Assessing Fair Market Value
Q. I came across a home for which I am trying to assess Fair Market Value. It is an interesting one because there are no reliable comps in the area due to sparse sales and a turbulent market in the area for the past six months. Raghukul T., Southern Calif.
A. Sometimes it is tough to assess fair market value. The truth is that there is only one thing that can correctly assess FMV for a particular property at a particular point in time. And that’s someone who is ready, willing and able to purchase a property – as long as it was adequately marketed and not a related party transaction.
When you note "reliable comps" I’m guessing that means you don’t like the values of comparable sales that you’ve seen. But if the properties are in a similar location with similar lot sizes, views, square footage and condition, and sold recently in an arm’s length transaction, they are probably good comps. You just have to realize that the market determines the market value, and that is what someone is willing to pay.
You can check values on Zillow, have an appraiser do an analysis and get all the MLS data to get a good feel for the value. If you do not like the pricing, then it’s probably not the right property for you. Good luck.
Investing in Safe Real Estate
Q. I would like to invest in properties to rent out. I would prefer single-family homes. I have about $280,000 cash to invest. How many homes could I safely purchase? My interest is not in flipping, but in getting into properties in stable neighborhoods where appreciation is expected. Joseph M., San Diego
A. There are no safe real estate deals. There are only ways to lower your risk on a purchase. Real estate for most people is like buying a junk bond – very high risk! If you do the proper due diligence and avoid problem properties, your risk can potentially be reduced, to a level like buying a corporate bond.
It’s good that you are not interested in flipping as that is high risk and most people who try this strategy lose money. Also, you note you’d like to buy where appreciation is expected. Well, no one can predict the future so no one knows where or when appreciation is expected. So forget that.
However, regardless, if you want to buy investment properties, you should concentrate on assets that pay positive cash flows. Cash flow builds up in your bank account, it pays the bills, it feels and smells good in your hands. If you purchase cash flow positive deals, they can provide a fair rate of return on your invested capital.
Any appreciation in value, or tax savings, or principal paid down on your mortgage is the icing on the cake. Go for the cash flow first!
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive "Real Estate Ownership, Investment and Due Diligence 101" textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com