Looking at property is a science in and of itself. Once you’ve learned the fundamentals of property, you can search the vast opportunity for wealth that the real estate industry offers. Every house tells a story and all you need to know is how to read the book.
Evaluating property involves two areas of concern: location and condition. From these factors, you can determine fair price. Location and condition influence your decision about a property differently, yet both have equal importance. When in the process of purchasing a home, the prime issue is school district. Even though you may not have or even plan on having children, most people who buy homes do, and this is the single greatest factor in the decision to purchase a home. “Location, location, location” might as well be “school district, school district, school district.” It does not mean that if you buy in an area that is not in a great school district you have made a mistake, it just means that people with school age children are not likely to look in that area, hence the pool of buyers now and in the future will be smaller.
Other factors influencing the location process are the proximity to schools, churches, shopping, work and highways as well as crime perception and personal safety. My recommendation is to create a chart listing each of these criteria and any others you want to consider for each area you’re interested in. You’ll quickly determine a hierarchy of locations. Now that this is now set next up is evaluating the condition.
Evaluating the condition of houses you have an interest in is cumbersome in the beginning, but soon is quick and easy. Your evaluation should determine what condition the major systems of the house are in and when replacement of them is most probable. Don’t worry if you can’t get all of this information when you’re considering making an offer on a property. Your offer should always be contingent upon satisfactory inspections (in your opinion only) by professional companies to catch any items that may have been missed in your preliminary evaluation.
Following is a list of the most expensive items to replace or repair their life expectancy (LE) and the replacement cost (RC).
- Roof: How old is it? Has it ever leaked and how often? When was the last time it did? How many layers of roof are there? More than 2 layers of shingle require a tear-off. LE: 15-25 years. RC $3000-plus
- Furnace: Age and repairs done. LE: 20-30 years: RC $1,500-plus
- A/C unit: Age and repairs done. LE: 20-30 years: RC: $1,500-plus
- Plumbing: Check the sanitary stack for leaks and check the sub-floor under the bathrooms for excessive dry-rotted floor. LE: 50-100 years; RC: $1,200-plus
- Electric: Each home needs at least 100 amp services. LE: 25-50 years; RC: $2,000-plus
- Downspouts/Gutters: Are they serviceable or not? LE: 25-50 years; RC: $1,200-plus
- Foundation: Check for vertical and horizontal cracks, water penetration, leaning walls, buckling of the basement floor from hydrostatic pressure, drain tile systems, walk-outs and floor drains for sewer back-up. The LE of a foundation is 50-100 years, and the cost to repair them is usually the most expensive item a homeowner will ever incur. Bottom Line: If you’re looking at a home that has horizontal cracks or leaning walls leave immediately before it falls down on you. Only kidding…not really…don’t buy that house…I wouldn’t…even at the best price.
By estimating the repairs that each home you have an interest in potentially needs, you can combine that information with the selling price of similar homes in the area that have recently sold and establish a fair market value of the home under consideration. Recent sale of similar property minus repairs that are needed to make it functional equals fair market value. Cosmetic repairs are not a part of this equation! Just cause its ugly doesn’t count.
Pricing a foreclosure is different. These houses have already been heavily discounted…operative word…heavily. They are usually cosmetically ugly and in need of paint, carpeting and a really good cleaning. They are usually priced 30 or more percent below market value and still have room for negotiation. Gems in the rough are they!!!! In these cases look at what the value of the regular houses in the neighborhood sold for and go from there. In a foreclosure scenario check out the major systems, look at the potential value versus what they are asking and go for it.