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Real Estate Valuation Methods

How do you value a property? How do you evaluate a property? There are different methods of doing this depending on where we’re at in the market cycle.

Is the real estate market in a bubble? Did it just pop? Is it in a comeback? That’s gonna play a huge factor..

Let’s get some of the facts straight. Real estate overtime goes up in value but I think all us is aware that I doesn’t just go up consistently.There are two major methods on how we evaluate properties.

infographicBubbles & Troughs

Real estate overtime has these things we call bubbles and troughs. Let me give you a little bit of history on this because you’re going to evaluate your properties different in cash flow markets in times of troughs. With the right strategy, you can make money in both bubble, and troughs. If you got the right strategy, it doesn’t matter what the market is doing, but you have to know how to value a property.

What is CMA?

billionphotos-1025040What is a Comparable Market Analysis? I’m interested in buying a house and the CMA basically says go back in the last six months. Find five or six nearby properties that are similar in size, age, bedrooms, bathrooms, features, lot size, and use a system that most realtors have access to through the multiple listings service – the MLS.

102You can select the five best properties and compare them to the property that you’re looking at buying, and it will usually spit out some kind of thing saying, “Well, these five properties in the last six months roughly sold for $200,000 and you’re buying this for $160,000?”. Yeah, that’s a good deal. I’ve got roughly $40,000 of equity.

Now does it mean that there’s $40,000 of equity? No. There’s only one way to know that. A home is only worth what someone’s willing to pay for it. But if you’re wicked fast and you know how to find good deals, then you can substantiate that valuation. You can substantiate that equity. At least get as approximately as close as you can through the CMA.

We spend 80% of our lives in the bubbles and 20% in these recessions. Most people make the mistake of investing or buying real estate when we are at the peak of the bubble at the trough is when the wealthy will buy the most number of real estate. the problem is you can’t use a CMA because remember, it’s talking about what we’re selling in the last six months. Well if I’m buying a property where things will still get lower in the market, then six months ago, things were on the decline so it doesn’t look good.

Similarly, If I’m in a re-emerging state, I’m always chasing the market;
so CMA’s don’t work! So what do you use? You use what is called a rebuild value.

Rebuild Value

phoenix_azI buy a property, for example in Phoenix, for $130,000 and it cost $210,000 to rebuild plus Iand, well there’s a discrepancy of roughly $80,000 right there.

That rebuild value that the insurance company gives me which is based on “Hey, if this thing burnt down today what would I have to pay to rebuild it?” gives me probably my closest guess of not what’s it worth but what it will be worth in the near future. Why? Because we know the population like we talked about is driving the values at least back up to the rebuild value.

And so when I go into equity growth markets which is what I call these as opposed to cash flow markets, I’ll buy these homes at these huge discounts but not based on today’s value, based off of what it will cost to rebuild. And I know from history I don’t have to sit there very long before I can capture often a very sizable profit.

just quick recap: CMAs are what you use in cash flow markets, normal markets, where we spend 80% of our time and in these equity growth markets, we’re using the rebuild value that you would get maybe from an insurance company to give you the closest idea of what this will be worth when real estate goes back to just building homes normally.

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