Transcript:
How to Value Tax Sale Properties
Welcome to the Tax Sale Podcast, where tax sale investing is made easy. My name is Casey Denman, I’m a tax sale veteran, the leading tax sale expert, author of The Tax Sale Playbook, founder of The Tax Sale Academy and I’m your host right here on The Tax Sale Podcast.
Thank you so much for joining me on today’s podcast episode. This is a completely free podcast and is brought to you through and because of The Tax Sale Academy. If you’re looking to learn more about investing in tax defaulted real estate, just head to TaxSaleAcademy.com. Again that’s TaxSaleAcademy.com.
Today we’ll be talking about valuing your tax sale properties. This is obviously an extremely important topic and is going to be one of the most important skills you must learn. So in today’s episode I’m going to walk you through the process, as best I can through an audio format.
Now, before we start going through the process, I want to go over a few very important points:
(1) Valuing real estate is a detailed, comprehensive skill to learn. Although I’ll do my best, please understand this is a podcast episode so it won’t be nearly as detailed as we teach inside The Tax Sale Academy which isn’t nearly as detailed as the process appraisers go through. To become someone certified to appraise real estate can take upwards of 200 classroom hours, 1,500 hours of experience and a couple hundred appraisals. I simply can’t do that.
(2) Valuing real estate is an art, not a science. There is no perfect formula that will give you the precise number every single time. At the end of a day, a property is worth the most a buyer will pay for it when met with the least a seller will sell it for. The marketplace determines true value, not you or I. Instead we’re merely using data points to predict a property’s value.
(3) When I learned real estate valuations, it was down to the penny. That’s useless for tax sale investors since it’s take so long and becomes inefficient for us. Instead, I teach ballpark valuations. Get within 5% or so and you’re doing just fine. Remember, we are buying these at steep discounts.
(4) Once you understand the process we go through, you’ll be able to get these ballpark figures within minutes or perhaps even faster if you’re familiar with the area. There are many areas I invest where I can look at the subdivision name and have a solid idea what the property should be worth before I even start running numbers.
(5) Stop being lazy. Stop looking at the Zillow.com numbers, the Realtor.com numbers and whatever else easy way you’re trying to get values. A lot of those values are computer generated – they’re close sometimes and other times they couldn’t be more wrong. What if you buy something when their numbers are off? Don’t be lazy.
Ok, there are a few different ways to value real estate. One is the income capitalization method, which puts a value on the future income a property will receive. It’s a great way to value income generating properties. The second is a replacement cost valuation which is a great way to value real estate that is just different, such as a church or football stadium. With this method we take the land value and add it to the depreciate building value. Both of those aren’t going to be used too much by tax sale investors, so let’s discuss the most common method which is the comparable sales approach.
The concept behind the comparable sales approach is that a buyer is not going to pay more for one property than he would for an equally comparable property. In other words, two houses side by side exactly the same, he’ll choose the cheaper one.
At it’s core, you’re comparing properties, making additions and subtractions as necessary until you determine a value of a property.
Let’s go over the five step process.
To begin your valuation, you’ll need to know your subject property which is the property you’re wanting to get a value of – the one being offered at the tax sale. This is where your research phase will come in handy. As a tax sale investor your research phase is much more comprehensive than what a typical appraiser would look for. A typical appraisal might include an all-encompassing “if things are the way it should be” type statement. In other words, if the title is clear, if access is legal, if everything is “normal” then this is the value. As a tax sale investor, it’s up to us to determine if it’s normal or not. Even so, I’ll usually start my research with a quick run through of the process we’ll be discussing today.
The more detailed you are in your analysis of the subject property, the more accurate your valuation will be. Of course, as I mentioned previously, we can’t be ultra-detailed otherwise we’ll be valuing real estate and not investing in it. I generally like to start with a breakdown of the basics. What is the property? Is it vacant or is there a building of some sort? This will provide us with the minimal information we need to source comparable properties or comps. From there we can get more and more detailed until we have a strong handle on exactly what we’re looking at. It could be a vacant lot in this subdivision, on this street, with this nearby and this size and shape. Or it might be a house in this area of the city, that’s three bedroom, two bathroom and 1,500 square feet.
After you have a handle on your subject property, it’s time to find comps. In the perfect world you’ll have a subject property in the middle of two of the exact same properties that have recently sold in the manner you want to sell it. Of course, that’s awfully rare. What you’re looking for are physical and transactional similarities of the comparable properties. You’ll want to have at least two, but hopefully more comparable properties that have recently sold. The more recent the better.
In the next step we’ll be making some adjustments, but right now focus on finding something as close as possible to your subject property. A ¼ acre lot is not comparable to the 2 acre parcel next door. A ¼ acre lot is not very comparable to a ¼ lot that’s 24 miles away. A site built house is not comparable to a mobile home. Likewise a property that sold last week is not a comparable transaction to one that sold six years ago. The same can be said for a property sold with cash compared to one that’s sold with $100 down at 10% interest with owner financing – two different types transactions. Obviously, no two pieces of real estate and no two transactions are exactly alike. But if you work to find the closest comps possible it’ll make your next step much easier.
The next step is to analyze and compare your comps with the subject property and start adjusting. And it’s important that you need to be very objective here. Be smart, be conservative. This is not the time to get shiny object syndrome and start inflating the numbers to make yourself feel good about investing in something. This is the time to be smart – much of your investment depends on your valuations so do it wisely.
When you compare the subject and the comps what exactly do you see? Is one bigger or smaller? What’s the specific location? Any valuable features included with one but not the others? An actual appraisal will have a chart that includes items like sit size, building size, views, quality of construction, age, condition, room counts, functionality, HVAC systems, garages, carports, patios and decks, and other pertinent information. What you’re looking for here are the reasons that your property is worth more or less than the comparable properties. A quick note is to always assume that your subject property, if it’s a tax sale property of course, is in poor physical condition.
The next step is then to begin making calculations based on everything we’ve discussed. If you did a good job selecting comps, and provided there are good comps available then this will be an easy step. If you did a poor job selecting comps or you just couldn’t find anything all that comparable then this will be more difficult. What you’re doing in this step is making the decision about how one aspect of the property increases or decreases it’s value. This is a skill that takes time and experience and varies with every single market and every single property. It’s not possible to say as a blanket statement that a bathroom is worth this much, a view is worth this much, and so on.
But from a very basic level, let’s say we have our subject property which is a vacant lot and four comps.
Two comps sold for $5,000 and the other two, which were similar except they were corner lots, sold for $6,000. Using this data we can determine that a corner lot would sell for a $1,000 premium. That’s it in a very simple nutshell.
If the comp is better, you’ll subtract from that comp’s sales price. If the comp is inferior, then you’ll add to that comps sales price. You’re adjusting the sales prices of the comps during this step. So, if we have an interior lot in the example we just mentioned, then we’d have two comps at $5,000 which are interior lots. The other two lots, which are corners would be adjusted downward $1,000 since we’ve determined that corner lots go for a $1,000 premium.
The last step is to take all of your comps, after your sales numbers have been adjusted and use them for a final value for your subject property. Some people will simply average these together, but a better way is to weight each individual property. So for example, let’s say we have 3 comps. We have already adjusted for size, condition and that kind of thing. One is right next door. The other two are 11 streets away. The one right next door would presumably be more comparable to your subject property than the others which are 11 streets away. So, what we could do it apply 40% weight to the property next door, and a 30% weight to the two properties 11 streets away. So you’d take the adjusted value of the house next door and multiple it by 40%. Then you’d take the adjusted value of the two properties 11 streets away and multiply each of those by 30%. Then add them all up and you have your value.
So there it is, valuing real estate using the comparable sales approach. Analyze your subject, then find comps, analyze and compare those comps, make adjustments and then determine the final value. Once you’ve done this a few times and understand the framework behind valuing real estate it becomes extremely easy and can be done very efficiently, at least for the purposes of a tax sale investor.
Hopefully this episode has helped you out. If so, please take a second to leave us a positive review on whatever podcasting platform you’re listening on as it really helps us as we determine where to distribute our free training information.
Valuing real estate is something that we go into great detail on inside the tax sale academy and it’s much easier to understand as we can explain it visually. If you’d like to learn more about investing in tax defaulted real estate, including valuing real estate, just head to taxsaleacademy.com. Once there you can grab my free book or to get access to all of our premium trainings just click on join and become a member of the academy.
Take care and make it a successful day!