Jeremy Demers from Titanium Investments of Arizona steps in for RJ this week as a guest host. He discusses how to analyze an investment property from the eyes of an appraiser. Next week RJ Bates III will be back to normal episode with the guest being Brad Sumrok!
Speaker 1:0:01Not Real estate investors, entrepreneurs and agents, your wife place unlocking the secrets to real estate investing and entrepreneurship. Welcome through that titanium bolts posted by Rj Bates. But third, here's RJ.
Speaker 2:0:26Hey Gang. This is Jeremy Demos with titanium investments. I am our days partner here in Arizona. And he asked me to jump on board while he's enjoying some family birthday time to offer some value. So hopefully you enjoy this. A skillz session. Um, so on today's episode of the podcast, I'd like to share with you some thoughts on a crucial step of the investing process. This step is actually, it's the first step and, uh, it's where most investors agree you make or lose money. So I'm going to talk about value. I'm going to talk about property valuation. This is actually how I got into the business and it's an area that sort of helped me earn a partnership, uh, with Rj and the titanium team. So hopefully after listening to this, you will be able to value a deal to value a property like an appraiser would, which would then help you price your property like a magician, right?
Speaker 2:1:26Poof. Gone. Sold. So in my head, uh, I have a five step process for the most part. It's five steps, um, and ms dot these are the same five steps that I go through every time I have a property come across my desk or something pops up in the titanium, um, you know, communication, showing hey, you know, can we run constantly this, can we look at that? So, um, this is kinda the process that I go to. So I hope you enjoyed it. Hope to get something out of it. A number one. So number one is, is really just to do the work, do the due diligence. It's really easy, you know, if you're an investor and whatever market you're in, you probably get a ton of properties in your email box. I do. Um, you know, it's really easy to get caught up in it, you know, I got to go see that one.
Speaker 2:2:13I want to make an offer on that one. I got a call my partner about this one. Just do the due diligence and run the cops. If you don't have mls access, man, my advice would be to find an agent like right away, drop everything, get an agent on board. They're super easy to find a, it's really easy to find the non producing agents, you know, you can probably throw a stone in your area and find a non producing agent, but you know, find somebody network a bit, get somebody, some coffee, get you know, take them out to lunch, show them how you can help them, you know, list a home a month or a home every quarter or whatever goals you have, you know, with very little time commitment by working with you and assisting you with valuation. Um, I mean that would be the number one step if you do not already have mls access because you're going to need it.
Speaker 2:3:01And every other resource out there pulls information from the mls. So you just got to get to the source. And then once you start using the mls and learning how it's set up and, and you start using it to value your property is don't listen to anybody but yourself and your team. No one else is in the game with you, but your team and it's, it's, it's very hard to get swayed in either direction by other investors or even friends and family and stuff like that. So just, just trust your numbers and trust your team, you know, trust but verify. So number two would be you got to get out to the property, um, you know, physically place your feet on the property, you know, get their look north, look south, look east, west, you know, drive a few streets in every direction just to soak it all in and, you know, picture yourself living in that community, in that area.
Speaker 2:3:54Um, you know, drive back to the property, you know, how do you feel? Take way more pictures and you need 100 percent take way more than you need. Um, talked to the neighbors if they're out and about, you know, be inquisitive, asked maybe too many questions so they feel like just kind of brushing you off. Uh, but yeah, be inquisitive, uh, account for, uh, the materials, not just on the house your considering, but the houses in the neighborhood. Um, is your house in anomaly in terms of it's finishes on the exterior, somebody can see by just getting out of the car. Um, you know, a lot of agents do you favors by describing every update the property has so account for that. Um, take as much a, take as many notes as possible and take a lot of photos. Um, so number three, the third step for me in this process would be to run comps.
Speaker 2:4:48Okay? So this is the way that I start off doing it and you know, I know other appraisers, other investors, agents, and you know, everyone has to kind of their own system, but this is what I feel is it's super quick to do. It takes minutes. And once you do it several times, it becomes kind of second nature when you're, as soon as you get an address. So first you're going to find a map search. You're going to start in the middle of the lot, you know, you're going to circle out one mile. And this is for a suburbia subdivision by the way. Okay. This changes a bit in rural areas, but start out with a mile in every direction. It's just very easy to do. And you can generally, if you're in a suburban area or city area, you can pull, you know, way more than you'll need, but if you find yourself out more towards rural areas, um, and, and the lots are much larger, you know, half an Acre acre plus you're going to have to go out further than a mile, of course.
Speaker 2:5:40And you're probably, you're probably going to at least extend out a mile or two. Excuse me, to a half mile at a time, half mile to a mile at a time. So just be conscious of your freeways, be conscious of your natural borders. Um, you know, anything from canals, you know, if you're near colleges. We have a few colleges here in Phoenix, you know, large parks, schools, churches, you know, be aware of these types of properties and how they impact the area that you're searching in. You know, if half of your miles search is a, is, is taken up by some of these other types of properties, you're going to want to extend it another quarter mile, half mile mile, perhaps just be incremental, uh, and be patient with your results. It's easy to overlook a lot of things if you just try and hurry up and then, you know, get a good sample of cops.
Speaker 2:6:33So, um, as far as time for solds sold comparables, you're going to want to extend backwards in time about six months and that's generally where appraisers are going to be when they pull closed sales. Um, and you can include active and pending listings as well. I try to stay away from cancels or expireds and the only reason I might pull those in as if I really want to generate some sort of report to, to provide to an appraiser to show them what the, you know, what percentage of the area are distressed listings or were distressed listings. But for the most part you can. You can toss those aside. Just focus on the actives and pendings and then going back six months. Now if you can't find enough solds, and I'll tell you what, what would a good number would be? A, you just might need more time or more distance.
Speaker 2:7:18So going back seven months instead of six or eight and nine months instead of six, perhaps it's not ideal, but you do want a good sample of sold comparables. And the other thing would be the distance. You know, if you need, like I said, you need to go a mile or a quarter mile or half mile out. No, you can do that just again, be patient and don't start going out two and three and five miles just to find good comps. I'm having no active listings or very little active listings with a lot of souls are a lot of pendings is a really, really good sign. Uh, and you'll be able to see that when you pull your first batch of listings. So if you pull a, a set, and I have attended 25 rule, so if you can get a list of comparables, you know, between 10 and 25 listings roughly, and that's just a rough, you know, some more dense areas you might be on the higher end and more rural areas you actually mean on might be lucky to get five or six or something, but you want to try and stick to 10 to 25.
Speaker 2:8:12It just gives you a really good sample. And of those 10 to 25 listings that you get from doing the search now you want at least four to five sold listings at no less than four. You know, three is good enough to get example. But a very rarely will you get three listings in three of those things that are all kind of right in line with your price. So, um, if you do get a good list, you know, 20, 25, even 30, you know, you can feel confident if you cut out the top 10 to 20 percent and then cut out the bottom 10 or 20 percent, you can pretty, it can be pretty assured that you're getting rid of the fluff. Uh, you know, the outliers are not going to support market value, not like the lean meat and the lean meats going to be in the middle.
Speaker 2:8:57So if you have 20 listings, you need to toss out the top one or two and toss out the bottom, one or two, feel free to do that because it's only going to strengthen your ability to determine market value. So the goal of 10 to 25 listings and you want at least for those sold, um, that is step three and that's run comps. Okay? So now that you've got a set of cops, you're going to have some other things you're going to do with those cons. You're gonna have to make adjustments. That's number four, make adjustments. Uh, there's two ways to do this. And I'll use a, let's use pools for an example. So if you take a list of comps and let's say you get 25 comparables, right, and half of those comps have pools and half of them don't. And let's just assume everything else is equated for the sake of argument, right?
Speaker 2:9:40So you've got to list a half the list has pools, half the list doesn't. Well, if you take the median price from each list, the list with no pool and the list with pools and you compare those two while you could probably assume that the difference between the two would be what you would adjust for if you needed to adjust down for a pool or even up for a pool, whichever, if your subject has a pooler doesn't, um, that's a great way to do it. Uh, it just takes so much time. So the other way to do this, the preferred way that I use is I just like to keep in mind how appraisers normally adjust for those items like a pool. And I'll get to some other adjustments as well. I'm on their reports. There are a few rules that they follow. A, there's three rules and uh, I see rules, I use rules loosely.
Speaker 2:10:28Basically they have to follow these guidelines and if, if for some reason that they extend beyond these guidelines, they just have to argue and support and argue they have to support why they feel that way, why they went over that rule while they had to pull a comparable or make an adjustment that was beyond these rules. So what are these rules? Okay, so there is a 10 percent guideline for a single line item. And what that means is on appraisal report, if you have a pool to keep going back to pools, uh, and you didn't think you'd need to make an adjustment for that pool. Uh, if you have a $400,000 house, um, that pool adjustment can't be more than $40,000, $40,000 being 10 percent of $100,000 the, um, the appraised value, right? So, um, if you, uh, if you go over that amount, if you're at 50,000, you know it's not a big deal, but now it raises a little bit of a flag in the appraiser in the appraisal and the appraiser then has to make notes and summarize why he decided to make that adjustment and for what purposes and why they're there wasn't a better comparable for that spot and so on and so on.
Speaker 2:11:31So it is a guideline 10 percent for a single line item, like a pool, and there's a 15 percent rule for a net adjustment. Okay? So in that adjustment just means that's the total of all the adjustments. It can be positive or negative and it's usually expressed as a percentage on the appraisal form. So if you adjust a comparable down for a superior mountain view of for $25,000 and then you adjust the same comparable up for not having a pool like the subject does. And that's for 15,000, you end up with a net adjustment of negative $10,000, essentially 25,000 minus fifteen thousand ten thousand dollars on a $400,000 house that'd be negative two and a half percent. So it's a way low, you have a ton of room there to make more adjustments. But again, just to give you an idea, how many things can you really adjust for when you're looking at comparable sales compared to your subject property, the deal that you want to buy or even the deal that you want to sell.
Speaker 2:12:32So that's the, the second rule, the net adjustment. And that is the total of all the adjustments both plus and minus. So the gross adjustment is the third one and that's the total of all adjustments in absolute terms. So in other words, the adjustments are added without regard to whether it's a positive adjustment or a negative adjustment. So, uh, and that same example, the $25,000 a mountain view adjusted down from the comparable compared to the subject property and then the 15,000 pula adjustment up because it had a pool on the subject and not have a pool, your total adjustment would then be 40,000. That's 10 percent of the $400,000 house. Again, way below what that guideline is about 25 percent you're way below that so you can make more adjustments if you need to, to help support value. Um, so that, that would be a number four.
Speaker 2:13:27And then I'll give you a couple of, um, uh, items that would be a things that you would make adjustments for. So these are what I feel are like the top line items, the top characteristics of properties that you will adjust for, um, you know, on your, on your, during your research. So some of those items include the view. Um, we spoke a bit about that mountain view. Um, and that could be anything from a commercial building next door to a main road, to a school, to a church. Um, you know, there's all kinds of different, you know, park view would be a superior view and in most cases in Suburbia, right? So lot size, that's another one, you know, larger or smaller lots. Uh, you know, if you have a 10,000 square foot lot, you probably wouldn't give the same value to a two acre piece of property even though it's next door, a condition in year.
Speaker 2:14:19Um, you know, whether the home is 40 years older than your subject property is probably not the best comparable anyway. But if you did have to use it, uh, you definitely want to make an adjustment for that. A living area, so size, you know, gross living area. If you have a thousand square foot home, you're probably not going to use a 3000 square foot home. So that's something you want to adjust for along with bedroom, bathroom count a garage or parking facilities. Um, another one would be, you know, pool, we spoke about pools, spas, fireplaces, any, uh, extra amenities. And then you have, there's kind of like another section where you can kind of put in different things that the property has that are really unique to that area or that neighborhood or in that house specifically. So like a guest house, right? In Arizona we have a lot of guest houses, a lot of CASITA's.
Speaker 2:15:10We have workshops in a horse property. You might have that. A lot of those types of listings in your region, those types of things. You're definitely gonna want to make adjustments for those are account for those in some way. That's kind of number four in a nutshell. And that is to make the, make the adjustments. Number five would be, you know, argue the number to yourself. You know, what it stand up in court when you come up with your number, whatever you think it is. If you think it's 400,000, you know, can you go back through reverse engineer that price through the comparables and can you find the weakness in your evaluation doing this over and over again, it's going to take time, but the time that you'll save down the road will be so critical, especially if you can spend a little bit of time doing this upfront, sit down with the agent, partner of yours, and sit down and go through some of these things with them.
Speaker 2:15:57So when you're sending them stuff, they're actually doing the way that they're doing it the way you'd want to do it. And then when, when they send you over the list of comparables for a deal, you can go through and reverse engineer and find the same thing. You'll spend so little time assessing properties in the long run with, uh, with the right system. And this system may not be right for you. It works for me. Um, but the time that you'll say, if you'll be able to write more contracts, you'll be able to get out and door knock, you know, a drive for dollars or whatever it is that you do to generate business, you know, make cold calls, whatever. And that's a good thing. Um, that's five is argued the number to yourself. And honestly, I'd put, you know, I'd probably put like a five b and it would be repeat this process a ton of times.
Speaker 2:16:42Um, repeat this process a lot since 2005 when I first got into this business and the real estate business as an appraiser. I, you know, I've probably appraised well over 3000 properties at this point. Um, and there's nothing that will help your speed more than doing this, uh, as many times as you can. And definitely nothing that will help your confidence in your number more than just sheer volume. Just doing this a bunch of times, I forget who said the quote, maybe Zig Ziglar, but there was a quote, you know, success is, is not in doing several things very well. It's doing, you know, one thing exceptionally, something like, I probably just butchered that, but it's something like that and you guys probably heard that. Um, so yeah, volume is key. Finding a partner is definitely key. So those are the five, the five steps that I have for, for valuing a property, for property evaluation. So that's really all I have today. I just wanted to kick out a couple of processes that I use. Um, I appreciate you guys sticking around the end of this episode. Don't worry, rj is going to be back soon with, with great success stories and more amazing guests. Um, but it, you know, feel free to reach out to me on social media. If you have any questions, I'd be happy to help in whatever way that I can. And, uh, you know, thanks again. Adios.
Speaker 1:18:09Thanks so much for listening until the titanium vaults with your host Rj. For more info and to stay up to date, visit www.podcastonthetitaniumvault.comandonfacebook.com/titanium vaults. If you enjoyed the episode, please rate and review and we'll catch you next time on a timetable.