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.