How to identify a good deal in today’s market


Lately I’ve been working with buyers. Not to say I have not been selling homes, but it is a buyers’ market – and buyers are getting great deals on homes, all over the country – as well as in Houston.

Most buyers that I come across tell me what they are looking for, and we find it. One of my goals as a real estate agent is to get my clients the best deal possible – financially. Most of the time my clients have been looking at HAR.com long before they call me, and send me houses they are interested in. This is great. I encourage this kind of behavior, because it gets them familiar with what they want, before we go look at 15-20 homes.

I am going to explain how a buyer can get the best possible deal in real estate, in today’s market. The old saying goes “In Real Estate – You Make Money On The Buy”

I am going to explain this article with a sample deal that I closed as of yesterday. My client got a great deal on his home. Here are the details:

After Repair Value: $85,000
Purchase price: $52,000
Repairs needed: $10,000
Equity Capture: $23,000

You can read dozens of real estate books (I have) and they explain how deals work, but not how to find the right deals. I have my own methods of finding undervalued properties for my clients, I cannot publish on the web because others would take my method – but here are some guidelines to go by:

1.       Find out the after repair retail value
2.       Estimate Repair Cost
3.       Find out purchase cost / closing cost
4.       Work backwards
5.       Submit offer

Step #1: Find out the after repair value
The after repair value, commonly referred to as the ARV, is what the subject house should sell for  – after repairs have been completed. Your local real estate agent will be able to get this information off of sold comparables, preferably in the past 90 days. This information is valuable, because you will begin with the end in mind. If there is a $20-40k variance in the after repair value and the list price, then you are off to a good start. If there is no variance, or a negative variance, than the house is overpriced. In my sample deal, the after repair value was $85,000 – and the list price was $55,000, this was a $30,000 variance.

Step #2: Estimate Repair Cost
Once you have determined the after repair value, you need to find out what repairs the house will need. I would recommend doing a visual inspection / walkthrough of the house with your real estate agent. Ask them what they think the repairs will be. Pay extra attention to the foundation, roof, HVAC system, and any sign of flooding or mold. These repairs are the most expensive, and can eliminate any kind of profit or put you upside down. Have a general contractor look at the house, and give you a written estimate on what the cost will be so you know for sure. On my sample deal, the repairs were $10,000.

Step #3: Find out the purchase cost / closing cost
Ask your real estate agent to find out how much the closing cost will be on your house. If you are financing, you will pay more fees in closing than you would purchasing in cash. Your real estate agent should give you an accurate estimate on what your closing cost expenses will be. You can also ask the seller to pay for some of your closing cost. On my sample deal, the closing cost expenses were $950 total.

Step #4: Work Backwards
Add up your Closing Cost, and Repair value and subtract from the After Repair Value. Now subtract your offer amount, and you will come out with how much equity you will capture on buying the property. If you have a negative number, than your offer amount is too high. The higher the number, the more money you will pocket. So for an example, on my sample deal: $10,000 (repairs) + $950 (closing cost) = $10,950. $85,000 (ARV) – $10,950 = $74,050. Then $74,050 – $52,500 (Our offer) = $21,550 profit.

Step #5: Submit Offer
You can run the numbers and see how much you’ll make based off different offers. Once you find a number you are happy with, then have your agent write up the offer and submit to the seller. Make sure you have determined your maximum offer amount, and stand by your offer. I’ve spent 2-3 months negotiating offers, and it paid off.

Now you know how to analyze a basic real estate deal. Don’t be fooled by the media – purchasing is a great way to make equity in a down market. If you can buy right, you will always be able to sell right..

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About redannyday
Danny Day is a local Houstonian who has worked in many different areas of real estate. He blogs about real estate investing, trends, and data that relate to micro and macro markets in the United States, and Houston.

3 Responses to How to identify a good deal in today’s market

  1. shafky says:

    nice blog on real estate, i like it…

  2. Mitch says:

    Hi,
    Very Nice Blog. Your posts are very informative.
    Thanks
    redannyday

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