Clarity or lack thereof regarding the value of real estate can make or break you.

Whether you are buying, selling, looking for funds to finance, refinance or seeking an equity line of credit on a property, the value of the property is of the utmost importance. In working with numerous investors and home owners, I have always found the area of determining value to be a place where people run into confusion. If there is ever a place where one needs clarity over confusion, it is in regards to the value of property. Whether you are a real estate investor or a home owner, you want to protect your investment in a property and buy right so that when it comes time to sell, you walk away from the closing table with money!

Confusion regarding the value of a property can cost you big money, lots of time and financial distress. This month alone, I have had two people contact me saying that they pulled out of a deal at the last minute due to fear that they were making a bad decision on the investment based on value. In both cases, these individuals backed out of the deal AFTER investing money in appraisals, surveys, etc. They both lost their earnest money deposits. These are mild situations compared to the student ho attended a class that I taught. He came up to me after class to ask if there was any way that he could basically give the property back if he explained to all involved that he had made a mistake and paid way too much. He was stuck with a property that he could not rent or sell to cover his costs. This is how investors often end up in foreclosure situations.

Although there is more than one method for determining the value of property, the one that you must use is the market value approach. Basically, the value of anything is what someone is willing to pay for it. In the case of real estate, people will want to pay and banks will lend based on comparable sales.

The comparable sales approach looks at recent home sale prices and compares the property to similar properties on the market that have recently sold. The comparable properties used to determine the value should:
Have sold within the last six months
Be within 0 to 1 mile from the subject property
Have the same number of bedrooms and bathrooms
Be similar in construction and amenities
Sound simple? It is in a sense but requires a great deal of due diligence on your part to have complete clarity and accuracy when it comes to the value.

I once had a coaching client ask me, 'What is due diligence'? Due diligence is performing research and analysis on an investment. It simply means - do your homework. When you are doing your homework, write it all down on a piece of paper. Perform the necessary calculations factoring in all the costs. So many times, I have had real estate investing clients say, 'Well, I've looked at the recent home sale prices and run the numbers in my head - it looks like a good deal.' My response is always, 'You have to put it on paper.' It is so odd, but often there is a resistance to putting it on paper. Is it the fear that it won't look so good once it's on the paper? It is better to see that deal as a bad on paper upfront, before it costs you too much money and time. Perform your due diligence.

If you are dealing with a property or that needs renovations then you must be able to determine the urrent value and the after repair value or ARV. Here you take into consideration the costs of purchasing the property, the rehab costs, the holding costs and the selling costs - especially if you are a real estate investor planning to sell for a profit. After repair values are often inflated by wholesalers and sellers, which is why you absolutely must know how to perform your own due diligence.

What about home appraisals? I highly encourage a home appraisal at the right juncture. If you are obtaining money from lenders, they will require a home appraisal prior to lending. However, you don't want to spend a few hundred dollars on every property that you think looks interesting. You want to perform your own due diligence to see if it makes enough sense to pay for a home appraisal. You can know every creative real estate investing strategy around, but the bottom line is - if you don?t know how to properly determine real estate values you can lose big! You've probably heard, 'You make your money when you buy!' Make sure you know how to do just that 'make your money when you buy.' In today's market, you cannot rely on the rapid appreciation of the past decade to make money investing in real estate. You must buy right!

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Nancy Spivey, known as The Real Estate Investor's Resource, is an active investor, speaker and coach. Through her training and coaching programs, she helps new and experienced investors create profitability, productivity and prosperity. Nancy serves on the board of directors for the Georgia Real Estate Investors Association, the largest investor association in the U.S. Sign up for her free ezine
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