They say there are two ways to look at value – hence the title of this video – your “assessed value” and your “market value”. Well that’s pretty easy to explain so let me breeze through that quickly.
Assessed value is calculated by an appraiser – whether for tax purposes or financing purposes. Every few years your county is going to reassess your property value – they just did this in Davidson County this year and pissed a bunch of people off. The timing seems convenient doesn’t it?
Someone in the office: “Yo Mayor, are you seeing this real estate market right now?”
Mayor: “So crazy! Man I wonder if we can leverage that in some way to help pay for the office BBQ bash?”
Of course a tax appraisal is factored in a very specific way, and I think every county has a different way of figuring that amount. When you go to refinance your house, or take out an equity loan or line of credit you will also be reassessed, or appraised. But that type of appraisal is a little closer to the type of appraisal you might see a bank do during a home sale.
Anytime you’re financing a house through a bank, the appraisal is going to look at and take into account recent home sales, the market data. However, it’s not until you get into a situation where a house is being sold in the retail market that you will begin to see the much higher values that we see homes selling for these days.
Which brings us to market value. The unknown factor that occurs with market value is that there are buyers negotiating with sellers around how much they’re willing to pay to live there. So it’s more about what the market will bear at that moment and place in time. And then of course as homes sell for more and more, values around those home sales go up and appraisals also go up for assessed values. It’s a cyclical process. And in a seller’s market your market value is likely more than your assessed value, which is why Zillow’s Zestimate, and Open Door may be pitching you a little less than your REALTOR friends are telling you they can sell it for. Of course in a buyer’s market, the opposite may occur where buyers’ may offer less than a house is listed for because they know the house doesn’t have as much interest. It’s a supply and demand problem.
Now, that actually brings me to the final point I want to make with this video. You made it this far, so I’m going to share this secret with you as an investor myself, working with other investors, there are certain rules we like to follow that I find many homeowners wonder about. Have you gotten one of those calls or letters about “We will buy your house for cash?” This type of offer goes out to homeowners that have been sitting on a property for a certain time, or maybe owners that don’t occupy a property. These offers are real, it’s real people looking to invest in the property you own, but I hear people complain about how little the amount is compared to what a seller, or homeowner thinks their house is worth. Fair enough, I want to get max value for the property I own as well.
Here’s how an investor looks at property – it’s very simple. 1) I’m not going to pay more for a house than I can sell it for, that’s just bad business. But, 2) I also have to be able to make money on this transaction, I can’t just break even on an investment, that defeats the purpose of investing. The general rule of thumb that we follow is what we call a 70% rule. Basically the rule says that you don’t buy property for more than 70% of the value you can sell it for. In some instances, that needs to be even lower, like 50-60% because there can be a lot of work involved in getting that house ready for sale and you need to be conscious of your margins.
Now not every offer is going to be playing exactly by that rule the way I just described it. The unknown again falls in the hands of buyers and sellers. People negotiate and everything in real estate is negotiable. But, that’s the number 1 formula used in real estate investing today. My question to you is, what are you going to do with this information?