Bank Owned Properties still represent one of the greatest opportunities for saavy Real Estate Investors in the market today. See how it works from the inside out. This 5 part series is an entire REO Investing Course in disguise, so take advantage of these implementable strategies! 

 

HOW TO EVALUATE THE PROPERTIES

After you absorb this educational blog you will be able to:

  • Qualify a property as a deal in 5 minutes or less
  • Determine the rental cap rate return of a property
  • Determine the ROI for any property
  • Understand CASHFLOW
  • Educate your investor buyers on various investment strategies

 

HOW DO I KNOW IF ITS A DEAL?

This is the question I get more than any other from aspiring real estate investors. It’s also the thing that new investors run from more than any- thing else. Maybe it’s an inherent fear of math. Trust me, I understand. Whatever the reason, people tend to avoid true, objective evaluation of property deals. In doing so, you are avoiding the one thing that can separate you from “a dime a dozen” Realtors and “wanna-be investors.” Don’t be that guy!

I hear it all the time from bird-dogs that bring me properties. “Matt, this property is a great deal. It will make you a lot of money. It will be easy to fix up and flip. It will be a great rental return.” I always laugh to myself when someone attempts to qualify the investment value of a property by using descriptive terms like “great deal”, “a lot of money”, or “easy to flip”. These terms are totally subjective. They tell me nothing about the property and let me know that you have no idea what you are talking about.

Here’s a tip: If you don’t know what a good deal is, you can’t point it out to others. If you don’t know how to determine why a property is a good investment, why would anyone buy it from you?

Look at those inadequate descriptive terms above and ask yourself, “Would I put my hard-earned money into a property described like that?” I seriously doubt it. Here is what I would want to hear from a trusted real estate partner:

“Matt, I have a property that I think will meet your buying criteria. This property can be bought and renovated for around 65-70% of its after-rehab value. I calculated the ARV using real comps of similar homes sold within the last 90 days. You are looking at a 20-25% ROI.”

Or if it’s a rental investment I would want to hear:

“Matt, this rental property will yield a cap rate of 13% after all expens- es, which include insurance, taxes, property management, vacancy and maintenance reserves.”

Do you see the difference between the first examples and these last two? The last two clearly show a knowledge of the real estate investments that you are attempting to sell. You are saying to your prospect, “I am not just hawking prop- erties. I analyze and qualify true investment potential.” This kind of knowledge and understanding of real estate fundamentals will separate you from the crowd and bring real value to your investors.

 

This next section will be a little challenging, especially for those of you who are as mathematically challenged as I am. But trust me, if I can get it, anyone can! At the end of the section, I will give you some tools and some short cuts, so don’t worry. Okay, put on your analytical hat, because here we go!

shutterstock_185901971Return on Investment (ROI)

Sometimes known just as RETURN, ROI is the ratio of money gained or lost on an investment relative to the amount of money invested. ROI is a measure of investment profitability, not a measure of investment size. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage and indicates cash flow from an investment to the investor over a specified period of time, usually a year. If someone says that they made a 20% return, they usually mean that the investment made them a 20% gain that year.

In general, the higher the investment risk, the greater the potential investment return, and the greater the potential investment loss.

So, what is a good return on investment for a property that you will buy, fix, and flip? You will get many different answers depending on whom you ask, but here is my general rule of thumb:

After renovations, I want to be into a property for 65-70% of its current val- ue. For example, if a property is worth $100k, then I do not want to have any more than $70k invested in that property. Assuming I pay Realtor fees, buyer concessions, and closing costs totaling $10k, my profit will be $20k — roughly a 30% return on investment. I arrived at that percentage by dividing 20 (my profit) by 70 (my invested capital). Make sense? Good. Now you should be able to use the same process to quickly calculate the investment return for any flipped property you are selling. Your investor buyers will love you for being able to explain how this is done and they will value your input greatly.

NET OPERATING INCOME 

Generally, NOI is defined as the yearly gross income less operating expenses.

CAP RATE

When someone says that a property is a 10 cap, what they mean is the prop- erty will produce 10% return. Basically, cap Rate is the ratio between the net operating income produced by an asset and its capital cost (the original in- vestment amount). commit this simple formula to memory.

For example, if you bought a house for $100,000 and it produces $10,000 in annual net operating income, then:

The asset’s capitalization rate is ten percent; one-tenth of the property’s cost is paid by the year’s net proceeds.

A Word about other Wholesalers: In any decent investment market, there will be opportunists tak- ing advantage of the foreclosure crisis. FIND THEM. See what they are selling and for what price. They may be your competi- tion, but they are also the best way of gauging the underground bank-owned fluctuating price line. Subscribe to their lists, talk to them, keep an eye on their inventory at all times. See what moves and what they get stuck with. Like I said, they’re your competition, but they can also be your best source for determin- ing the ever-changing value of your property market. USE THEM!

shutterstock_78123298How to Get Good Comps:

www.Zillow.com: If you don’t have access to the MLS, this is the next best thing. This is what I use to quickly search properties when I am on the road. Not surprisingly, there’s an app for that. Enter your property address and it will bring up a variety of information. The most important thing to look at is the “zestimate,” their valuation of the property. These values aren’t always 100% accurate, but they are a good starting point. The other thing to look at is found halfway down the page on the right side. “Similar homes for sale” will show you a sample of comparable homes on the market. “Nearby similar sales” will show you all available similar homes that sold in the last year. You will want to focus on the properties that sold in the last 90 days.

www.Eppraisal.com : This is a good secondary source for property value estimate, but doesn’t have a fraction of the info you find on zillow. It’s still good for a comparison though.

www.Redfin.com: Not available in all areas of the US, but a good source for property info and val- ues. (These guys are mostly out west right now. Sorry, east coasters!)

MLS Comps/Realtors:  This is the best source there is. However, it can only be accessed by Realtors. This is the source for the most accurate property details and real-time compara- ble sales. However, it is limited to listed (actively or previously) properties. This won’t help you see properties sold privately between owners, auction properties, or properties bought directly from the bank without a broker involved.

 

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Real Estate Investor, and friend to the Real Estate Freedom community, Rob Swanson just released a training video that goes through a probate investing scenario, step-by-step.

In this video you’ll learn:

Learn how to get probate leads that no one knows about by getting the houses released from the probate early — the families will love you. SEE THE FULL TRAINING VIDEO HERE!

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Why do 97.4% of Real Estate Investors FAIL?

This new video by Matt Andrews reveals why most Investors are dead before they complete their first flip and how you can insure that you are one of the 2.6% who profit on EVERY DEAL. The Secret is… SEE THE VIDEO HERE

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