Sometimes we like to complicate things more than is necessary. Investing in real estate seems to be one of those areas that becomes overly complicated. It isn’t rocket science, and yet why does real estate investing seem more arcane then putting a man on the moon?

The answer is surprisingly simple – fear. When real people decide to put up real money for an investment of real property that they may not understand completely, they get scared. That fear causes us to complicate the issue.

So let’s overcome that fear and simplify things. Let me give you three proven steps to help you evaluate any real estate deal. But before we begin, remember the key principle in real estate investing success: buy low, sell high. It is really that simple.

Determine The Property’s Value

The first step you must take in evaluating a property is to determine its value. To do that, you must have something to compare it to. So, when looking at a specific neighborhood, group the properties with other like properties.

For example, if you are looking at a 4 bedroom, 2 bath one-level house with a 2-car garage, make sure you group that with all the other houses that are exactly the same. Don’t compare it to houses that are two or three-story, and have only a single car garage. We aren’t comparing the price of houses, but the approximate value, so we must compare apples-to-apples.

To determine the value of a property you must look at it as if it is in pristine shape. You can’t look at it as a rundown house with outdated flooring and a broken toilet. You must see it completely remodeled. What we are going for here is the After Repaired Value (ARV). When evaluating a property, see it as if it was fixed up in order to determine it’s full ARV.

Estimating Repair Costs

The second step is to come up with an estimated cost for repairs. Note that I didn’t say an exact cost for repairs. You will do that later, but don’t get bogged down with the minutia now.

After you figure out a close estimate of repair costs then you are ready to figure out an offer price.

Figuring Out Your Maximum Offer Price

In step one you determined the Value of the property by envisioning it as a pristine property and comparing it with other properties of the same type. In step two you estimated the repair costs.

Now, in the final step, it is just a matter of taking the value, subtracting the estimated costs to reach that value through repairs, and then subtracting all the extra costs involved, such as closing and holding costs, and maybe most importantly, your profit. When you subtract all those costs from the determined value, you have your maximum purchase price.