There's little question that real estate investors are taking advantage of the opportunity to purchase foreclosures with the idea that will get a good deal on real estate the bank took back due to someone else's non-payment. Fair enough.
But banks don't necessarily list their REO (real estate owned) property at discounted prices, so it's important for the investor to make his own calculation of value to be sure that the property meets with his or her own real estate investing objective.
In this article, we'll consider three things you can do to evaluate the worth of a property so you can do both, avoid missing out on a good deal, and at the same time protect yourself from over paying for a property.
1) Make Your Own Estimate of Repair Costs - Never rely solely on the estimates provided by a bank because banks often get their information from a realtor who is probably not a general contractor and thus may not be able to accurately estimate repair costs. Moreover, banks often look at what it costs to fix up the property so that it is in working condition but not necessarily retail-ready (i.e., repaired in such a way to sell for top dollar). For example, whereas they may add the cost of a new HVAC unit when broken, they may not add the cost of new paint, carpet, or updating an outdated kitchen. You should calculate and document the cost to repair a property to the point it can sell at top dollar and then deduct that amount from the sale price charged by the bank.
2) Perform a Comparative Market Analysis (CMA) - Be sure that you research the local market to discover the sale prices that other similar real estate in the neighborhood has recently sold. Be sure to include sale information only for those properties that recently sold (perhaps within the past six months), generally within the same area, have the same number of beds, baths and comparable square footage, and in the similar condition you deem appropriate. When done correctly with meaningful numbers, the CMA will give you an idea of a price you can expect to sell your foreclosure.
3) Add Your Desired Profit - It would be remiss for any prudent real estate investor not to cover the risks and opportunity costs associated with foreclosed property with an adequate profit and rate of return. Bear in mind that you are seeking either, to sell the property quickly for a profit or to keep it as a rental property that will generate a positive cash flow. Either way, the foreclosure has little value to you unless you profit.
Complete all three steps for each foreclosure you are considering and use your documentation to negotiate a deal with the banks. You might discover that it gives the people that service the REOs with enough reason to take an offer less than what they originally thought they would get. And best of all, it helps insure that any foreclosure you purchase is inline with your real estate investing objective.
But banks don't necessarily list their REO (real estate owned) property at discounted prices, so it's important for the investor to make his own calculation of value to be sure that the property meets with his or her own real estate investing objective.
In this article, we'll consider three things you can do to evaluate the worth of a property so you can do both, avoid missing out on a good deal, and at the same time protect yourself from over paying for a property.
1) Make Your Own Estimate of Repair Costs - Never rely solely on the estimates provided by a bank because banks often get their information from a realtor who is probably not a general contractor and thus may not be able to accurately estimate repair costs. Moreover, banks often look at what it costs to fix up the property so that it is in working condition but not necessarily retail-ready (i.e., repaired in such a way to sell for top dollar). For example, whereas they may add the cost of a new HVAC unit when broken, they may not add the cost of new paint, carpet, or updating an outdated kitchen. You should calculate and document the cost to repair a property to the point it can sell at top dollar and then deduct that amount from the sale price charged by the bank.
2) Perform a Comparative Market Analysis (CMA) - Be sure that you research the local market to discover the sale prices that other similar real estate in the neighborhood has recently sold. Be sure to include sale information only for those properties that recently sold (perhaps within the past six months), generally within the same area, have the same number of beds, baths and comparable square footage, and in the similar condition you deem appropriate. When done correctly with meaningful numbers, the CMA will give you an idea of a price you can expect to sell your foreclosure.
3) Add Your Desired Profit - It would be remiss for any prudent real estate investor not to cover the risks and opportunity costs associated with foreclosed property with an adequate profit and rate of return. Bear in mind that you are seeking either, to sell the property quickly for a profit or to keep it as a rental property that will generate a positive cash flow. Either way, the foreclosure has little value to you unless you profit.
Complete all three steps for each foreclosure you are considering and use your documentation to negotiate a deal with the banks. You might discover that it gives the people that service the REOs with enough reason to take an offer less than what they originally thought they would get. And best of all, it helps insure that any foreclosure you purchase is inline with your real estate investing objective.