New real estate investors out there, are you doing your due diligence to protect yourself from a deal that’s sure to go sideways?
Here are six steps (plus two bonus steps I threw in just because I like you) you can take to analyze potential properties and narrow your focus to the ones that are going to be the best fit for you.
Let’s dive right in.
Step 1: Instant Comp and All the Public Data
If you’re working with a real estate agent, they will give you comps. You should trust your agent, but you should also verify what they tell you. The best way to do that is to run a few of your own comps.
Compare notes about how much the property is worth and what the after-repair value (ARV) is. Sometimes my agent and I are on the same page; sometimes we’re not even in the same book. It pays to compare notes.
Then make sure to do your own leg work on comps to verify the numbers:
- properties within 1/3 to 1/2 of a mile
- sold in the last 3 months
- within 1 bed
- within 1 bath
- within 20% square footage
- not across the tracks
Do you and your agent agree? Try to meet in person to go over the numbers and make sure you’re on the same page.
Step 2: Schools
I once did an awesome flip in a neighborhood near where I grew up. It took way longer than I expected to find a buyer, and it was all because there was a negative perception of the school in the area.
The school actually was a great school, but it didn’t have as good of a reputation as another nearby school, and I kept hearing from potential buyers that they would be making an offer if the property were just one suburb over.
There are a few exceptions. For example, in Chicago there are several up-and-coming neighborhoods with poorly rated schools. These neighborhoods have other attractions like night life, restaurants, and new businesses. Often families in these neighborhoods send their children to private schools, so the school ratings don’t impact them. Out in the suburbs, though, school ratings become incredibly important.
Step 3: Review the Property
Before you take much time working out a deal on a property, check for a few red flags that tell you it would be better to walk away:
- Low ceilings
- Bad floors
- Foundation problems
- Poor layout
- Built facing a weird direction
- Homeowner additions or changes (most important in certain states like California)
- Busy street
Some of these issues, such as bad floors or foundation problems, are going to increase your repair costs. Others, such as a poor layout or a property on a busy street, are going to make the house less attractive to potential buyers and make it harder to sell.
BONUS: Look at Pricing History
Learn more about the property. When was it last sold? Has anyone else done a rehab on the property? Has it been on the market in the last year?
Answers to these questions are going to help you figure out how much the house might be worth and how attractive it could be to buyers.
Step 4: Rehab Costs
Figure out your rehab costs. You can do this in a number of different ways. Use AI Office, https://rehabvaluator.com, or get an estimate from a contractor (best option!).
It’s so important here to get an accurate picture of your costs. Don’t just trust your realtor; verify with your contractor.
My personal rule is to never buy a house my contractor hasn’t seen. Even if I don’t see it, I’m ok with buying with a recommendation from the contractor I trust.
BONUS: Cash Flow
All you landlords out there, check your cash flow. Run the numbers on your principals, tax, and insurance. If you’ll be brining in at least $250/month after all your expenses, it’s a good idea to move forward.
Step 5: Go See Each Property
You’re going to form final opinions about potential deals by seeing the property. Check for those possible downsides. You don’t need to take hours; just do a 20-minute walk-through. Note the needed repairs so you can figure out those costs. If possible, go with your contractor.
After you’ve done four or five flips, you can work up a rough estimate of your cost per square foot to do a complete flip. That way you’ll be able to figure out a very rough estimate of the numbers more quickly. But again, it’s best to rely on your contractor for more exact numbers.
Step 6: Run the Automated Offer Formula
In order to quickly figure out whether a deal will work for you, use the Automated Offer Formula:
ARV x 70% – repairs = maximum offer
$160,000 x 70% – $30,000 = $82,000
That 70–75% rehab calculation will vary from market to market. You might get feedback that your offers are too low. Adjust that percentage as needed.
Now it’s time to take those steps and see where they lead. Good luck!