If you listen to the media long enough, you will hear plenty about the real estate market. Some of it might even be relevant. For the most part, the media analysts do not really understand that the market is composed of hundreds of sub-marketplaces.
In some of those sub-marketplaces, real estate values are solid and not diminished as much as in other marketplaces. When analysts talk about higher selling prices or lower selling prices, they are talking about national averages. The sub-markets have trends. Investors can learn much about the market by knowing median selling prices in the sub-area, how long homes are taking to sell and what percentage of reported sales are short sales or REO’s.
When analysts report housing trends, they are talking about national averages. Most investors focus on one specific sub-market. What is happening in Albany New York, has very little to do with real estate sales in Naples Florida. In fact, sales in Naples Florida have little bearing on the market in Tampa Florida.
To be on top of the market, the investor must either have a real estate agent they trust or have a presence in the area that enables them access to the area’s multiple listing service. Successful investors often know more about their area of concentration than the real estate agents in the area.
Investors can assemble a Comparable Market Analysis as well as any agent. Investors know how to see what properties have sold for in the past, where to find a tax map, how to research the tax history and how properties are assessed.
In addition to being able to put a Comparable Market Analysis together, investors know the square footage cost of new construction. Using the square footage cost of new construction can be helpful in determining values in the area.
If the investor is interested in a property with 2400 square feet and the cost of new construction in the area is 200 per square foot, it will cost 480,000 plus the cost of a developed lot to acquire a new home. To arrive at a ballpark price for the renovated 2400 square foot property, the investor can determine the value of the lot and add 480,000. When it comes time to sell the short sale, the home will most likely have a value in that range.
The investor must determine if the property can be purchased at a price that allows for the repairs and a healthy profit. Of course, there will be carrying costs that need to be accounted for as well as the cost of repairs.
The square footage approach to value should be used to determine a ballpark only value. Combining the CMA with the square footage (replacement) value will be the best way to determine the true value.