When you’re investing in distressed properties, you need to know if the deal you’re agreeing to is in fact, a good deal. You want the time and energy you put into everything worth it when it comes to ROI and personal satisfaction. And, you certainly don’t want to walk away from a deal that could potentially be an incredible deal.
This is why I like to teach students about really getting to know the numbers involved in potential deals before going to an appointment. Many newbie investors get nervous about making an offer due to the fact that they aren’t quite sure about the numbers that would make the property a great deal.
If you’re familiar with my teachings, then you’ll know that I recommend buying homes at or below 80% of fair market value (FMV) using the current seller’s existing Subject To loan. Now, keep in mind that this is simply a guideline. If the numbers come out at say 82%, that doesn’t mean it’s a bad deal. And, numbers showing, let’s say, 74% doesn’t always mean the home is a steal either. There’s more involved than simply the percentage.
Two Types of FMV
This is why it’s important to understand a few things about the numbers before going on an appointment. First, learn the two types of the FMV: The Conservative FMV that you use on your Net Equity Worksheet and the Realistic FMV that you use to analyze the property to see if it’s a deal or not.
You’ll also need to get your hands on some reliable comps, either from your realtor or ProfitGrabber. Best case scenario is if you use both your realtor’s comps and ProfitGrabber, if you have access to it. Using Zillow or Trulia is alright if you’re curious, but know that they’re not that reliable, sometimes they can be off as much as 10%, and that makes a big difference!
The Loan Data
You’ll also want to learn about the loan data, including the interest rate, type of loan, amount of payment, if there is a balloon payment or not, taxes and insurance, and whether the loan is up to date or in arrears. You’ll need all this information to make an educated decision moving forward.
Current Market Rent
You’ll also want to check out what the current market rent is going for, mainly so you’ll have an idea of what exit strategy will suit you best for that particular home. You can also weigh it against the payment the current seller is paying (including taxes and insurance).
Using All the Numbers
After you’ve gathered all the data for these numbers, you can begin to analyze everything to see if the home fits your criteria. Along with the numbers, keep in mind the seller’s motivation for selling. Get to know the “why”, as this can help you see just how motivated they are in selling at a discounted rate.
The more you work with the numbers and go on appointments, the easier analyzing everything will come. You’ll get better and better at crunching those numbers and making an educated decision on whether to move forward with the deal or not. Keep learning and practicing, because as with anything, the more you practice, the better you’ll become