Though we are most familiar with the concept of value as a number, it is so much more than that. Today we are going to focus on 3 measures of value in real estate investing. There are many other forms of value than just a numerical one that are present in a real estate transaction.
Starting with the obvious, any real estate investor—whether you’re part-time or full-time, whether you’re buying residential properties to fix-and-flip or to hold and rent—has got to understand how to calculate the value of that property to know what to spend to get the best return on investment. And that’s non-debatable—the importance of understanding that numerical value, or dollar value, of the investment property.
Many forms of value
But there’s more value involved for a real estate investor when pursuing a purchase of an investment property. Today we’re going to look not just at the most common one, but also two of what are probably the most overlooked forms of value.
The first overlooked one is the value of understanding the seller’s need, objective or problem. Then the other thing we are going to talk about today is your being able to demonstrate your own value to that seller—meaning you have got to make it very apparent in the eyes of the sellers how you can satisfy their need or solve their problem or eliminate their pain. So, you’ve got two distinct types of value here, in addition to the traditional value of calculating the numerical or dollar value of that property.
Let’s differentiate between the three and then examine how they all fit together and drive your success when you recognize and incorporate them in your real estate investing.
Value No. 1: Purely calculation
The easiest and most common one is the dollar value of that investment property. Now this is just a pure calculation. It’s an analytical approach, and we all calculate values in a variety of different ways and manners. Probably the majority of us are using comparable sales to determine the value of a property in its current state, and what we can afford to pay to purchase that property and still make an acceptable return on our investment. It’s fundamental to what we do as real estate investors, and the good news is that it’s a task that can be learned and taught. You can develop and become very proficient at this skill of determining the price you should ultimately offer that seller.
This is SO fundamental, because you cannot afford to miscalculate the dollar value of an investment property. If you overvalue a property you’re going to spend too much and diminish or even potentially destroy any opportunity to get a return on that investment.
On the flip side, if you undervalue a property and offer too little to that seller, you’re very likely going to miss out on the opportunity to purchase that property. In this day and age in most real estate markets in our country, competition is so high and demand is so high and supply is so limited that there is a good chance there is another buyer waiting at the curb to buy that property if you pass it up. And that just further exemplifies how critical it is that you not undervalue a property, at the risk of losing it.
But the key point is that although it’s a critical competency, it’s a trained competency.
Not to demean this first point, but there are two other values that are equally as important.
Value No. 2: Understanding the seller’s motivation
First, as I mentioned earlier, you have got to value your seller in his or her particular situation, which is more complex than simple mathematics. You’ve got to comprehend and understand what is that seller’s motivation. What is that seller’s objective? What is that seller’s pain that you can ultimately solve in order to purchase that property?
That seller is seeking to accomplish something in addition to the obvious goal of getting a certain dollar amount. There is also an underlying need. This comes in many different ways, shapes and forms and as investors we have got to be able to recognize that and act upon it.
As an investor, you’re going to sit across the table from sellers who are sitting in a house they own but which is in need of repairs that have become too much. Either it is too much work and is overwhelming or they don’t have the money to undertake these repairs and it is financially overwhelming, versus emotionally or physically overwhelming.
You may come across sellers who are interested in selling the property because there was a death in the family and the home is no longer occupied but it is their responsibility to liquidate the estate, including selling the home.
You’re obviously going to come across sellers who are in a position of financial need. Maybe they lost a job or had a medical condition that’s caused financial stress and the house is no longer affordable. You’re also unfortunately going to come across domestic situations where the couple is splitting up and the home needs to be liquidated as part of that proceeding.
And you will come across folks who simply need to sell a house real fast. They’ve got a great opportunity to buy a new home and they’ve got to act quickly or they’re going to lose that chance. Or they’ve got a great opportunity to secure new employment but they’ve got to act quickly or they are going to miss out on that.
In addition, you’re going to come across sellers who are landlords or investors like yourself. But maybe they got a bad rental property, meaning it’s just been a bad experience and hasn’t worked out the way they had hoped. Maybe they had bad tenants or maybe it was a house that required too many repairs or is taking more time than they hoped—whatever it may be.
The point here is that none of those many reasons I just listed is necessarily centered around the dollar value of that property. Instead, it was centered around a pain, a need, an objective or a problem. And you as an investor have to value that seller’s position and understand or comprehend that person’s objective in order to be a solution provider. Not only do you need to provide them with a fair offer for the property, but you also have to provide them with a solution to whatever source—or sources—of pain they have. You have to understand that seller’s need or objective in order to solve his or her problem and purchase that house.
Value No. 3: The investor’s own worth
And then finally let’s talk about that third type of value that is also commonly overlooked by real estate investors. And that is their own value.
Our value as real estate investors is that we are solution providers. And we have to be able to demonstrate our value effectively and clearly to the seller. Our role is to purchase the property, and there is value in that. But we can also demonstrate and illustrate other values we have.
Perhaps that seller is a landlord whose dilemma is not being able to sell the property because it is tenant-occupied. Your value is that you are poised and ready to buy with that tenant in place and willingly will inherit that lease. That is a great value you can create within yourself and demonstrate to that seller to solve that problem.
Another value you offer is that you can buy the seller’s property so he or she can pay off that mortgage with those proceeds, and you also allow that person or family to stay in that house for another month as a tenant as they go look for their next home. There is great value in your ability as an investor to solve their pain, to meet their objective or solve their problem.
That is a unique type of value that we as investors can provide—to act quickly to buy as-is, to pay closing costs and lease that property back, if that helps in the seller’s transition; or to buy a home with a tenant in place and inherit the lease and perhaps even the difficulties that come with that tenant.
So we’ve talked about a lot of different types of value today—the ability to calculate the dollar value accurately being the critical, foundational element of what we do as investors. But don’t overlook the importance of identifying of the value of that seller in this transaction and the importance of their objective, their need, their pain. And third, don’t underestimate your own value and don’t hesitate to demonstrate your ability to solve the problem or meet the objective of that particular seller.
When you combine these three types of value together, you’ll elevate your success tremendously as a real estate investor.
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About the Author
Kevin Guz is a Dallas, Texas-based residential real estate investor with more than 10 years of investing experience. He owns a HomeVestors (or “We Buy Ugly Houses”) franchise as well as the Clear Key companies, which focus on residential real estate wholesaling, rental property management and self-storage leasing. He also is a licensed real estate agent in the state of Texas. He enjoys sharing his ongoing personal experiences, perspectives and learnings from his start as a part-time or “weekend investor” and full-time corporate professional through his ultimate transition to a full-time real estate investor and business owner. You can listen to his podcasts at http://www.blogtalkradio.com/kevinguz.