HOW TO VALUE A POTENTIAL RENOVATION PROJECT
The evaluation/due diligence stage of an affordable property project is by far the most important part of any cosmetic renovation project. If you find a property that has a lot of hidden value in a good area and you buy it at a good price then you will set yourself up to make big profits when you sell.
On the other hand if you buy badly there is very little you can do in the planning and management stage to save yourself from making a loss.
Remember if you are off by just 10% on your purchase price that could equal your ENTIRE renovation budget......
So once you have the project under contract and you are starting your due diligence what are the key things to look for to make sure there is room at the end for you to make some decent money?
1. Future value always trumps current value!
This is the most important point of this article. It seems simple but you would be amazed at how many people get this wrong! When you are evaluating your next project you need to be very clear in your mind what the "Estimated Sales Price (ESP)" is for the property. An example of this would be if you find three comparable properties nearby your project which have similar features but are well finished renovations selling for $510,000, $515,000 and $515,000 - It would be reasonable to conclude that your property (if finished to a similar standard) should fetch a similar price.
Once you have the ESP you can work backwards by inputting your cost estimations and profit target to work out what you can pay for the property. If this price is similar to or above the asking price then it is worth proceeding, however if you are miles off then you know you can walk away and look for another property.
Too many people focus on the current value of the property and want to make sure they "get a good deal" but they don't think about the end game which is to make as much money as possible. I know that we have paid over the current market value for projects in the past because we saw gold at the finish line.
The final point here is that you will make your money by finding the "intrinsic value" of a home. That is, you will make your money by seeing value where other people only see rubbish.
2. Understand the features
The next tip is to make sure you understand every single feature of your property in detail. You must do a detailed review of the home and know absolutely everything from the big ticket items like kitchens and bathrooms all the way down to the number of windows, lights and power points. You should have a system that ranks the features in order of importance - obviously bedroom size and number of bathrooms will be more important than the number of light switches in a property.
Once you have a good understanding of your property's features you need to get an understanding of the comparable properties features. This can be done via an online review for the big features but it is definitely worth getting through some open homes as well so that you can try to get a more in depth understanding.
You should pick at least five properties that are comparable to the finished project and compare the key features in a table. This way you can clearly see if the finished product will be lacking vital features that are required in order to achieve the target sales price. If all of the comparable properties have an ensuite bathroom and a deck but the prospect does not then it would be smart to downgrade the ESP or potentially walk away from the property!
3. Understand the location
The last important aspect you need to understand is the area around your property and how this compares to your comparable properties. Are the comparables all sitting on a hill with views of the mountains while your project is at the bottom of the street? Are the comparables on a quiet road while your project is on a busy road with bus stops? Maybe there is a power sub-station near your project or a really run-down house with broken windows? All of these things will affect the final sales price of your property significantly.
It is definitely a good idea to do a drive-by of your project and your comparables and evaluate the facade as well as the look of the neighbours and any nearby properties. Make sure to keep an eye out for commercial zones, electricity or other infrastructure, parks, schools and neighbouring houses as these can affect your sales price. Remember - Location is the one thing you can't change about a property!
Finally make sure to check all of the maps and online resources. If your property is in a flood zone or a bushfire zone or something similar that can also have a massive effect on the price!
4. Be a Robot!
The final point is a big one. Make sure you have your system and you stick to it every time. Once you have something that works there is no sense in changing it! And make sure you make the decision with the logical part of your brain....KEEP THE EMOTION OUT OF IT! If you buy a property because you get emotionally attached you are almost certain to fail!
Thank you so much for reading! As always this article is based on our experiences and point of view and should always be read as such!
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Have a great day!