Analyzing a deal properly before investing should be done for both you as the investor and for the lender. You want to analyze deals quickly, correctly, and, if you’re going to borrow money, you must be able to present the facts properly so private lenders see that you have a solid deal.
Here are some tips on what to look for, evaluate, and understand before you decide on investing in a distressed property, and what to tell your private funding source or hard money lender to position yourself for success.
1 – Know the market and neighborhood
Regardless of your experience level in real estate investing, it’s important to know the environment you’re in. This plays a critical role in investment decisions.
Distressed properties may be single-family or multi-family houses, condominiums, and even homes in the luxury market. We recommend that beginner investors stay in the basic housing market—homes with three or four bedrooms, two to three bathrooms, nothing too fancy.
Also understand the neighborhood. Are there bad neighbors, easements, commercial properties nearby, or other elements that could dissuade future buyers? Researching the neighborhood will help you understand what the market will really bear when it comes time to flip the house—and will inform how much you should put into the renovation and upgrades.
2 – Examine the property inside and out
Note all the property’s characteristics: house style, square footage, number of bedrooms and bathrooms, lot size. These criteria will go into analyzing your comparative sales (comps), which will help you arrive at the sales price later. Do a careful walk-through of the entire property to determine what will require repair, replacement, or cosmetic work. Major areas to look at are the kitchen, bathrooms, heating and air conditioning, roof, siding and windows.
3 – Get renovation estimates
Make a good punch list from your walk-through and get quick cost estimates from reliable contractors for needed renovations/repairs; you will factor those into your total costs and after-repair value (ARV). Don’t forget to include the cost of new appliances and fixtures.
4 – Pull accurate comps
A good real estate agent who really knows the area will pull accurate comps for you, with homes that are as similar as possible to your target investment—number of rooms, square footage, similar environment/neighborhood, age, and condition are among the factors to compare. This comparison enables you to determine your listing and sales price.
If the other homes’ square footage differs, try to stay within a few hundred square feet for comparison purposes. Remember also that busy streets vs. quiet side streets affect values and with a condo, you can’t compare something on a high floor with one of the first floor, because those values will be quite different.
TIP: If there are no accurate comps or only limited comps available for the property, move on.
5 – Calculate absorption rate
Find out the number of competing homes for sale in the area—another important part of the due diligence. Research how long the houses have been on the market, especially those that are renovated. Then determine the absorption rate, which tells you the number of months it would take to sell a home that’s currently listed for sale. The formula is total number of active homes on the market divided by the total number sold within a certain time frame, such as one month.
For example, if there are 124 active homes on the market in your target area, and 35 sold within a month, the absorption rate is 3.54, so it will take approximately three-and-a-half months to sell the rehabbed property.
6 – Determine the after-repaired value
Look at the properties that have sold within a relatively short period of time prior to your investment (up to three months), which is what real estate appraisers and hard money lenders do. If you plan to flix and flip the house in a short period of time, your ARV should not fluctuate much. After you’ve researched the property, determined your construction costs and after-repair value, and arrive at a target sales price, you will know—based on your available cash in hand—what you need to borrow to get the deal done.
At Peak Private Lending, we work with real estate investors at all stages of their business, from beginners to seasoned pros, who need capital quickly for their fix-and-flip real estate deals. Schedule a deal analysis with Glen and Paul, or get a rate quote for a loan from NJ’s go-to authority for private real estate lending. Read more about our private lending for real estate investors at www.peakprivatelending.com.