Should I Buy Raw Land or Homes?
Many people starting out in tax sale investing wonder if they should focus their efforts on land or homes. Both have advantages and disadvantages so it is important to consider these up front and decide which will be best for you or if you want to do both.
With homes, there is a greater margin of error because usually there will be more equity in terms of raw dollars. For example, if you buy a piece of land for $500 and the market value is $1,000, there is only $500 for profits and margin of error (in case your research isn’t completely accurate, which can happen, or if things don’t go exactly as you plan). On the other hand, if you get a home for $50,000 that is worth $100,000, there is $50,000 of equity, and thus, a much greater room for that margin of error factor. If you need to, you can sell the home at a significant discount and still make a good profit.
Usually, homes can make you more money per transaction. While this isn’t always the case, it is nice to be able to make a lot of money on each transaction. With land, you may need to do more transactions to make the same amount of money.
Land is more readily available. As you get your property lists, you will likely find that there are more parcels of raw land on the list than there are homes. If you own a home, you probably realize that most people who own a home have a mortgage. Mortgage companies usually require the property taxes to be paid through an escrow account and that portion of the payment is made along with the regular monthly payment. Mortgage companies are careful about making those property tax payments each year so that they can secure their interest in the property.
People are less likely to redeem land than homes. Many properties that end up on a tax sale list do so because the property owners are having financial difficulties. In such circumstances, they may have to prioritize which bills they pay. They are more likely to pay the taxes on their primary residence than on any raw land they own. They are also likely to pay other important bills first and let the land go.
Land is easier to research, especially from a distance. Sometimes it is very difficult to research homes you can’t see for yourself. There is an inherent level of risk in purchasing properties that you cannot inspect first-hand. That same risk is much less with land since there is less that could go wrong.
There is less competition. Some people decide they only want to purchase homes at tax sales. When I started out, that was my feeling. But with so many people competing for home and with less homes available than land (generally), it becomes very competitive sometimes. That competition may also drive up the winning bid on homes.
Starting bids (and usually winning bids) are usually lower on land. This only makes sense. Since counties are trying to collect property taxes and taxes are based on property values, it usually follows that the amount of taxes due (and usually the starting bids) will be lower on land. This makes land a more affordable option for those who don’t have a lot of money to start investing.
Getting land can still be very profitable. The first auction I ever went to, we got two homes. Our profit on these ended up being between $30,000 and $35,000 on each one. The second auction I went to, we got two building lots of raw land. The profit on these was around $30,000 each.
You can usually sell land faster. Online auctions allow you to sell your properties in a week or so. This can create faster turnaround on your money.
Land generally has fewer liens and other encumbrances that can cut into profits. Having fewer liens also increases the chances that you can sell the property quickly.
John Beck himself focuses on land for many of the reasons listed above. He also buys homes when good opportunities present themselves.
Some of the other coaches I work with purchase exclusively land for their investments. They find many opportunities
Personally, I focus on land and take the homes when they are in my area and good deals come along. I am willing to buy land anywhere in the country as long as my research indicates that there is a good profit to be made and that the property itself is a desirable property. I stick to homes that I can inspect personally, at the very least from the outside.
Wednesday, March 12, 2008
Performing Market Analysis
Market Analysis Basics
The market analysis process is how you will determine how much you think you can sell the property for. Once you have determined that amount, you can decide how much you are willing to bid on a property at auction.
You will want to have a formula for determining how much you are willing to bid. A simple one would be:
How much you think can sell the property for- (minus) your minimum profit margin- (minus) your margin of error
Your maximum bid
If you want to be conservative, determine the low side of the value range in which you think you can sell the property.
You always want to have a minimum profit margin and a margin of error built in to your formula. This is because without a profit margin, you aren’t making money, and without a margin of error, you don’t allow for anything to go wrong. What if your research wasn’t exactly accurate (hey, we all make mistakes, right)? And what if everything doesn’t go exactly as you had planned?
The 50% Rule:John Beck likes to use the 50% rule. This just means that he is willing to pay 50% of what he can sell the property for. For example, if his market analysis determines that he can sell a property for $2,000, he will pay up to $1,000 as a maximum bid.
This formula takes into account the profit margin and margin of error. If you are extremely confident in your market analysis, you may go a little over the 50% rule or if you are unsure in a particular area, you may go less than 50%.
You can change your maximum bid as you get more information about a property, but once you get to the auction, I suggest that you stick with what you have determined. There are two main reasons for this:
You don’t know how high the guy bidding against you is willing to go. It might be $5 over your maximum bid or it might be $10,000 more. You won’t know unless you engage in a bidding war.
Whenever you bid more than what you had established as your maximum bid, you are either eating into your profit margin or your margin of error, neither of which is good!
As you get more and more comfortable with the market analysis process, your ability to determine how much a property can sell for will get better and better. This will help you be more confident that you are getting only the properties that can be sold for a profit.
How much can the property be sold for?
To answer this question, you will want to keep several things in mind.
You should have the assessed value and the fair market value of the property from the county assessor’s office. You can get this from the county itself, or it may be available on the following website:
http://publicrecords.netronline.com/
To get the assessed value, click on the state you want.Then, click on the county you want.Click on “Go to Data Online” for the County Assessor, if it is available. If not, use the phone number provided, and ask how you can access the county’s records on property.If you need to call the county, have them look up a few properties at a time, and within a few days you will have them all done.
If you only have the assessed value, find out how the assessed value is determined. For example, in some states, the assessed value is the same as what the county considers to be the fair market value. In other states, the assessed value may be a percentage of fair market value:
Michigan’s Constitution says that the assessed value cannot be more than 50% of the fair market value.
In Arkansas, the assessed value is equal to 20% of fair market value.
Where I live, the assessed value is 55% of market value for residential properties and 100% of market value for commercial properties.
This should help you know what the county thinks the fair market value of the property is. However, this is just a starting point. I never completely trust the county’s assessment nor do I use that as the only method of determining the property’s value.
2) You can find out in many cases from the county recorder’s office what the property has sold for in the past. If you know what it has sold for in the past and you know the market trends in the area since those past sales, it might give you an even more accurate indication of what the property might be worth.
3) You may also be able to find out from the county recorder’s office what other surrounding properties have sold for in the past. Sometimes these will even be more recent sales. And if the properties are similar, it can give you a good idea of what the property might sell for.
The above information is helpful in determining a property value. But usually the most accurate measure of how much a property can sell for is finding comparable sales.
4) You will want to find several “comparable sales” in the area from other sources. Comparable sales are properties that are similar to the one you are researching that have sold in the area within the last 6 months (or 12 months if there aren’t very many within 6 months). You will want to find out what these properties sold for and under what conditions. For example, was it a normal sales transaction, or was the property foreclosed on and sold at auction? Was the seller under some sort of distress (about to be foreclosed on, being transferred to a different part of the country for a job and needed to sell quickly, etc.) and therefore more motivated to sell than a normal person would be? Knowing this will help you determine if it is truly representative of what the property you are researching might sell for.
Your resources for finding comparable sales will be different if you are researching a home versus if you are researching raw land. These will be discussed in two separate additional modules.
You will want to find out how much can the property be sold for through each available selling method.
You may find that you can sell a property for more money through one method than through another. In order to determine this, you will need to research the market value through each method (through a Realtor, For Sale By Owner, through an online auction, or another method you are considering). For example, you may find that you can sell a property for twice as much by using a Realtor than you could through an online auction. In this case, you should if the length of time required to sell it through that method is acceptable to you. Once you have determined which sales method will yield the best profit in an acceptable time frame, you will determine the maximum bid you will place at the auction based on what you can sell the property for through your chosen sales method.
All of the information you obtain about a property through both the Screening Process and through Market Analysis will help you determine whether or not a property will be profitable if you decide to obtain it through a tax sale.
The market analysis process is how you will determine how much you think you can sell the property for. Once you have determined that amount, you can decide how much you are willing to bid on a property at auction.
You will want to have a formula for determining how much you are willing to bid. A simple one would be:
How much you think can sell the property for- (minus) your minimum profit margin- (minus) your margin of error
Your maximum bid
If you want to be conservative, determine the low side of the value range in which you think you can sell the property.
You always want to have a minimum profit margin and a margin of error built in to your formula. This is because without a profit margin, you aren’t making money, and without a margin of error, you don’t allow for anything to go wrong. What if your research wasn’t exactly accurate (hey, we all make mistakes, right)? And what if everything doesn’t go exactly as you had planned?
The 50% Rule:John Beck likes to use the 50% rule. This just means that he is willing to pay 50% of what he can sell the property for. For example, if his market analysis determines that he can sell a property for $2,000, he will pay up to $1,000 as a maximum bid.
This formula takes into account the profit margin and margin of error. If you are extremely confident in your market analysis, you may go a little over the 50% rule or if you are unsure in a particular area, you may go less than 50%.
You can change your maximum bid as you get more information about a property, but once you get to the auction, I suggest that you stick with what you have determined. There are two main reasons for this:
You don’t know how high the guy bidding against you is willing to go. It might be $5 over your maximum bid or it might be $10,000 more. You won’t know unless you engage in a bidding war.
Whenever you bid more than what you had established as your maximum bid, you are either eating into your profit margin or your margin of error, neither of which is good!
As you get more and more comfortable with the market analysis process, your ability to determine how much a property can sell for will get better and better. This will help you be more confident that you are getting only the properties that can be sold for a profit.
How much can the property be sold for?
To answer this question, you will want to keep several things in mind.
You should have the assessed value and the fair market value of the property from the county assessor’s office. You can get this from the county itself, or it may be available on the following website:
http://publicrecords.netronline.com/
To get the assessed value, click on the state you want.Then, click on the county you want.Click on “Go to Data Online” for the County Assessor, if it is available. If not, use the phone number provided, and ask how you can access the county’s records on property.If you need to call the county, have them look up a few properties at a time, and within a few days you will have them all done.
If you only have the assessed value, find out how the assessed value is determined. For example, in some states, the assessed value is the same as what the county considers to be the fair market value. In other states, the assessed value may be a percentage of fair market value:
Michigan’s Constitution says that the assessed value cannot be more than 50% of the fair market value.
In Arkansas, the assessed value is equal to 20% of fair market value.
Where I live, the assessed value is 55% of market value for residential properties and 100% of market value for commercial properties.
This should help you know what the county thinks the fair market value of the property is. However, this is just a starting point. I never completely trust the county’s assessment nor do I use that as the only method of determining the property’s value.
2) You can find out in many cases from the county recorder’s office what the property has sold for in the past. If you know what it has sold for in the past and you know the market trends in the area since those past sales, it might give you an even more accurate indication of what the property might be worth.
3) You may also be able to find out from the county recorder’s office what other surrounding properties have sold for in the past. Sometimes these will even be more recent sales. And if the properties are similar, it can give you a good idea of what the property might sell for.
The above information is helpful in determining a property value. But usually the most accurate measure of how much a property can sell for is finding comparable sales.
4) You will want to find several “comparable sales” in the area from other sources. Comparable sales are properties that are similar to the one you are researching that have sold in the area within the last 6 months (or 12 months if there aren’t very many within 6 months). You will want to find out what these properties sold for and under what conditions. For example, was it a normal sales transaction, or was the property foreclosed on and sold at auction? Was the seller under some sort of distress (about to be foreclosed on, being transferred to a different part of the country for a job and needed to sell quickly, etc.) and therefore more motivated to sell than a normal person would be? Knowing this will help you determine if it is truly representative of what the property you are researching might sell for.
Your resources for finding comparable sales will be different if you are researching a home versus if you are researching raw land. These will be discussed in two separate additional modules.
You will want to find out how much can the property be sold for through each available selling method.
You may find that you can sell a property for more money through one method than through another. In order to determine this, you will need to research the market value through each method (through a Realtor, For Sale By Owner, through an online auction, or another method you are considering). For example, you may find that you can sell a property for twice as much by using a Realtor than you could through an online auction. In this case, you should if the length of time required to sell it through that method is acceptable to you. Once you have determined which sales method will yield the best profit in an acceptable time frame, you will determine the maximum bid you will place at the auction based on what you can sell the property for through your chosen sales method.
All of the information you obtain about a property through both the Screening Process and through Market Analysis will help you determine whether or not a property will be profitable if you decide to obtain it through a tax sale.
Performing Market Analysis, Part 2: Homes
Market Analysis: Comparable Property Research for Homes
If you are researching a home, use the following sources:
Local realtors – Sometimes the best way to sell a home is through a local realtor. You may pay a commission of somewhere in the 6% range, but sometimes you will make more money this way than through another method. For example, if you try to sell a home on the internet, you will find that most people who buy homes this way want a big bargain. You may be able to sell the home for much closer to market value through a realtor, especially if you are willing to wait a little longer than an online auction would take. Also, realtors are usually very willing to help you get the information you need on a home (especially if they know there is a good chance of getting a listing from their efforts).
The reason that Realtors are a great source for comparable sales in the area is that they have access to the MLS (Multiple Listing Service). Through the MLS, they can find similar properties that have recently sold and get possibly the most accurate information about a property’s value.In some areas, you can access the MLS even if you are not a Realtor. To find out if this is available in the area you are researching, go to http://www.google.com/ and in the search box type in “MLS” plus the area you are researching (city and state). If it is a small city, use the largest city that is close for your search. This way you can get the MLS comparable sales listings yourself!!!
http://www.realquest.com/ – This is a great website for getting a variety of reports on properties. For example, it can provide reports on the property’s details, comparable sales, street maps, parcel maps, transaction history (what it has sold for in the past – especially helpful if you can’t get this from the county recorder’s office), flood maps, legal and vesting information (helpful in preparing deeds for the pre-auction acquisition method), neighborhood information, and much more. I recommend that you get on this site and see what types of reports are available. You can see samples of each of the report types before you buy them so you know what you will be getting. The reports are found at www.realquest.com/pro.
http://www.zillow.com/ – This site gives you a valuation estimate on a property based on information it collects from several different sources such as county records, other sales transactions, etc. It is not always accurate, but the website explains which areas it is most accurate in. This is a source of information you can compare with the others to see how accurate it is.
http://mail.eclientaccess.com/exchweb/bin/redir.asp?URL=http://publicrecords.netronline.com/ - This site will give you a link to give you access to county public records, if they are available online. If not, in most cases they will at least give you a phone number to call to access the appropriate county office to find the parcel information that you need.
This site can also provide you with comparable property lists to determine the market value of the property. There is a link along the left-hand side that says, “Comparable Properties”. Click on this link and follow the instructions.
http://www.realtytrac.com/
If you are researching a commercial property, try the following sources:
Local realtors who specialize in commercial properties
http://www.loopnet.com/ - Go to main page and click on “Search Recent Sales” in the middle of the page. Sign up and get comparable lists.
Assignment:
Get comparable sales reports for any homes on your lists that you are interested in purchasing.
Try to determine based on the information you have how much you can sell the property for.
Establish your maximum bid on the property based on the information you have found.
Disclaimer: "The information contained herein is meant for educational purposes only. By presenting this information, Mentoring of America (MOA) and its employees do not render legal, accounting or other professional advice. It is your own personal responsibility to seek professional advice for any specific transaction or investment from those licensed to render such advice. If you require specific legal, tax or accounting advice, seek the advice of a qualified professional."
If you are researching a home, use the following sources:
Local realtors – Sometimes the best way to sell a home is through a local realtor. You may pay a commission of somewhere in the 6% range, but sometimes you will make more money this way than through another method. For example, if you try to sell a home on the internet, you will find that most people who buy homes this way want a big bargain. You may be able to sell the home for much closer to market value through a realtor, especially if you are willing to wait a little longer than an online auction would take. Also, realtors are usually very willing to help you get the information you need on a home (especially if they know there is a good chance of getting a listing from their efforts).
The reason that Realtors are a great source for comparable sales in the area is that they have access to the MLS (Multiple Listing Service). Through the MLS, they can find similar properties that have recently sold and get possibly the most accurate information about a property’s value.In some areas, you can access the MLS even if you are not a Realtor. To find out if this is available in the area you are researching, go to http://www.google.com/ and in the search box type in “MLS” plus the area you are researching (city and state). If it is a small city, use the largest city that is close for your search. This way you can get the MLS comparable sales listings yourself!!!
http://www.realquest.com/ – This is a great website for getting a variety of reports on properties. For example, it can provide reports on the property’s details, comparable sales, street maps, parcel maps, transaction history (what it has sold for in the past – especially helpful if you can’t get this from the county recorder’s office), flood maps, legal and vesting information (helpful in preparing deeds for the pre-auction acquisition method), neighborhood information, and much more. I recommend that you get on this site and see what types of reports are available. You can see samples of each of the report types before you buy them so you know what you will be getting. The reports are found at www.realquest.com/pro.
http://www.zillow.com/ – This site gives you a valuation estimate on a property based on information it collects from several different sources such as county records, other sales transactions, etc. It is not always accurate, but the website explains which areas it is most accurate in. This is a source of information you can compare with the others to see how accurate it is.
http://mail.eclientaccess.com/exchweb/bin/redir.asp?URL=http://publicrecords.netronline.com/ - This site will give you a link to give you access to county public records, if they are available online. If not, in most cases they will at least give you a phone number to call to access the appropriate county office to find the parcel information that you need.
This site can also provide you with comparable property lists to determine the market value of the property. There is a link along the left-hand side that says, “Comparable Properties”. Click on this link and follow the instructions.
http://www.realtytrac.com/
If you are researching a commercial property, try the following sources:
Local realtors who specialize in commercial properties
http://www.loopnet.com/ - Go to main page and click on “Search Recent Sales” in the middle of the page. Sign up and get comparable lists.
Assignment:
Get comparable sales reports for any homes on your lists that you are interested in purchasing.
Try to determine based on the information you have how much you can sell the property for.
Establish your maximum bid on the property based on the information you have found.
Disclaimer: "The information contained herein is meant for educational purposes only. By presenting this information, Mentoring of America (MOA) and its employees do not render legal, accounting or other professional advice. It is your own personal responsibility to seek professional advice for any specific transaction or investment from those licensed to render such advice. If you require specific legal, tax or accounting advice, seek the advice of a qualified professional."
Performing Market Analysis, Part 1: Land
Market Analysis: Comparable Property Research for Land
If you are researching raw land, use the following sources:
http://www.ebay.com/
http://www.bid4assets.com/
Local Realtors (see part 2 of "Performing Market Analysis")
Instructions for finding comparable sales on eBay
Go to the top right and click on “Advanced Search”. (Make sure that you are registered with ebay.com first.)
Keyword = the area that you are researching; subdivision, city, county, or state.
Category = Real Estate
Check the box next to “Completed Listings Only”. This will do a free search that will show you what has ended in the last 15 days.
Click “Search”
Once the search results are displayed:
Gather all properties that are similar or comparable to the one that you are researching on the tax sale list.
Document these properties on a sheet of paper or using Microsoft Excel.
Document the following information on each property:
Did the property sell Y/N? (If the ending bid is Green = Sold, Red = did not sell.)
What is the size of the lot?
What was the ending bid?
Figure out a price per acre using the size of the lot and the ending bid.
Analyze data once documented.
Set a market value for the potential investments according to their size, using the price per acre.
Set a price cap for each one. (Max price you would be willing to pay at the auction according to the market value.)
http://pages.ebay.com/marketplace_research/
This feature will allow you to look at more that 15 days, however it will cost you.
FastPass – $2.99 for 2 day access. 60 days of historical data.
Basic – $9.99 per month. Monthly ongoing subscription fee. 60 days of historical data.
Pro $24.99 per month. Monthly ongoing subscription fee. 90 of historical data.
Avoid the fees to look at listings older than 15 days by the use of the “Save this search” option.
Click advanced search.
Put in the search criteria as listed above except for the “Complete listing only.”
When the search results come up, next to the number of items found it will say “Save this search”
With eBay and bid4assets listings, look at the listing. If the property did not sell for very much, it may be that it was just a bad listing. A better listing will usually yield a higher sales price. So you need to take into account the effectiveness of the listing to determine whether or not the listing you are looking at is an accurate representation of what you might be able to sell the property you are researching for.
Instructions for finding comparable sales on Bid4Assets
Go to the top right and click on “Power Search”
Keyword = the area that you are researching; subdivision, city, county, or state.
Channel = Real Estate
Category = leave alone
Sub-category = leave alone
Location = use state not zip code
State = (desired state)
Status of Asset = Closed & Sold
Date range = leave at 6 months
Sort by = leave alone
Click “Search”
Repeat the same process you just completed on eBay.
Going through this process on both sites will give you a better idea of what the property can sell for through the online auction method and it may help you determine which of these two sites would be better for listing the property you are researching when it comes time for you to sell it.
When you are looking at these auctions on both eBay and Bid4Assets, don't just look at what the prices are, but also look at the ads to see what the differences in the ads are. What is bringing in the better prices? What is wrong with the ads that are not bringing in as much money?
Assignment:
Get comparable sales reports for any land on your lists that you are interested in purchasing.
Try to determine based on the information you have how much you can sell the property for.
Establish your maximum bid on the property based on the results of your market analysis.
Disclaimer: "The information contained herein is meant for educational purposes only. By presenting this information, Mentoring of America (MOA) and its employees do not render legal, accounting or other professional advice. It is your own personal responsibility to seek professional advice for any specific transaction or investment from those licensed to render such advice. If you require specific legal, tax or accounting advice, seek the advice of a qualified professional."
If you are researching raw land, use the following sources:
http://www.ebay.com/
http://www.bid4assets.com/
Local Realtors (see part 2 of "Performing Market Analysis")
Instructions for finding comparable sales on eBay
Go to the top right and click on “Advanced Search”. (Make sure that you are registered with ebay.com first.)
Keyword = the area that you are researching; subdivision, city, county, or state.
Category = Real Estate
Check the box next to “Completed Listings Only”. This will do a free search that will show you what has ended in the last 15 days.
Click “Search”
Once the search results are displayed:
Gather all properties that are similar or comparable to the one that you are researching on the tax sale list.
Document these properties on a sheet of paper or using Microsoft Excel.
Document the following information on each property:
Did the property sell Y/N? (If the ending bid is Green = Sold, Red = did not sell.)
What is the size of the lot?
What was the ending bid?
Figure out a price per acre using the size of the lot and the ending bid.
Analyze data once documented.
Set a market value for the potential investments according to their size, using the price per acre.
Set a price cap for each one. (Max price you would be willing to pay at the auction according to the market value.)
http://pages.ebay.com/marketplace_research/
This feature will allow you to look at more that 15 days, however it will cost you.
FastPass – $2.99 for 2 day access. 60 days of historical data.
Basic – $9.99 per month. Monthly ongoing subscription fee. 60 days of historical data.
Pro $24.99 per month. Monthly ongoing subscription fee. 90 of historical data.
Avoid the fees to look at listings older than 15 days by the use of the “Save this search” option.
Click advanced search.
Put in the search criteria as listed above except for the “Complete listing only.”
When the search results come up, next to the number of items found it will say “Save this search”
With eBay and bid4assets listings, look at the listing. If the property did not sell for very much, it may be that it was just a bad listing. A better listing will usually yield a higher sales price. So you need to take into account the effectiveness of the listing to determine whether or not the listing you are looking at is an accurate representation of what you might be able to sell the property you are researching for.
Instructions for finding comparable sales on Bid4Assets
Go to the top right and click on “Power Search”
Keyword = the area that you are researching; subdivision, city, county, or state.
Channel = Real Estate
Category = leave alone
Sub-category = leave alone
Location = use state not zip code
State = (desired state)
Status of Asset = Closed & Sold
Date range = leave at 6 months
Sort by = leave alone
Click “Search”
Repeat the same process you just completed on eBay.
Going through this process on both sites will give you a better idea of what the property can sell for through the online auction method and it may help you determine which of these two sites would be better for listing the property you are researching when it comes time for you to sell it.
When you are looking at these auctions on both eBay and Bid4Assets, don't just look at what the prices are, but also look at the ads to see what the differences in the ads are. What is bringing in the better prices? What is wrong with the ads that are not bringing in as much money?
Assignment:
Get comparable sales reports for any land on your lists that you are interested in purchasing.
Try to determine based on the information you have how much you can sell the property for.
Establish your maximum bid on the property based on the results of your market analysis.
Disclaimer: "The information contained herein is meant for educational purposes only. By presenting this information, Mentoring of America (MOA) and its employees do not render legal, accounting or other professional advice. It is your own personal responsibility to seek professional advice for any specific transaction or investment from those licensed to render such advice. If you require specific legal, tax or accounting advice, seek the advice of a qualified professional."
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