So, you’re looking for an investment property to ﬂip? How do you analyze the potential of the property? You get comparable properties, right? But are they comparable properties? You must build your analysis from the ground up. Unfortunately, you don’t have the luxury of time, you need to decide quickly and make a wise decision.
Having a reliable system for your analysis is critical. I recommend you start with a radius search of no more than 1/4 to 1/2 mile. The further you get away from the subject property, the comparable properties are less like the subject property in a variety of ways. The comparable properties might be on the other side of a major street, which can add or subtract from the actual value. An appraiser will tell you that the further out the comparable properties are, the more adjustments they must make for oﬀsetting factors; i.e. distance, diﬀerent neighborhood, other amenities, etc. When you have a tight radius, the age, size and other characteristics tend to be similar like the subject property and will give you the best data about the subject property.
The next important step is to look at the square footage. At The Equity Finders, we analyze all properties on a price per square foot basis. This is the great equalizer when you are analyzing properties. It will help you when you must make an informed and quick decision. The exclusive SmartMap software we use at The Equity Finders has a tight criteria of plus or minus 10% of the square footage to evaluate the comparable properties. This keeps comparable properties as close as possible to the subject property, which then allows us to use the average price per square foot to determine the value of the subject property.
But you ask, “We are talking about ﬂipping a property, how do we calculate ARV (After Repair Value)?” Great question! This leads to my last point on comping investment properties for this article. In this scenario, you need to consider the following:
Everyone wants to buy low, renovate and then sell high, as well as move it fast. First, you need to know if you are buying properties in a transition area. This is critical; you don’t want to be the canary in the coal mine. The comps will tell you this, if you are using the right system. The renovated comps will have a higher price per square foot, than the rest of the comps in the area. Multiplying the subject property by the average higher price per square foot will let you know the subject property’s after repair value. Second, the system you use should have all the pictures of the comparable properties. These pictures are invaluable. They give the details of what was done to the property to get the ARV price. My friend Adrien Burkhart, an AZREIA Associate, always says, “if the area is an 8 out of 10 you only want your property to ﬁnish out at an 8.5.” One of the big reasons people fail at ﬂipping, besides not having a good system, is they either over improve the property, using money they will never get back, or they don’t spend the money required to move the property. Finally, the last piece of the puzzle, the average days on market. This will tell you what your marketing time will be.
As I mentioned earlier, you need a reliable system when analyzing investment properties. At The Equity Finders, we use our exclusive SmartMap technology, which gives all the data needed to help you make a smart investment decision.
by Laura Leatherdale