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Determining Probable Outcomes:Analyzing Real Estate Prospects Using Historical Data

I bought a house yesterday for $11,500 on a street named Willowview in Memphis, Tennessee.  It needs about 5k in work, and will produce $600/month in rental income.  I manage our own properties, so we are looking at true net cash flow here, not counting vacancy and maintenance.

Good deal, perhaps?

What if I told you that the house was sold 8 months ago for $62,750 – right before the owner stopped making payments?

Clearly, on paper, now this is a great deal.

The massive 82% discount that I received on the property(be all in a property at 18 cents on the dollar, anyone?) however is certainly not enough to justify the acquisition of this property.  Anyone who is familiar with some of my real estate theories knows that ‘pieces of the puzzle’ cannot be broadly defined solely by purchase price.  Many other factors need to be taken into consideration.

However, for the conservative real estate investors in all of us, when we are looking at prospect properties, purchase price, rental numbers, and other ancillary figures, while helping to paint a picture of probable success, do not clearly give us a complete picture of what the investment may hold for us.  To examine such paradigms, we need to look retrospectively – at recent empirical data.

Now, I am no math wizard, and while at time to time I tend to introduce certain simple formulae to real estate analysis in my writings, I am more of a ‘let’s get in the field’ type of investor.  I almost failed pre – calc in high school, so let’s be clear – looking at empirical data is relegated to examining facts and figures that are easily accessible and easily interpreted.  Figures that can easily be found while sitting at your home computer.

For example, when I purchased this property on Willowview, I looked back at the sales data and saw the following numbers posted on the tax assessor’s web site:

Date of Sale    Sales Price    Deed Number   Instrument Type

01/02/2008     $62,0000           8010589                 TD

10/21/1998      $54,000            HW0739                WD

06/02/1998      $17,600            HL3043                  TD

11/17/1977      $23,150            M74612                  UN

Now what does this tell me?  I see that a transaction took place in January of this year, for $62,000.  The title search showed that the transaction actually was for $62,750 – but really, the extra money isn’t that important.  What this tells me is AN APPRAISER LESS THAN 8 MONTHS AGO, FELT THAT THIS HOUSE WAS WORTH AT LEAST $62,000.

Looking back even further, I see that over 10 years ago the house was STILL worth $54,000.  So, for $11,500, I am getting a deal here, at least from a price point.

But again, price alone is not sufficient to justify us pulling the trigger on an investment home.  I need to look at rental comparables and the rental area itself.

Resources such as and property management companies, as well as your local network of investors and your local Real Estate Investor Association, can be great sources of information for the viability of a potential rental area.  As we have stated many times previous, we really DON’T want to buy in a ‘war zone’ or high crime area.  However, in this case, I happen to own another home on the same street that rents for $600/month, has the same number of bedrooms and baths, and has much smaller square footage and amenities.  So, this data I know for a fact gives me a strong indication that I can expect an equal performance from the new prospect property, if not a slightly stronger one.

When analyzing real estate investment prospects, it is critical that you review historical data as a possible forecast for what the future holds.  The past, does in fact, sometimes seem to repeat itself.  If a property has a history of high price values compared to what you are able to buy the property for, the area looks good, and the rental comparables are solid, you may want to think about taking a shot and putting the property into your portfolio.

On the other hand, if historical data indicates that the empirical strength of strong sales prices, rental numbers, and low crime statistics are not in place for a property you are considering, you may want to think about moving on to the next deal.

I once heard someone say “the deal of the century comes around once a week.”

Don’t be afraid to examine the historical precedents that have been lain out before you to help forecast future performance.