THE REAL ESTATE CENTER

Given the erratic behavior of the stock market, many investors have opted to put at least part of their investment funds into real estate. Although their decision to invest in real estate may have been a good decision, and they may make lots of money, their success in real estate investing will be due at least in part to the quality, completeness, and accuracy of the process they use to establish a purchase price and submit an offer. Based upon (1) my experience working with real estate investors and (2) my personal experience investing in real estate, I developed the 10-step process below for establishing an offer price on an investment property.

1. Get a comparative market analysis for the property you are considering purchasing. This will give you an idea of what the property will sell for in an average condition for the neighborhood.
2. Use a checklist (e.g., roof, flooring, paint, appliances, etc.) and identify all problems that need repairs, replacemments, and/or remodeling before the house is marketed.
3. Estimate the cost of the repairs, replacements and/or remodeling identifies in step 2 above.
4. Estimate/get the estimated closing costs, commissions, etc. for (1) the purchase and (2) the sale of the house.
5. Estimate how long it will take to get the property ready to put on the market, and then how many months it will take to sell and close on the property.
6. Estimate the following miscellaneous costs that will be incurred until the house sells. These miscellaneous costs include loan payments (if you plan on financing the purchase), utilities, insurance, lawn care, taxes, etc. Multiply the number of months estimated in step 5 above times the estimated monthly cost of each miscellaneous item.
7. Using the results of step 1 (or an appraisal that includes the repairs and remodeling planned) , establish an estimated sale price for the property. Consider how the condition of the house (after repairs and renovation are completed) compares to the condition of the houses used as comps in step 1, and increase/decrease estimated sale price accordingly to reflect the anticipated relative condition of the house.
8. Establish the amount of profit you want to make on the sale of the property.
9. Calculate total estimated expenses using the results of steps 3, 4, and 6, and add the amount of profit established in step 8 to the total estimated expenses.
10. Subtract the result of step 9 from the estimated sale price established in step 7. The result of this step is the estimated offer price.

The process above is simplified for the purpose of including here as a posting on this blog. I highly recommend that the process be augmented by the use of an investment spreadsheet with supporting formulas to reduce the effort associated with the implementation of the 10 steps and improve the accuracy over manual calculations.

The real estate industry offers a tremendous opportunity to anyone (young or old) to make a lot of money. However, not everyone who wants to make a lot of money is suited for real estate sales. The following is a test that I created (it has not been verified by a testing organization - it's just my opinion) .

1. Do you want to make a lot of money?
2. Do you like working with people?
3. Are you willing to work long hours and weekends?
4. Are you willing to be available for phone calls 7 days a week?
5. Are you a good coordinator of schedules and activities (e.g., home inspections, appraisals, termite inspections, closing the transaction, etc.)
6. Do you handle frustration well (e.g., when a sale does not close because of some unexpected reason or event)?
7. Are you willing to do a lot of paper work even if you do not like it (e.g., real estate sales and listing contracts, disclosure forms, estimating closing costs, etc.)?
8. Are you good at following rules (e.g., the Alabama Real Estate License Laws and Rules)?
9. Are you good at simple math/arithmetic (e.g., calculating square feet, cost per square foot, figuring percentages, calculating commissions, estimating closing costs, etc.)?
10. Are you prepared to spend the money it takes to get started in the real estate business and maintain your real eatate license every license period?

This test is designed to give you an idea of what it might be like if you enter the real estate profession. There is no magic score that indicates you should or should not become a real estate agent. The purpose of the test is to help you perform a self-evaluation of your potential to succeed in the real estate business. It is one input into your decision to become a real estate agent.

Click here <http://arerec.cba.ua.edu/License%20Index/License%20Law/code/34-27-32.htm to see Alabama requirements for a real estate license.