One way to estimate the fair market value (FMV) of a property is to look at sales of similar properties that sold recently. As a flipper, you will need to do this twice. The first time, you will evaluate the comparable sales for your prospective property in its current condition, taking into account physical and legal problems. The second time, you must estimate the value of the house after you buy it and do whatever you have to do for an ultimate sale.
The underlying philosophy of the comparables approach to value is that buyers are indifferent to minor details and will pay the same amount of money for roughly similar properties. You would look at comparable properties, comps for short, and then adjust their sale prices upward or downward depending on how they compare relative to your own prospective flip.
As an example, let us assume there have been several recent sales of 3-bedroom, 3-bath brick homes on 1/4 acre lots, within walking distance of an elementary school in a good school district. They are listed in the following chart, along with differences among the homes.
As you can see, your house is most like the first comp, except for the fenced backyard. Fencing a yard is a very inexpensive way to add value to a home. It is also very easy to estimate costs, which are generally done on a dollar-per-running-foot basis. Your roof is ten years old, but the first comp has a new roof. Will that affect value? These are all 3-bedroom, 2-bath starter homes that will not be owned for a long period of time by any one family. As long as the roof has enough life left in it for the next owner, people generally do not care about its age.
The second and third comp houses are virtually identical, except one has a garage and one has only a carport. The one with the garage sold for $3,000 more than the one that had only a carport. A garage is a very important feature for most homeowners, so the garage alone probably added $3,000 worth of value. We can use that information when estimating a value for your home.
As you can see from the chart, your house and the first comp are almost the same, except that yours is in poor condition and has a garage that the comp house lacks. Let us disregard the poor condition for the time being because you plan to fix up your house so it will be in excellent condition, also. After you do that, the only difference between your house and the first comp house will be the garage. We have already determined that a garage adds about $3,000 to the value of a home. If House #1 sold recently for $109,000, then your house, fixed up, should sell for $112,000.
Estimating value is that simple. You might have more points of difference, some of which will cause upward adjustments and some of which will cause downward adjustments in the estimate of your home’s value. Just do like the professional appraisers and take each difference in its turn, calculating how much of an increase or decrease in value each causes. Then you do the simple arithmetic at the end to arrive at your own estimate of value.