August 30, 2010

Rental Investment Shopping - Took 1st Outside Look At Four Properties

This weekend my wife and I drove by four properties that are for sale in our city.   They are all foreclosures or short sales and relatively low cost units that might make good rental investment properties.   We did not call a realtor to schedule an official look but just drove to the homes and looked from the outside.

Four houses we drove by:

Property #1 :  Cost $130k, 3 bed / 1 bath, 1050 sq ft, foreclosure

Property #2 : Cost $120k, 3 bed / 1 bath, 1200 sq ft, short sale

Property #3 : Cost $150k, 3 bed/ 2 bath, 1080 sq ft, foreclosure

Property #4 : Cost $130k, 3 bed / 2 bath, 1100 sq ft, short sale

Property #1 :   The house is in our neighborhood only about 5-6 blocks form our home.   That would make it convenient to operate for us.   It is a foreclosure so its vacant.  The property looks like its in fairly good shape. It needs some landscaping work, new kitchen appliances and some misc. repairs.     Pros:  Good neighborhood.  Cons:  only 1 bath

Property #2:  This property is a short sale so we didn't get a good look at it.  We didn't want to disturb
the current residents.   From the street the property looked fine.   But the neighborhood is not very good and most of the houses in the area were not well kept.   Location matters a lot so we're crossing this one off the list.

Property #3:   This house was the most expensive at $150k.   It was a nice property with some good features like central AC.   It would need new carpets and a lot of landscaping work.   The location was pretty good, but the neighbors across the street were making a lot of noise when we were there.  Pros: 2 bath, Cons: Most expensive.

Property #4 : The last house we looked at was also a short sale so we didn't look much and just drove by.   The house looked OK from the street and the neighborhood was very good.   The other homes in the street were well kept and you could tell it was a mature neighborhood.   Pros : Nice neighborhood, 2 bath.  

Our next step will probably be to call our realtor and see if we can get into the #1, #3 and #4 homes to take a closer look at them.   We'll also want to talk to her about short sales and foreclosures to see what her advice and experience is with buying either.  

I'd much rather spend $130k than $150k for obvious reasons. But price isn't everything.   Overall we want to get a good property that will fetch a good rent.   We crossed the $120k property off the list since the neighborhood was not very good and it wouldn't fetch good rent or attract and keep good tenants.  

Right now I'm liking the #4 property the most but we haven't seen inside it yet and I'm not sure how much of a hassle a short sale might be.   The #1 and #3 properties are both doable.   #3 might be better since its a 2 bath and bit nicer, even though its more expensive.    But without taking closer look at the properties it is too early to narrow down the prospects. 

Are These homes really bargains?  Comparables & Zillow estimates

I think one of the key ways to succeed in real estate investing is to buy properties that are a discounted price and a bargain.   These properties seem like a bargain based on my general knowledge of my local housing market.  But it is important to use some real data to estimate the valuation of the properties.  

One key way to value real estate is to look at what comparable homes in the neighborhood have sold for.   If 10 other 3 bed / 1 bath, 1100 sq ft homes have sold for $160k in the same zip code within the past month then its a pretty good guess that another 3 bed / 1 bath, 1100 sq ft home is worth about $160k as well.   Redfin shows similar recent sales to the homes listed.   They also tell you the average cost / sq. ft. for the area.  

Property #1 : Range : $90k to $200k.   Average $147 / sq ft.   This home at $147 = $154k    Value - Cost = $23k.   85% of value
Property #3 : Range : $125k to $185k.   Average $158 / sq ft.   This home at $147 = $170k    Value - Cost = $20k.   88% of value
Property #4 : Range : $110k to $200k.   Average $128 / sq ft.   This home at $128 = $141k    Value - Cost = $11k.  92% of value

Zillow values:

Property #1:  Estimate : $179k,  range $145 to $186k.   Discount = 69% to 89% of value

Property #3:  Estimate : $175k,  range $141 to $178k.   Discount = 85% to 106% of value
Property #4:  Estimate : $177k,  range $145 to $184k.   Discount = 70% to 89% of value

Property #1 and #4 have very similar values in Zillow and are equal values based on Zillow estimate.   Zillow doesn't think too much about the #3 property in fact the bottom of their range is below the asking price.

Generally it looks like the homes are selling at about a 85% to 90% discount over comparable homes in the area.   

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