Due Diligence - What Value?

Here's some more thoughts on being diligent in one's research before acquiring a property.

How does one decide the value (price) of a property?

If I'm a flipper, I want to get a property at a low price, fix it up, and sell it at a higher price. If I like to do long-term-holds then the price isn't as important as how much income the property can generate for me.

Who decides the dollar value? Are there any other values I should know about?

If a property is for sale, it has a selling price. It's likely that a realtor assisted in figuring out the sale price. If it's a single family home up to a four-plex, the way that's done is relatively simple. Find similar properties in the area that have sold recently, account for differences in age, size and amenities then assign a sale price An experienced realtor will also use a bit of gut-feel to tweak the final price. That comes from watching the market trends and having experience with the selling process. Notice that on MLS listings there is an asking price and a sold price. The seller may want $450,000 AND the sale price may end up being $425,000 or even $475,000. It all depends on what happened during the selling/buying process.

There's an assessed value associated with all properties. This is a dollar value assigned by the local assessment authority, using a complex formula, that is used as the basis for taxation. As an investor, the assessed value can be useful if you're comparing two or more different properties that look the same. Other than that, I don't find assessed value all that useful.

On the property, the land and the improvements (buildings) each have their own value according to the assessor. If on a $500,000 property the land value is $450,000, guess what the actual building is worth? Not much, comparatively. In that case, the dirt is expensive and the buildings might be eligible for tearing down and re-building. If you build a $200,000 house on the land, will the property now be worth $650,000 (450+200)? You better check with your realtor before you build because the comparable properties in that area might be selling for $600,000. Building in that case is not a good idea.

If I'm a flipper then there's my selling price, ie: the price I'm going to sell the property at when I'm done fixing it up. Again, my realtor can help me decide if fixing the place will get me enough increased value that I can make a profit. The realtor uses local selling price comparisons as before. There are many factors that influence that price, which is one of the main reasons we are learning about due diligence. Understanding how the realtor does all that will help you choose the correct property to invest in more efficiently.

Do you see a pattern developing here? There appears to be a realtor involved in many of the value decisions. I can't emphasize enough the advantage of having an experienced realtor on your team.