Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy.
I’m Casey Denman, a tax sale veteran, expert, and trainer, author of the tax sale playbook, founder of the tax sale academy and your host here on the tax sale podcast.
Thanks for joining me on today’s podcast, and as always, at the conclusion of this podcast, if you’re looking to learn more about investing in tax defaulted real estate head to taxsaleacademy.com. That’s taxsaleacademy.com.
Today we’ll be discussing valuing real estate. The values of real estate are what we base on max bids off of – their the reason we make or lose money. There really isn’t much as important to us as the value of the real estate we’re buying. It IS our investment.
So, how do we determine this value? Well, there are a number of ways including the income capitalization approach which places a value on real estate by the income it receives – this is primarily for income producing properties of course. You also have the cost basis approach which values the improvements on the property less depreciation and plus land value – this is typically used for more unique properties.
Then we have the comparable sales approach which is what we’ll be focusing on. This approach will apply for 99% of the properties you’ll ever purchase. The comparable sales approach is based around the premise that a buyer will not pay more for one property than he could pay for an equally comparable property. In other words, if two homes are side by side and they are exactly alike, and one is $100k and the other is $120k; every buyer will pick the $100k house.
Now, this episode is going to go over a summary of the comparable sales approach. You can get an appraiser’s license with a few a couple hundred of hours worth of training, a year’s experience and some state boards so there is quite a bit to valuing property.
But let’s go over the brief version of the comparable sales method:
1. The first step is to understand the property you’re looking at. This is called your subject property. If you don’t know anything about your subject, you can’t move forward. So learn about your subject property – type, area, size, condition that kind of stuff. It’s going to be difficult to learn too much about most tax sale properties so understand that you’re shooting for a ballpark number. Appraising in general is an art and not a science – meaning that two different appraisers will likely provide two different valuations. They might be close or they might not be. Your goal is to provide a valuation off of what you can see. Don’t assume the kitchen counters are granite, with a deep rich imported wood flooring, crown molding and spacious rooms. Instead, assume that the inside is a complete wreck. Toilets gone, counter tops destroyed, that kind of stuff. Know your subject and assume the worst.
2. Find comparable properties. Utilizing a number of the different tools we discuss in the academy, including primarily public records, you’ll want to find comparable properties. There are two ways to do this. The first what many people assume is the correct way and that’s to search for active listings. These are the easiest to find of course, since they’re actively being marketed. But these only indicate what your current competition is. They don’t indicate what a buyer is willing to pay for something. The best way and the true way to value real estate is by using recently sold properties that are comparable to your subject property. We refer to theses as “comps” short for comparables. The more closely your comp resembles your subject property the better. If you have the same exact house directly next door, that’s ideal. Of course, that rarely exists in the real world, but understand that any comps you find should be as close as possible to the subject property. Location, size, characteristics, condition, all that stuff. The date sold should be a recent as possible. And of course, be sure you take note of the sales price.
3. Once you find these comps, you’ll begin to compare them to the subject property. If the comp is bigger, then you’ll adjust the value downward to reflect that. Or if your subject is bigger, then your comp would assumingly be worth less. So factor that into consideration. At this step you’re working to determine how to adjust the values of the comparables in relation to your subject property’s characteristics.
4. From there, you should be able to have a solid idea of the value of your subject. You can even use a weighted average of your comps to given a higher weight to the property that most closely resembles your subject. This will leave you with your subject properties value utilizing the comparable sales approach.
5. And of course, as a tax sale investor buying in a somewhat blind manner we need to make adjustments to that number since we must assume the parts of the property that aren’t visible will end up being in poor condition. Also assume the worst and undershoot the value – and if it’s better than expected, you’ll end up with your money in your pocket.
So, there’s the comparable sales approach in a nutshell for tax sale investors. Learn about your subject property, find comps, adjust these comps, use a weighted average if needed, and then add a buffer.
Obviously, this is just the abbreviated version and there is much more on this. We actually go into quite a bit of detail of valuing properties, since it’s so important, inside the academy, but I wanted to provide you with some of the basics.
Thanks so much for joining me on today’s episode.
And if you haven’t done so yet, be sure to pickup your copy of my free book, Tax Sale Playbook, which you can get at TaxSaleAcademy.com. The book itself is free, we just ask for your help covering the nominal shipping costs.
And as always guys, if you found this episode helpful it will mean so much to us if you take a few second to leave positive feedback.
Take care guys and make it a successful day.
See ya!