Real Estate Investing: Judging Home Value

Q: I put an offer in at 20 percent above the asking price for a property in the neighborhood. The house was originally priced about $70,000 and then later reduced it to about $50,000.

We don’t know why the owners reduced the price. We put in an offer at around $60,000 as the sellers called for the highest and best offer.

Even though the sellers asked for the highest and best offer, I get the feeling that we could be in for another round of bidding. Can you offer any guidance as to whether I should offer more money or stay at the price we bid. I am investing in this property, but the home would be a primary for a family member and I would really like to get this house.

A: We appreciate your effort in putting in a bid for a home, but you seem rather lost in trying to figure out how you should handle this real estate investment.

As we have never seen the home or know anything about the property you are trying to purchase, or even in which city or state it is located, there is no way for us to know if you are paying too little or too much for the home.

As an investor in real estate, you need to have as much information about the real estate market in your area as possible to make that determination yourself.

If you can’t determine what the value is for a home, you probably shouldn’t be investing in real estate. A real estate investor needs to know the real estate market: what type of homes are good real estate investments in a particular market; whether the pricing for housing there is stable or will trend to move up; and whether renters are readily available in this area. These and a number of other factors to determine whether an investor is better off buying in one location or another.

While the price for the home might seem cheap, you truly have to know the market to make that determination. If the home has been destroyed by prior occupants or owners and it will take tens of thousands of dollars to bring it back to livable condition, let alone meeting the condition standard of the rest of the homes on the block, the price you are paying may be too high.

But if there a quite a number of foreclosures in your area and you believe that the market will improve three or five years down the line and you want to put money in real estate now, you might have found a good home to buy.

But you need to become informed about the real estate market in your area. You need to understand how to make money in real estate and you need to understand the risks involved in buying an investment real estate property.

Finally, if you know that the offer you made is all the property should be worth, let’s say in great condition, and the property now needs another $20,000 to fix it up, you might wind up with a property that is over-valued for the neighborhood.

In other words, you’ll have put $80,000 into a property where the best home on the block other than yours is worth $70,000. If that’s the case, you might want to find a different property to purchase.

If you know that the home is in great shape and the owners of the home are trying to get rid of it quickly for their own reasons, and you believe the home might be worth a tad more once you fix it up, you could bid more for it.

Keep in mind, however, if you have not heard back from the owner of the home on your first bid, you are bidding against yourself by going back to pay more. Paying too much for an investment property – or any investment for that matter – is a mistake.

If you are using a real estate agent to assist you in this transaction, have a conversation with her and her managing broker to discuss how the response to the bidding should be handled. If you are not using an agent, please hire a real estate attorney to guide you in the negotiations and protect your interests.


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