Typical Friday conversation with a knucklehead led me to remind people that investing like most things in life is simple,
Keep to the rules I have talked about in the past but before anything "how do I know if a property is a good deal?" (this was the question asked to me four "4" different times this morning from a potential investor / NOT!)
How to quickly know if a property is a good deal
Here’s a handy method to get a good idea, at a glance, if a property is worth a closer look…
This is called the “price per square foot” method you can use to quickly evaluate a deal:
Take the price of a house
Divide it by it’s square footage
The number you get will be a benchmark by which to evaluate that property by.
House price/square footage= price you own the home for!
BAM!!! YOUR A REAL ESTATE GURU!!! YOU OWE ME $4995 FOR THIS LESSON!! lol
For example, if most the houses in a certain square mile are worth about $150/sf, then if you find a deal that is $120/sf then you may want to look into it. Likewise, a deal that is $150/sf or over, you can pass on right away.
Some things to keep in mind:
Attics and basements are usually valued lower–so if a house is 2,500sf but half of that is unfinished basement, the price per square foot will be lower–maybe that’s why it’s $120/sf instead of $150/sf.
Upgrades and damage may not be taken into account.
The property location will play a big role in the price.
Verify the square footage–sometimes garages are included, sometimes they aren’t.
Sometimes it’s just the “living” areas.
The amount of land the property sits on makes a difference.
Can you rent part of it out? Rental income adds value to a property.
Know your neighborhood
The important thing to get to know one area very well, and then branch out from there. Start with the neighborhood you live in. In a future BLOG I’ll talk about having a “farm area” that you’ll get to know really well. Farm Area definition: meaning something you invest in and grow, like raising crops "you get out what you put in".
Your local county records office (if they have it online that’s even better) and zillow.com are two places to start to get a feel for the price per square foot of a particular area.
The numbers on these web sites are not always completely accurate, but they’re great for getting an overall average price per square foot on any given neighborhood.
Keep in mind that the price per square foot method is just a quick look at any property. Use it just as a way to reject obviously bad deals or as a green light to look into a deal more closely.
I will use one of my homes as an example so you can see how I look at a house:
Purchase price $20,000
Square feet: 1300 square feet
$20,000 / 1300 = $15 per square foot
$70,000 renovation budget
$70,000 / 1300 = $53.85 per square foot (brand new)
Total cost into home: $68.85 per square foot
Average home in area selling for $107 per square foot!!!
NOW CHILDREN FOR THE LEARNING PART OF TODAYS SESSION:
This is a real formula and a real home!!
Houses selling in the neighborhood, are not new, do not have the ammeneties that mine does but are selling at $107 per square foot.
We list ours at $107 per square foot and it sells immediately!!!
NOW LETS LOOK AT THE PROFIT SHALL WE.... (DRUM ROLL)
$107 SOLD PER SQUARE FOOT - $68.85 COST PER SQUARE FOOT = $38.15 PER SQUARE FOOT PROFIT
$38.85 X 1300 SQUARE FEET = $49,595 CASH PROFIT
Now let me ask you the reader a question,
IS THAT A GOOD DEAL?
Have a great weekend, e-mail me with any questions!!