How To Do a Comparative Market Analysis, Determine ARVs & More – Videos 1 & 2
Video 1 Transcript
Presenter: Determining the after repair value. I never recommend, as an investor, to pay to be into a property more than its property’s worth. I don’t see how that could be a deal. I actually recommend working to obtain equity, because of my strong belief in that, we normally provide our investors on single-family between 15% to 25% equity in your deal.
I believe that part of being a real estate investor, obtaining equity within your deal. Whether you’re doing this for your owner-occupy or you’re doing this for your investment, you should always do your due diligence in regards to after repair value. This is one of the areas that people always wonder, how in the world can I obtain the after repair of value? Where do I start, and what do I do with the information that I gather on this?
RealWealth asked me to present on this, and I was very excited to do so because it’s what I do for a living. Has anybody got any ideas on how to obtain an after repair value of a home?
Participant 1: An appraisal?
Presenter: An appraisal is one idea.
Participant 2: Yes. Do the cons.
Presenter: Do the cons CMA, Comparative Market Analysis. I’m going to talk about those too here.
You can hire an independent appraiser to do an appraisal. You can contact them. Now, the pros of contacting an independent appraiser, they provide you with a very extensive report. When you get that appraisal reported, it’s extremely extensive, it has a lot of good information.
Also, they provide a third-party opinion. They’re not related to the transaction, they provide a third-party opinion in relation to the value of the home. The con of an appraisal is time. Appraisals take time. When you’re researching deals, especially — I know In California, deals fly off the market. People pay hundreds of thousands dollars over what the asking price is. In Pittsburgh, the market’s hot too. Most good areas right now move quickly.
If you want to obtain an appraisal on every deal that you’re going to buy, you’re probably going to miss out on a lot of good deals. The other downside is the cost. The normal cost of an appraisal is about $450. If you obtain an appraisal on every single potential deal — Let’s say you look at 10 deals a month. What’s that? $4,500 a month in appraisal fees.
A third con is appraisals are still very subjective. Even after you take that time and you miss out on a bunch of deals, and you pay that money, the appraisal is still subjective, it’s the appraiser’s opinion. I’ve had appraisals on the same exact property, one come in at $50,000 and another one come in at $85,000. Now, when you say $35,000, that’s not a big deal. When you look at the percentage difference, that’s huge. That’s over what? 60% difference. Yes, sir?
Participant 3: When you’re getting qualified for a loan, don’t they have to get the appraisal, is that the agreement?
Presenter: If you’re purchasing the property with financing, yes. In our case, we normally purchase the property cash, renovate cash, and then refinance afterwards. We’re going to talk about the other way to do this.
The other route you can go, you say, “Well, what’s my next option?” A CMA, which is called a Comparative Market Analysis. We’re going to talk about comparable properties, obtaining comparables in the area.
Now, the number one way to do this, and really the only way is you must build relationships with global realtors. In any area you’re going to buy in, you want to build relationships with two separate realtors if possible, because realtors have access to the MLX, which has a lot of data which will allow you to do what we’re talking about. CMA is an estimate of the home’s value compared with others. When purchasing in an area, you want to build those relationships.
The more sold comparables you can get the better. When you’re looking at comparables when you’re looking at properties you have ones that are sold, ones that are contingent, and ones that are active. The sold comparables means it has sold at some point in time, so it’s already sold.
The contingent means it’s under contract. When you look at the contingent, it doesn’t tell you how much it’s under contract for. You know how much it’s listed for, but you don’t know how much it’s under contract for. When you see active, that’s a property that’s currently available. It’s not under contract, it’s not sold, but it’s currently available. That gives you an idea of what’s happening in the market, what’s going on out there, but that doesn’t tell you what’s actually sold.
I could list a property in an area that I know is only worth $60,000 for $200,000 if I wanted to, which would skew the number, so you want to take that into consideration.
The pros of a CMA are the cost. The cost is normally zero dollars. If you build a relationship with a realtor whom you’re going to use, your cost for a CMA is normally zero dollars. Your time, you could normally get a CMA back within 24 hours without a problem. They can be very effective in determining your ARV. If you analyze the data properly, a CMA can be very effective. I’ve found some CMAs to be more effective than appraisals.
The cons, this sounds like a contradiction. I just said it can be effective, the cons are that it could be very ineffective. If you have the wrong person giving you the data, if that individual wants to skew the data, or if that individual doesn’t know how to do a proper CMA and analyze the data, it could be ineffective.
The other downside to a CMA is that you need to do some of your own research. Not a lot, but you do have to put extra time and energy in once you obtain that CMA. I recommend that you do put extra time and energy in once you obtain that CMA.
When looking at comparables what we’re looking for is, make sure they are comparable. What do I mean by that? That sounds kind of funny. You want to make sure it’s the same building layout. If the building you’re purchasing is a ranch, you want to make sure that on your CMA, your comparables are ranches. You don’t want to compare a ranch to a two-story home. They don’t compare, it’s not apples to apples.
Make sure it has the same number of bedrooms. As you know anybody in here who has rented or purchased a home, the number of bedrooms makes a big difference. You’re going to pay more for a three bedroom on average than a two bedroom. Make sure it has a similar number of bathrooms. Three bedroom, two and a half bath as compared to three bedroom one bathroom, you’re going to have some different price adjustments there.
Make sure it’s similar size. A lot of people forget about this. They put up all the three bedrooms. Now, this is kind of hard because MLX doesn’t really put the square footage anymore. They stopped doing that several years ago. You need to talk to the realtor about this, but for example, a three-bedroom home that’s 2,100 square feet as compared to a three-bedroom home that’s 1,200 square feet, that’s a dramatic difference in square footage. That’s going to greatly affect the home sales price.
Another thing, make sure it’s the same school district. Even if you’re in the same area and you can be in two different school districts, that will greatly affect your value if one school district is better than the other.
Adjustments that need to be made to the comparables. You have your comparables, they are comparable. They are very similar, as similar as it can be. You have some sold comparables, we call them comps. You have some sold comps, you have some contingent comps, some active comps, now you need to account for the differences.
Your realtor who runs your CMA will probably do this, but they don’t always. It depends on how busy they are, and how much they know about it. When you get your CMA report and at the end, it says, “Our suggested sales prices this…” Don’t take that and say, “Okay, that’s what it worth.”
These are things that you now should make sure were done or that you can take into consideration yourself.
Adjustments need to be made on comparables for size differences. Like I mentioned, the difference between 2,100 versus 1,200 square feet, that’s going to be big. Number of bathrooms, that’s important. On your CMA you will see three bedroom, if you’re buying a three bedroom, one bathroom you will see three bedroom, two bathrooms or three bedroom one and a half. There has to be some sort of adjustment down for your three bedroom, one bathroom.
Whether the house has an air conditioner or not, central AC we call it. A house that has central air, it probably has a little bit more value than a house that doesn’t. Whether the house has a garage or not, compare that to your property. Whether the house has a yard, that makes a difference. There is no bottom line cookie-cutter adjustment to make for each of these. You need to speak with realtors in the area to help you determine what those numbers are, but having a yard is very important to some people.
Participant 4: In a home how much is the adjustment let’s say, between two bedrooms or three bedrooms? Or a bathroom, two baths or three baths? Is there an amount that you have to–?
Presenter: You need to speak to the realtors you’ve got relationships within that specific area. We found, in one area, that going from a two to a three bedroom, is probably going to be about a $20,000 to $50,000 difference depending on how big that third bedroom is, because the makeup is primarily families. If that area consisted of smaller families, like a husband and wife and one kid, then the jump from a two bedroom to a three bedroom wouldn’t to be as much.
It’s important that all of this due diligence goes together. You have to understand the picture as a whole, and then once again building those strong relationships with people you trust in the area who are educated that’s invaluable also.
Another adjustment would be the location, so for example, if the house that’s a comparable is closer to a major highway that could get you there quicker, there may be an adjustment for that. Closer to a park, there’s just different little things to take into consideration. I’m not saying that you should spend 20 hours doing this, but put some of your time and energy into and it will pay off.
Then your next step in your ARV process is considering the outlier factors. I love this picture because you see that there’s some sort of power plant there [See Video 12:55]. That’s an outlier factor.
Outlier factors could be the street. Is it on a major road? That’s a big outlier factor that just by looking at the MLX, and just by looking at the pictures wouldn’t tell you.
If the property you’re looking to buy is on a major street, what I mean by that is like two lanes each way where cars would go at 45 to 55 miles an hour, and the other homes are back on a quiet street, you’re going to need to detract your value for that. That’s going to be less attractive. I know at least for myself having my wife and kids back on a quiet street as compared to being right on a main street pulling the car out of the driveway, those things are major outlier factors that you want to take into consideration.
Power lines, what I mean by that is, are the posts in the power lines right in the backyard? People get scared about radiation and different things like that, so you want to try to take that into consideration if possible.
Railroad tracks, I don’t know you guys have railroads here in California? If the property you’re looking at has railroad tracks in the backyard, that’s something- when someone’s going to buy your property, or your tenants are going to rent your property and they hear that train whistle running by, that may be a detractor. Something you want to take into consideration.
Also, business activity, are you right next to a major business park where there’s trucks and cars coming in and out all day until the evening? Something to take into consideration. Any other outlier factors anybody can think of?
Participant 6: Well, how many bridges do you have in Pittsburgh?
Presenter: We have the most bridges in the world. We have 446 bridges.
Participant 6: Are those a benefit or is a turnoff?
Presenter: It’s very helpful because you don’t have a lot of traffic. If you live by a bridge. It’s just normal traffic. If you’re right under a bridge, that could be a deterrent because you have a lot of cars going over top of you, but there’s not many homes that are right under the bridge but that’s a good point.
Participant 7: Shopping.
Presenter: Shopping. Very important. Shopping can be an outlier factor. How close is the home to have access to shopping? You could be in the same neighborhood and you can have one home that is in walking distance from the main street with shopping and food and things of that such, and another home that’s further away. That’s a good outlier factor. Anybody else?
Participant 8: Airport.
Presenter: Your proximity to the airport. Very good.
Participant 9: Parks.
Presenter: Parks, especially with families.
Participant 9: Rec centers.
Presenter: Very good. Parks and rec centers. Anything else?
Participant 10: Hospitals.
Presenter: Hospitals, that’s right.
Participant 11: When you’re talking about some of these things, like it being valuable to be by a bridge in Pennsylvania. How do you know what is of value in a certain area?
Presenter: Once again, your relationship with either an experienced team, an experienced realtor, or a combination thereof will help you to determine this. These are outlier factors. Most of the time, these outlier factors aren’t going to make or break a deal, but sometimes they can change your value. It depends on how much room you have in your evaluation.
These are things that I’m stating that we do that you may not take into consideration because you don’t do this every day. We are doing this every single day, so we end up taking all of this into consideration. We are the team that knows the area, but it is different in areas we don’t know so well. Recently, in Pittsburgh, we started investing a lot more on the east side of town.
We hooked up with realtors on the east side of town who know that area like the back of their hands and we made sure–this is very important–the realtors that we hooked up with are real estate investors themselves. A non-real estate investor realtor isn’t going to accurately be able to give a real estate investor the information they need. I forgot to point that out at the beginning.
When making relationships with the teams you’re working with and the realtors you’re working with, make sure they’re real estate investors. That’s what I like about – I forget the guy’s name who does the homeowners insurance up here. I don’t work with him right now, but I’m going to contact him and maybe start to build a relationship with him. The fact that he’s a real estate investor is major. Anybody on your team you’re working with as a real estate investor, you want to make sure that they are also real estate investors.
Video 2 Transcript
Now you have to analyze all this data. What to do once you receive the CMA? The CMA will provide an opinion as to the property value, but you must make your own determination. First, you gather all the data. Now you process the data.
Look at the pictures of the comparables to see their condition. This is something a lot of people don’t do. When you get a CMA, normally, the pictures come up in the top left corner and there’s numbers 1 out of 20, 1 out of 10. You can click on those pictures to see the condition of that property. For example, say the property I’m looking at, the CMA has determined and my knowledge has determined that that property value should be between $65,000 to $75,000. I see a comparable, a recent sold comparable that sold for $45,000.
What I do is, I open the pictures and look at them, and I can tell from seeing those pictures that that property is completely out of date. That property needs new flooring or needs painting. It probably needs a new hot water tank, maybe a new furnace. Just from looking at that, I can tell that that property probably needs between $15,000 to $25,000 of renovation. Now I’m able to accurately assess that comparable. You can’t just take a comparable by what it sold for. You have to look at those pictures and figure out what is the situation with that comparable.
In addition to that, while you’re looking at your comparables, if you can use that app, he told me about [00:02:00] at the same time, you want to use Google Map. I like what Maggie has, Maggie with RealWealth has two screens up in her office. I’m going to start doing that because that’s amazing. You could have your CMA up and at the same time as Google Map and you can map out where that property is in location to your property, and that’ll make a difference. You want to take your adjustments into consideration, you want to take your outliers into consideration, and then you want to make your own determination. That’s everything we do when working within CMA.