window cooler /
window air conditioner.
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On the air conditioner, a visual inspection will tell you if it is the original unit or fairly new.
If it is rusty and old looking, keep in mind that a normal change-out could run between
$3,500 and $6,500, depending on the quality of the unit. Any unit older than ten years
needs to be addressed and an adjustment made to your Worth Value (and especially, to
the seller’s idea of Worth Value).
3. Kitchen and Baths
Are they run down, with broken cabinet doors and drawers, cracked tile or damaged
countertops? Are there rust stains in the sinks or tubs? Any signs of mold on the walls or
ceiling?
It is important to do a thorough inspection and find out how this house compares to your
comp houses and the other listed houses you’ve seen. I often tell sellers who are living in a
fantasy land that they need to drive around their neighborhood and find out what the amount
that they want for their house buys them (it will be a lot more house than what they’re trying
to sell).
The Calculation
So now you have inspected the property and feel pretty good about your Worth Value of
$204,600. All in all, with the exception of the $5,400 in repairs as determined by using my
Ugly Uglier Ugliest Home Analysis worksheet, this house is a fair comparison to the house on
1121 Padre Street that sold for $210,000, and that included about $5,000 of seller-paid
repairs. This house seems to be in about the same condition and probably needs about the
same amount of repairs, so the Worth Value looks good. If it didn’t need the repairs, the
Worth Value would have been $210,000 instead of the $204,600 I am giving it.
Now, how much are you willing to pay for the house? What is your Money Value?
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
My simple formula is I always want to see a $52,000 difference OR pay less than 75% of
the Worth Value, whichever is less. Remember, Worth Value is a value after subtracting the
cost of repairs.
Some books will talk about “After Repair Value,” which is the amount a house can be
expected to sell for after repairs are done. In a word, this concept is nonsense. Let me show
you why.
Let’s say you have a house that in its current condition is worth $160,000 (its Worth
Value). After $20,000 of repairs, you think you can sell it for $200,000 (After Repair Value).
Using my formula, $52,000 from $160,000 is $108,000. Or 75% of $160,000 is $120,000.
So I would not pay more than $108,000 for the house (the lesser of the two figures).
If I used the same formula on the After Repair Value, $200,000 less $52,000 is $148,000.
Way too much. 75% of $200,000 equals $150,000, less $20,000 in repairs equals $130,000.
Still too much.
You only want to determine Worth Value and Money Value of a house in the condition
the property is in right now. If you rehab the building and sell it for more, great! You make
more. But what if something happens to you or you don’t have the funds to rehab it right
away? You are stuck with an overpriced house. Remember that you are an investor, not a
speculator.
So let’s apply my formula to the subject property we have been talking about. Its Worth
Value is $204,600 – a value after subtracting the needed $5,400 for repairs to make it
marketable. (Keep in mind that the $5,400 is what the consumer would have to pay for
repairs. I would pay significantly less, having built up connections within the various home
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
repair industries, and I hope you also have been doing this, or will establish these kinds of
relationships. Just realize that people are willing to charge less in exchange for regular work
they can count on from you.)
Now apply the formula: $204,600 less $52,000 equals $152,600. 75% of $204,600 equals
$153,450, so I would not pay more than $152,600.
You see how this works? I think I can turn this property around and sell it for $204,600
without repairs, or I can spend less than the estimated $5,400 and get $210,000. Either way
my gross profit is going to be $52,000.00
THE PRESENTATION
Now how, you might ask, are you going to buy a house for $152,600 when the seller
thinks it is worth a lot more? Actually, there is another complete module that goes into this in
great detail, but I will give you a fast overview here. As you will see, it’s all a matter of
knowing your numbers and showing the seller how these numbers make sense.
Assume the seller wants $205,000 for his house. He knows a similar house sold for
$210,000, but it was in better condition and his house needs some repairs, so he is looking for
$205,000.
First, look at the costs that sellers typically pay during an escrow:
1.
6% real estate commission
2.
title insurance
3.
escrow fees
4.
transfer tax
5.
natural hazard report
6.
termite clearance
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
7.
roof certification
8.
water heater strapping
9.
smoke detectors
10.
repairs to bring to market standards
11.
4 to 6 months holding costs, waiting for it to sell
a.
mortgage payments
b.
property taxes
c.
d.
property insurance
monthly maintenance
12. And the cost no one thinks they pay – loss of time and fear of loss
What I mean by this is that you will be offering them a solution so they can get on with
their dreams and goals, or out of this headache, and there is a cost for waiting for someone
else to come along and give him what he wants for the house. Maybe they want to buy a
certain house but they can’t until this one is sold, and they are afraid someone else will buy it
before they can. Fear of loss is a great motivator.
You should put numbers to all of these costs, because you are going to need them in a
few minutes. You’ll see what I mean. Remember, this is just a quick overview, a single
example.
Now it is time to talk to the seller. What you say will depend on the seller’s motivation,
the market (seller’s market or buyer’s market) and your own personal estimation of what the
particular seller will respond to. In this example it is a seller’s market, so I will use the seller’s
market language. Here we go.
“Let me tell you a little about what I do. I buy houses like yours all the time. I pay all the costs,
including the real estate commission, the title insurance, escrow fees, transfer tax, Natural Hazard
Disclosure, etc. And I buy them in an “as is” condition. I am going to kill the bugs, assume the
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
responsibility for all the needed repairs, whether I have seen them already or not. So when we agree
on a price, the only thing you will subtract from that price is the principal left on your mortgage. I will
make all the repairs, and you saw that the items I marked down came out to about $5,400 as we
went through your house, and that doesn’t even include the items I didn’t see.
“One of the positive factors about selling me your house is that you can stay in it for as long as
you need to and have the peace of mind of knowing it’s sold. And not only sold, but sold to someone
who can afford to buy it.
“You see, I sell houses too, and many times I have seen buyers make offers on houses, and when
we got into escrow and I’ve spent a lot of money on the process, then it turns out the buyer has an
IRS problem or child support payments he didn’t mention, and he can’t qualify. Believe me, there is
nothing more frustrating than seeing a deal break down in escrow. That isn’t going to happen to you.
“Another positive factor is that you won’t have any of the monthly costs waiting for the right
buyer to come along with the right offer, and you’ll have a buyer who can actually follow through on
the purchase.
“And maybe the most important factor is that you can get on with your life and not have this
burden hanging around your neck. Isn’t that really what you want?
“Let me ask you—I know you have a number in your mind of how much your ‘walk-away’ money
was going to be – the amount of money you believe is fair – so you can get on with your life—so how
much do you want to clear after paying off your mortgage; what I call the ‘walk away’ value?’”
I always ask this before I give them my offer just in case they give me a lower number
than the one I was going to offer. I have been surprised more than once. Just be sure not to
look surprised. I had one man tell me that all he wanted was $36,000 for the houses. We were
at the first house and I didn’t know there was another one he wanted to sell and I was going
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
to offer him $45,000 for the ONE house. Needless to say, I bought both houses for $36,000
total.
So let the seller tell you what he was hoping to clear, after paying off the mortgage.
Usually, the combination of the mortgage and his walk-away money is less than your Worth
Value but more than your Money Value, which is a great starting point.
Again, I ask them how much money they want in their pocket, not how much they want
to sell the house for. I want to be negotiating a few dollars, not a few thousand dollars.
In this example, assume the mortgage is $117,600, which you know from the property
profile and the inbound script when they called. The seller tells you he wants to walk away
with $50,000, which would bring his sale price to $167,600. This is $15,400 more than you
are willing to offer him.
I now know that we are close and that I need to build more value into my program.
Therefore I must continue to convince him that my Money Value and his walk away value are
the same. I always start by asking if he has seen the cost involved in selling a house. I don’t
care what he answers; I just start outlining the numbers.
The next question is how much of that money he actually needs to move on with his life
right away, instead of waiting. If he says all of it, well, maybe you are at an impasse. But maybe
you’re not.
“If you use an agent and have to pay the agent along with all of the escrow and title costs, those
items run around 12% of the sales price.” Which, if he asks for $205,600, is about $24,600. “Plus
the repairs of $5,400, so we are at $30,000. Now, what is your monthly mortgage payment –
$1,100? Figure five months or $5,500 plus another $1,100 for taxes and insurance and we are at
$36,600.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
“How much it is worth to move on right now rather than waiting for a buyer?” He hasn’t
thought of that, so I help him with a number. “Is it worth $4,000 to be done with all of this right
now? $4,000 is a small enough number. Now we are at $40,600 in seller costs that we can see, and
I still have to kill the bugs and repair all the items that come back on the buyer’s home inspection
report. Have you ever seen a buyer’s home inspection report? My goodness, they write a book about
how bad your house is. I know that on average I spend about $2,500 in termite control, roof
certification, strapping the water heater, wiring the smoke detectors and other usual costs, and that’s
just an average. Now we’re at $43,100.
“I take on all of this responsibility and risk so that at the end of the day I resell the house after I
fix it up, and I have to make something and I have determined that my minimum is $10,000. I don’t
think earning $10,000 over a four or five month period is too much to ask for, do you?” Wait for the
“NO”.
“Therefore, if we subtract the $53,100 from your asking price of $205,000, we are at about
$35,000 in your pocket – this week, if you want.”
So now I let him know that I’m going to pay him $152,200 for his house, which will put
$34,600 in his pocket within days. He says “NO.”
Then I ask him, “Why? Is it that my offer isn’t fair? After all, I am paying all the costs and
assuming all the responsibility for repairs. Or is it that you just want to make $50,000 on your
house?”
Most of the time the seller will say he really wants $50,000 and I will have to continue
trying to negotiate with him. But the numbers are on my side, and usually, given time, I can get
him to see them.
© 2006 by Michael Quarles. All Rights Reserved.
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HOW TO DETERMINE THE VALUE OF PROPERTY IN ABOUT AN HOUR
Learn the Secrets to The Price for Success!
Still, you are not going to buy every house you make an offer on. If you purchase one
house a month and sell one house a month you are a superstar. Just make sure you know
your numbers, and stick to the minimum you want to make on every deal.
I could go into more detailed negotiating methods and how to buy this house as a lease
option or seller financing with a wraparound mortgage and “wrap” the deal. But those
subjects are covered in other modules.
I wish you all the best in your career as a Real Estate Investor, and will continue to share
what I know to help with your success.
Sincerely,
Michael Quarles
Real Estate Investor
For more information on real estate investing, go to www.MichaelQuarles.com and find
out where successful real estate investors are gaining an advantage in the house sales industry.
© 2006 by Michael Quarles. All Rights Reserved.
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