60% Annual Appreciation Opportunity: How To Analyze The Facts

FinanceWealth-Building

  • Author Chris Anderson
  • Published April 16, 2006
  • Word count 1,101

Greetings from the Los Angeles Real Estate Wealth Expo! What an amazing event where thousands upon thousands of real estate investors converge on the convention center to listen to speakers such as "The Donald" himself as well as Robert Kiyosaki.

In addition to the headline speakers, there was plenty of opportunity for individuals to walk through the exhibit hall and meet with different vendors and investment groups. Michael and I were there for both days of the event and got a great opportunity to talk with hundreds of new and experienced investors alike.

Since this was our first "show", it was quite an eye opener listening to the investors. Everybody at the show is obviously very interested in making tremendous returns on their investments. Who isn’t? As the people bounced from booth-to-booth-to-booth, they were getting presented so many different opportunities.

While talking to them, I would invariably get asked about what I thought about an opportunity being presented by another group. Quite frankly, I had not analyzed any of them so I could not respond; my gut feel is there where some great opportunities there and some that were not so good.

One very common theme that started to come out was that people where basing their investment decisions on 3 different things: 1) did they "believe" the person they were talking to, 2) how little money was required "down", and 3) what kind of appreciation numbers where getting quoted to them.

And then the realization hit me: these investors have no idea how to even remotely evaluate a project but yet they are ready to buy a $275,000 house!!! JUMPIN JELLYFISH, THAT’S NUTS! I coached a number of new investors right on the show room floor about some simple steps that they could take from their desk to see if things even remotely made sense.

One project that I heard about repeatedly sounded very compelling. I probably don’t have all the details correct but here is the gist:

Located in Cape Coral Preconstruction House With $500 Down Obtain Construction-To-Perm Loan Appraised Value Is $75K to $100K ABOVE investor purchase price!

If all that makes sense, then how many $500 checks would you write? For me, I would write a ton of them until the bank quit letting me.

In actuality, I have been aware of this area for quite a while, have visited there twice, and have considered bringing a project out of this location. Looking at the appreciation curve below, you see that the annual appreciation has been amazing and well over 60% at times.

After the LA show, I decided I ought to take a quick peek again to see if I missed something in my previous visits and also to use it as an opportunity to show people how to do their own quick analysis. From a quick look basis, what do we really want to know? The two things that immediately come to my mind are: 1) Is this market saturated or likely to be saturated when your house is built; and 2) Are we really buying this $75K below appraisal?

Let’s address the appraisal question first. YES, YOU ARE BUYING THIS $75K BELOW APPRAISAL. There is an appraisal showing that value. But is that the real question you want to ask? For me, I want to ask if I am purchasing $75K below market value (heck, I would be happy with $25K below market value). Market value to me means a price at which mom and pops (not investors) will buy it from me within 2 months.

How would I find this out? Couple different ways. First, let’s just use the common sense test. If a builder could build your house and sell it for $75,000 more than if they sold it to you, do you really think they would do that? There would be so many investors (Bill Gates types) who would supply plenty of money to allow the builder to build all the homes they wanted. Maybe there is a good explanation but this immediately would raise a question mark for me.

Next, take the features of the house that is going to get built for you and then go to www.realtor.com and start looking at competing houses for sale. My suggestion is to know the zipcode for the new house and put that into realtor.com. By skimming through the listings, you should be able to get a pretty quick feel for what similar properties are selling for in the area.

Now, let’s take one other step from your desktop. I wonder how many competing properties there are in the Cape Coral area. At realtor.com, you could then see how many properties fall into a certain bracket. So, for example, I was told that a lot of the houses being constructed where being sold in the mid $200,000’s. At realtor.com, I plugged in Cape Coral and I limited it to show me only houses that were 0-1 year old, that were priced in the $200,000 to $300,000 range.

The number of properties that I got back for sale was staggering.. 1571 properties were found! That is a lot of new homes for sale in a small place like Cape Coral.

****** Total Time Invested So Far: 10 Minutes

Next, I did my last step of the analysis just as a final sanity check. If I am serious about buying a property in an area that I don’t know that well, then I call 3 realtors and tell them that I am considering buying a property, I tell them what I am looking at buying, and then give them the chance to convince me that I should really be looking at something else that they are selling. In my opinion, this is perfectly fair to them because, in fact, I have occasionally had them change my mind and I did buy something from them.

The synopsis of what I heard pretty much confirmed what realtor.com was telling me.. there was a lot of similar property on the market and not moving fast. One realtor even told me there was a 30% vacancy factor in those type homes right now. I have no idea if that was true or not.

Based on the above techniques, the investor could then start to make a preliminary informed decision. If you go through the above approach and decide that this is a great investment with low risk, high reward, then you are light years above the masses. Oh, by the way, if you go through that analysis and conclude you have a deal with $75K in equity with only $500 down, then please call me!

Dr. Chris Anderson is the founder of http://www.GetPreconstructionDeals.com and is referenced in many venues including the New York Times and USA Today. Get his weekly, thought provoking articles by signing up today!

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