The Art Of Real Estate Deal Analysis
You’ve found the property…
It’s in the right neighborhood.
It’s in good enough shape.
You know you will be able to find a buyer.
The owners are ready to sell.
It’s exactly what you're looking for.
So...what do you do now?
Before you can do anything else - whether that's seeking out financing or finding a buyer - you need to analyze the deal.
Determining how much you should pay for a property doesn't need to be a guessing game.
Once you learn how to analyze real estate deals - the numbers will tell you you exactly how much you can pay for it.
But how do you know what that magic number is?
This is your business we’re talking about - you can't just guess. Giving it your "best guess" is no longer going to cut it in today's hyper-competitive real estate investing marketplace.
You Need To Know Every Component Of The Deal
What you need to do is evaluate data like property value, repair costs, financing and holding costs, as well as buying and selling transaction costs. You need a complete picture of all associated deal costs to determine if this deal is worth it.
The Different Components Of Real Estate Deals;
- After Repair Value of the property
- Determine “As-Is” Value
- Calculate Estimated Repair Costs
- Determine Estimated Hold Time
- Account For Financing Costs
- Calculate Holding Costs
- Account For Buyer-Seller Transaction Costs
“So what do I do with all these numbers once I have them?”
To do a thorough real estate deal analysis - and make sure nothing slips through the cracks, you need a resource that lists and accounts for every expense associated with the deal.
So to help you out, we've taken Realeflow's Deal Analyzer and created a free real estate deal analysis spreadsheet that you can use to instantly analyze the estimated ROI on different properties.
How To Use The Deal Analysis Spreadsheet
All you need to do is enter the numbers for these different types of deals and then compare the estimated net profit and return on investment to decide which is the best option for the deal.
This will also help you determine the maximum amount that you can purchase the property for by simply plugging in a different purchase price and seeing how it changes your estimated net profit.
Determine The After Repair Value (ARV)
Enter in the after repair value, which is the market value of the property after necessary repairs have been made. When you get to this step, you should have already pulled comps and done your due diligence to determine this number.
Where To Pull Comps To Determine ARV
Realeflow - Anyone who uses Realeflow has access to an integrated tool that allows you to pull comparables and generate custom reports.
Leadflow - Leadflow's comps tool is powered by artificial intelligence and helps you find the exact value of any comparable property.
FlipComp - This is a software that provides access to listing data and comparables and analyzes deals in seconds.
What To Look For When Running Comps;
- Properties within 1/2 to 1 mile of your subject property
- Similar square footage, bedrooms, bathrooms, year built, and lot size
- Properties that have sold within the last 6-12 months
Determine "As-Is" Value
Remember to also pull comps on properties that are similar to your current property in it's "as-is" condition, so you know what the delta is between current and ARV is.
Calculate Estimated Repair Costs
Now that you've run comps to see what your property could be - it's time to see how much it will cost to get your property into selling shape.
You will need to do a repair estimate to determine the repair costs. If you’re new to real estate investing and aren’t sure about how to do a repair estimate, you have three options;
- You can take a contractor with you to assess the property (which you'll have to pay for).
- You can use a free online home repair estimator to get an approximate idea of costs
- You can use a professional Home Repair Estimator tool, to get exact costs. This tool comes with preloaded formulas and national average costs of thousands of items, and allows you to edit item costs to reflect exact local costs that you'll pay.
For even more tips on how to estimate repair costs, check out our post on home repair estimates.
Play Around With The Purchase Price
One of the biggest advantages of analyzing a deal like this - in such granular detail - is it gives you a very clear understanding of exactly what each component of the deal costs, and how it affects your bottom line.
This means you can play around with the numbers to see how negotiating the purchase price will affect your bottom line.
Doing this will help you determine your Maximum Allowable Offer (MAO), based on how long you plan to hold it and what your strategy is for selling it.
Estimate Your Hold Time
Hold time will vary based on your sales strategy. If you’re going to flip it, you may only hold it for a month. If you’re going to rehab it, you may hold it for 4-6 months or more, and if you plan to hold it or rent it, you will obviously hold onto it for a lot longer.
Account For The Costs Of Financing
Next, you will go to the financing section and fill out the mortgage information if you will be borrowing money to purchase the property or finance the rehab.
Remember to take your time with this section. Many newer investors often forget to include the interest paid on their loans in their final costs.
I've known many investors that lost money from deals because of interest payments, so it's critical that you really understand how much you're paying for financing.
We've got some default values already loaded in the Deal Analyzer to get you started, but we highly suggest you update the information to better reflect your real-world financing specifics.
Include Holding Costs
Next, fill out the "holding costs" section, which is loaded with some default values for property taxes, HOA fees, insurance costs, and utilities to get you started.
Again - these numbers are a guide to get you started, but you should do your research and fill this section out with the specific costs associated with this specific property.
Buying and Selling Transaction Costs
Next, complete the buying and selling transaction cost sections. Again, we’ve loaded it up with some default values, but if you find that they’re different for your deal, make sure you update them accordingly.
Crunching The Numbers
Once you've entered in all of the necessary information, the real estate Deal Analyzer will calculate everything for you and will give you an estimated net profit, along with estimated ROI.
Once you have a baseline, play around with the purchase price and holding time, and see how it affects your bottom line. This will help you determine what your initial offer should look like, and what your MAO looks like.
How Much Should You Offer?
To give you general idea of what you should offer, on average, most investors buy a property for about 70% of the After Repair Value, which leaves room for profit. So when you do your analysis, make sure you take that into account when determining your maximum offer amount.
Analyzing your potential real estate investments takes a little extra work - but as you can see, the work is well-worth the payoff.
And if you're looking for a tool suite that takes on the bulk of that work for you, and leaves you free to network and sniff out more deals, grab a 7-day free trial of Realeflow and see what it can do for you.