How to Make Money Investing in Real Estate: Determining the Value

Making money investing in real estate really starts with determining the value of the property. There is often a lot of confusion, especially for new or budding real estate investors, about determining the true value of a property for resale. This is particularly true for single-family homes. The maximum amount that can be expected to be received for any given property is known as the ARV or after-repair value. As you begin your real estate investing career, you’ll find that inaccurate property values ​​can have multiple repercussions, none of which are desirable for long-term success. This is even more true if you want to sell properties wholesale. Overvaluing a property makes you appear inexperienced and could eventually lead to a loss of credibility with your buyers. Worse, your buyers could take advantage of your inexperience and exploit it, or worse, you could undervalue your offers so much that you leave huge profits on the table.

As an example, my first wholesale deal was for an older brick single-family home in Columbia, South Carolina. A potential customer came from an extremely motivated seller. They lived out of state, had been taken advantage of by several local contractors, and decided to cut their losses. The sellers wanted $10,000 for the house and agreed to pay back taxes and closing costs as well. Sure it sounded like a great deal and I figured if I couldn’t make this work, maybe real estate investing wasn’t for me. Immediately after signing the contract, I called an investor who did a lot of rehab in the area. He had now valued the house at $115,000 based on some nearby houses that sold for $120,000 each. They were a bit larger in square footage and I found their asking prices on Zillow.com so I felt pretty safe with my ARV. My house needed a lot of work in the kitchen and on the outside, but it was in good shape for its age (old!).

My selling price was $45,000 for the deal and this investor immediately began negotiating the price lower. Since another investor had already contacted me (there were quite a few after I put up some ads), we went to the house together. The second investor asked me how he had determined the value of the house and I showed him the other two houses on the same street. At the time, this investor informed me that these were new houses, built in an old style according to the community. Whoops, it quickly became apparent that the most realistic ARV in my house was around $95,000. Fortunately, my deal was so good that I couldn’t really lose any money. I ended up selling the house for $27,000 and then that investor resold it for $33,000. However, I quickly learned a valuable lesson.

In my next article, we’ll look at more accurate and reliable methods for determining the ARV, or after-repair value, of residential real estate. This is a must if you want to become a successful real estate investor.