Using technology in your Property Analysis… It’s Well Worth the Effort

“Solid analysis identifies great opportunities…” That’s true in all facets of life, but it is especially true in this uncertain real estate market. Sophisticated investors have long embraced technology as a means to assess potential investments and track investments they have already made. Highly specialized technological tools are now available at no charge to most people who open a stock trading account with an online brokerage firm like Scottrade or Charles Schwab, for example. Most real estate brokers have a vast array of technological tools at their disposal through their Multiple Listing Service (”MLS”) system; and any serious buyer giving thought to a purchase would be very well advised to ask their broker to provide a list of comparable sales and active comparable listings for the last 6 months or so in the subdivision or area in which he or she is interested. These “comps” can usually be reduced to a simple, manageable “Comparative Market Analysis” (”CMA”) Report, using the data kept in the MLS system. Such a report will give a buyer a much better idea of how active sales are in a particular community… whether prices are stabile or are trending downward… whether foreclosures or other types of “distress” sales have had a particular impact on a community… and so on. Investors have used this information– and much more– for years; and house hunters looking for a new home in this uncertain market would be well advised to enlist all resources available to them before making a decision.

There are other ways to put technology to work for you. Most people who have purchased a home computer in the last decade or so have had some exposure to computerized spreadsheets for financial analysis. Probably the most common of these programs is Microsoft Excel. It has come pre-loaded on PC’s for years– at least in trial form. It is also a part of the MS Office Suite of programs, and many people have it loaded on their computers, even though they never use it. If you are considering a home purchase… or you are a casual investor looking to take advantage of the enormous opportunities this current real estate market offers… I would strongly recommend that you take the time and make the effort to get to know at least the basics of MS Excel. It really is not as difficult or time-consuming as you might think. With the aid of a simple interactive tutorial program like Video Professor, you can learn everything you need to know on a Saturday afternoon.

Then what? Of course, the uses for such a program are limited only by your imagination and creativity. But I will give you one possible “template” to use in any type of analysis– that is, whether you are a house hunter looking for your prinicpal residence or you are an investor. I call it a “Target Price Calculator” spreadsheet, and it is really simpler than it may sound.

You have found a home that interests you. You like the idea of buying a “fixer” because you know you can get a good price in this market, and you have a contractor you trust to do the work you may need– or simply desire– to have done. (Perhaps you are uncomfortable with anything more than cosmetic updates– kitchen cabinets… flooring… bathroom tile… it really doesn’t matter for the purpose of this example.) Your realtor has pulled comparable sales and other active listings from the MLS system, and you have a simple CMA report for this property. Among other things, that report gives you the average sales price of comparable homes in this community over the last six months, the high sale price and the low sale price. You believe that in this market, you should be able to purchase a home at least 10% below what the average comparable price is in this neighborhood, giving you immediate equity on the day you close the purchase. This should cover you in the event prices continue to decline. But you also have the issue of repairs or renovation costs. There are probably several homes you are interested in. How does one compare to another with respect to meeting your goal of having at least 10% immediate equity on the day you close the purchase?

Using Excel or a similar spreadsheet program, you can set up a simple form into which you can plug the pertinent numbers, and have the spreadsheet finish the calculations for you. This will give you a simple, bottom-line analysis for each property you are considering. The template for this “Target Price Calculator” looks like this:

In the above example, your target offer price would be $203,000 for the subject home. Of course, the above is a simplification. There are other variables that investors, for example, might add. An expense line might be added for purchase closing costs (and many sellers will pay a portion of a buyer’s closing costs in this economic climate)… or a line might be added for investor carrying costs. Further, these calculations can be made manually using this general template without using Excel. But for those who are considering several properties, or for investors who are constantly looking for opportunities, the use of Excel to set up automatic calculation of pertinent amounts is easy, convenient and very useful.

This is really just the “tip of the iceberg” with respect to the spreadsheets that can be created and the data that can be gathered and analyzed using a spreadsheet program. I create and use spreadsheets to analyze HUD bids, for example, or to manage HUD bids successfully entered. The possibilities are only limited by your creativity and imagination, and the usefulness of spreadsheets in compiling, analyzing and managing information so that you can make truly informed decisions cannot be overstated.

When Buying REO’s and other Distressed Properties, Expect the Unexpected… and Prosper

So you’re looking for a bargain. This is certainly the best market in a generation in which to find value. While many buyers appear to recognize that opportunities abound, many also have little idea of what they may expect when they begin dealing with sellers of “distressed properties.” Most serious buyers have heard the horror stories increasingly associated with offers made on short sales– properties offered for sale by sellers who owe more than the home is worth. Since approval of the short sale must be obtained from the seller’s lender(s), these sales involve third parties who very often take ridiculous, unjustifiable amounts of time– often months– to approve or disapprove an offer. There are also those listing agents who advertise a short sale at a price well below what they know the lender will accept, in the hope of generating interest in the property. These agents have no respect for the prospective buyer’s time or emotions, and they have increasingly given the entire process a bad reputation because it is difficult for many buyers to know when they have fallen prey to this practice.

But I am not referring to short sales when I say “expect the unexpected.” I am referring more to REO ("real estate owned" by the lender after foreclosure) properties– distressed properties on which the foreclosure process has already been completed and which are now held in the inventory of banks and entities like Fannie Mae, Freddie Mac and HUD. One would expect uniformity in making an offer on a Fannie Mae home, for example. One would think that if one contract administrator accepts electronic signatures on contract documents (which are legally recognized in North Carolina and which can save everyone involved a great deal of time– especially in the case of offers by investors who may be located outside the area or the state), then all contract administrators for an entity would accept electronic signatures, for example. But one would be mistaken.

Most quasi-governmental entities like Fannie Mae and HUD now employ multiple contract administrators, even within a state or within a county. And while the purpose of this practice may have been to promote efficiency, it frequently has the opposite effect. Some contract administrators, and some listing agents, are far better than others. Some understand their role as facilitators of reasonable offers that move properties out of the bulging inventories of REO’s. Others seem to adopt the mentality of petty bureaucrats, taking the attitude that they are doing the buyer a favor by selling them a home. Decisions on whether the seller will pay any or all of the buyer’s closing costs… or how much of an earnest money deposit will be required… become more seemingly arbitrary than rational. And some contract administrators seem to view investors less as one of the market forces that will help absorb REO inventories and stabilize the market more quickly, and more as greedy opportunists who deserve to be thwarted. Indeed, Fannie Mae, Freddie Mac and HUD all have institutional owner-occupant preferences that many view as continued feeble efforts to elevate social engineering over market realities– and in so doing, only prolong the pain and suffering in the real estate market.

How can you know which type of contract administrator you will be dealing with? You really can’t. This really depends on the particular property you are interested in making an offer on. However, this is not a reason to avoid REO’s. In fact, Fannie Mae in particular has been offering some very attractive properties of late in the Charlotte metropolitan area. (See Fannie Mae’s website for a complete list of their inventory in a particular area: www.homepath.com .) It is a very compelling reason to enlist the assistance of a professional, though. “Solid analysis identifies great opportunities,” and after the opportunity has been identified, the offer needs to be moved through the process by someone who will not be intimidated, mystified or discouraged by the unexpected. Opportunities really do abound in this market. But expect the unexpected throughout the process. Be prepared– and prosper.

As always, the reader is invited to use the resources on my web site to research properties-- including distressed properties of all sorts-- and to search the entire MLS system free of charge at: http://edorer.wilkinsonandassociates.com.