Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Analyzing Deals (Part 2): The 3-Step Deal Evaluation Process

Written by Than Merrill

When analyzing deals, it is imperative that the speed of implementation is a top priority. The ability to quickly and accurately analyze a deal is a skill that will propel your real estate investment business to the next level. The 3-Step Deal Evaluation Process will allow you to review relevant data and determine whether or not the subject offers generous profit margins.

Stage 1: Phone Analysis

As its name suggests, the phone analysis connects investors to potential leads over the telephone. Engaging prospective sellers in such a manner will permit investors to gauge whether or not a property is worth pursuing. Accordingly, understanding how to quantify a lead is one of the most critical components to analyzing deals in the real estate industry. Determining how serious a seller is will ultimately affect the way in which you should approach them, if at all.

During this initial conversation, which should take no longer than 10 minutes, it is important to obtain the following:

  • General information about the property
  • Sellers motivation and price
  • Mortgage information

Interested buyers are advised to simultaneously compare the seller’s answers with data from a real estate site like Zillow. If the phone analysis corresponds to the information provided by Zillow, or numbers are better than anticipated, it is likely indicative of a hot lead. Assuming the numbers allow for an acceptable profit margin, take the time to schedule an immediate appointment to view the property in-person.

Remember, analyzing deals is not an exact science, just make sure you act fast and acquire the right information.

Stage 2: Desktop Analysis

Once you have made the decision to pursue the respective property, an interim analysis is required before you meet with the seller. Here, you will compile hard data to determine whether or not you keep the previously made appointment.

Any lead that has been deemed hot, or worth pursuing, should be complimented by the creation of a comparables packet. This package contains documents that will help determine your offer when you meet with the seller. This will require a more in-depth analysis, as to confirm the numbers presented by the seller and clear any discrepancies either party may have.

It is during this phase in which investors will want to acquire property records and use every deal valuation tool made available to them. Obtaining the property tax card from county records will reveal details that include: assessed value, heated square footage, the number of bedrooms and bathrooms, and much more.

In addition, it is important to familiarize yourself with local MLS comparables that meet the following criteria:

  • Within a half-mile radius.
  • Within the past six months.
  • Similar style and square footage.
  • About the same number of bedrooms and bathrooms.

After you have compiled a list of relevant data, use the information to determine the After Repair Value (ARV) of the subject property. The ARV will establish a rough estimate of what the house will be worth if it is fixed up and resold in pristine condition. Use the same date to determine the As-Is-Value too. Knowing these numbers will help determine your exit strategy.

Stage 3: In-Person Analysis

Assuming the previous steps have culminated in a hot lead, the next step is to conduct an analysis in-person. Confirm your meeting to see if the property corresponds with the seller’s description and continue to reevaluate a more-accurate price point. Remember, analyzing deals in person requires investors to establish a relationship with the seller. It is critical to establish a good rapport with them.

This process is initiated en route to the home and should take approximately 1.5 hours. Schedule time before the meeting to drive by and evaluate the following:

  • Closed comparables
  • Pending sales
  • Active listings
  • Subject property

This is the time to confirm any inconsistencies that may exist between the subject property and the surrounding homes. When analyzing deals, you must look at the comps in the neighborhood before you visit the prospective seller.

Once the meeting has begun, conduct a walk-through to ensure the house was advertised correctly. Take notes of any unanticipated issues and adjust your offer accordingly.

You should then have all the information you need to make an acceptable offer. During the course of the meeting, however, the most important thing you can do is to build rapport and trust with the seller. You want to create a solid foundation that will help you successfully negotiate and close a deal.

If you feel strongly that the property meets your financial goals, this is where you will make your initial offer. Be sure to present them with the appropriate packets you have created, as they will provide irrefutable evidence of a fair price.