How to Make Money Investing in Real Estate: Determining Value

Making money investing in real estate really starts with determining the value of the property. There is often a lot of confusion, especially for new or budding real estate investors, about determining the true value of a resale property. This is particularly true for single-family homes. The maximum amount that can be expected to be received for any given property is known as the ARV, or After Repair Value. As you begin your real estate investing career, you’ll find that inaccurate property values ​​can have multiple repercussions, none of which are desirable for long-term success. This is even more true if you want to wholesale property. Overvaluing a property makes you appear inexperienced and could eventually lead to a loss of credibility with your buyers. Worse still, your buyers could take advantage of your inexperience and exploit it, or worse, you could undervalue your offers so much that you would leave huge profits on the table.

As an example, my first wholesale deal was for an older brick single-family home in Columbia, South Carolina. A lead came in from an extremely motivated salesperson. They lived out of state, had been taken advantage of by several local contractors, and decided to cut their losses. The sellers wanted $10,000 for the house and agreed to pay back taxes and closing costs as well. Sure it sounded like a great deal and I thought if I couldn’t make this work then maybe real estate investing wasn’t for me. Immediately after signing the contract, I called an investor who did a lot of rehabs in the area. He had now valued the house at $115,000 based on some nearby houses selling for $120,000 each. They were a bit bigger in square footage and I found their sale prices on Zillow.com so I felt pretty safe with my ARV. My house needed a lot of work on the kitchen and exterior, but it was in good shape for its age (old!).

My asking price was $45,000 for the deal and this investor immediately began negotiating the price lower. Since I had already been contacted by another investor (there were quite a few after I put up some ads), we went to the house together. The second investor asked me how he had determined the value of the house and I showed him the other two houses on the same street. At that time, this investor informed me that these were new houses, built in an old style according to the community. Whoops, it quickly became apparent that the most realistic ARV for my house was around $95,000. Fortunately, my deal was so good that I really couldn’t lose any money. I ended up selling the house for $27,000 and then that investor resold it for $33,000. However, I quickly learned a valuable lesson.

In my next article, we’ll look at more accurate and reliable methods for determining the ARV, or After Repair Value, of residential real estate. This is a must if you want to become a successful real estate investor.

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