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How Much Should You Pay for that Foreclosure Home? Part 1

By: Alexis McGee | Written: March 6, 2013

The meaning of market value can be very confusing for a foreclosure home buyer. As consumers, we understand that market value is the price that something will sell for in a reasonable period of time. We also know that some items are not negotiable (consumer retail products, medical care) and some are very negotiable (cars, boats, houses). When purchasing a foreclosure, you imagine a motivated seller and hence a better price right? That is not always the case.

The questions remain – How negotiable is your foreclosure home purchase?  
foreclosure home

And how much should you pay for that foreclosure house?

In a normal real estate market, market value is defined by three elements – 1) the price at which a particular home will sell for; 2) the resaleable condition; 3) the value in the next 30-60 days.

However in a competitive market, like we are in right now, many of you are having a difficult time predicting how much to pay for your foreclosure home, as it is not easy to determine what someone  will pay for your resale in 30-60 days. With prices moving up quickly, and you may feel like you need a crystal ball to accurately price and project your rehab budget and profit potential, before you buy your house.

That is not true. You can learn how to come  very close to predicting the true market value of any house even without a crystal ball. Real estate appraisers and successful investors do it every day. Even so, the appraisal of  real estate is more art than science.

To predict future market value you must analyze these 3 elements…

1. The particular house

When you determine market value, you must always remember that you  are estimating the market value of one particular house. The location, or neighborhood, of this particular house is the starting point for your  investigation. The exact same house in the next city, or even on the other side  of the same city, is not relevant to this determination.

For example, a  house located in Fair Oaks, Sacramento, California is worth $300,000. But  if the exact same house were located in Citrus Heights, Sacramento, California, a neighboring zipcode, it is only worth $200,000. That’s a big difference in price for just one zip code away right? But it’s more than just a zip code.  The Fair Oaks house is in quiet neighborhood, walking distance to the American River Natural Parkway and has cool delta breeze every hot summer night. The Citrus Heights is in a dense neighborhood, with lots of traffic, higher crime and higher summer temperatures. There is a reason for the price difference.

Although this may seem like an extreme  example, house prices throughout the country fluctuate significantly from neighborhood to neighborhood. Therefore, whenever you determine  the market value of one particular house, you must compare it only with similar  houses in the same , equivalent neighborhoods.

2. Resaleable condition

Next, you must assess the condition of your particular house upon future resale.  How well your property will look and show once you list it for sale in 30-60 days will determine the number of buyers who are interested, and will affect the amount of time the house remains available for sale, before it is sold.

Home buyers are picky. They want to buy the prettiest house they can afford. Is the house gorgeous and ready to move into?  Or is it lacking curb appeal in your neighborhood? First impressions are everything! You need your house to be as nice, if not a bit nicer, than the houses that surround you. Your house must have a “wow” factor when buyers drive by, so they stop to come in. The more buyer traffic you have early on, the more offers you will get, the more aggressive buyers will be with their offers. You cannot afford to make mistakes here. You must “do your rehabs right” and your house will sell quickly in less than 30 days.

You must also “do your right math” when calculating your rehab budget and profit potential, before you buy the house. Simply subtracting the  amount of estimated fix-up costs from the selling price is not an accurate way to determine current market value. If your house in good condition could sell for $300,000 but the house you are interested in needs $20,000 worth of repairs, that  does not mean the current market value of your house is $$280,000.

Why? Because you haven’t taken into account your time or return for both financial and market risk. Remember, fewer buyers want to buy a house that doesn’t look pretty. When a house attracts fewer buyers, it takes longer for the house to sell. To attract more  buyers and sell the house sooner, the price must be reduced by much more than just the mere cost of repairs.

Although the current condition of the house is an essential element of market value, you must first determine  exactly how much the physical condition of the house affects its value. This is not an exact science. As an investor, the way I calculate this is by finding comparable repaired homes and then deducting a rate of return to compensate me for my risk to rehab and flip this house.

So what is a “fair rate of return” for me to buy, fix and flip project? Don’t ask your realtor, he will tell you that should make your money when the market goes up. By the way, that is not investing – that is gambling. You should not take that advice! Remember, they are trying to get your offer price up so yours will be accepted and they will get their payday. You must watch your back here!

Also, don’t forget your realtor is paid 6% commission to simply help buy and sell real estate without any financial risk on their part. Shouldn’t an investor make 2-3 times that? Yes, they should and that is why I build in a 15% profit deduction on all of my purchases. It is also how I came up with my “70% Less Repairs Offer Formula” for all my “as is” purchases.

3. Next 30-60 Days

In a normal real estate market, if a house doesn’t sell  within 30-60 days the reason is simple: The price is  too high.  Even perfect houses don’t sell within this time frame if the price is  too high.  On the other hand, if a house sells within one week, the  asking price  was probably too low. A house that sells within a month is priced at the true market value of the house.

Imagine this scenario. You have a fixer foreclosure you want to buy, fix and sell in the next 60 days. You start looking for comparable sales and find a home that sold for $275,000 in January 2013. That home went pending sale back in November 2012. It is now March 2013 and the market has moved up in price. There is another comparable home that just went pending sale in just one week at $295,000 at the end of February. And there is an Active comparable listing that has been on the market since early February (30 days now) for $350,000 and is still unsold. What is the correct predicted resale value for your home?

I’ll review the above scenerio and explain exactly how to use the “right comparables” to calculate  the current market value of a particular foreclosure house in my next post “How Much Should You Pay for that Foreclosure Home? Part 2“.

Do you want to get your “foreclosure offers priced right”?

If so please join me in my next Live Strategy Session, March 13th, Wednesday at 6pm Pacific (9pm Eastern).  I will be reviewing clients live foreclosure deals and be offering my professional opinion on how to properly price your wholesale foreclosure offer so it gets accepted – even in today’s competitive market.

Let Me Help You Get Your Deals Accepted. Here’s How…  

  • Start by Searching Listings for a Great Wholesale Home Lead.
  • Pick a Pre-Foreclosure with Equity; Short Sale (no Equity); or REO deal You Want to Buy;
  • Send me Details of your Potential Deal (asking price, square feet, lot size, year built, etc.);
  • Find Comparable Homes Sold (Last 90 Days within 1 mile);
  • Find Comparable Available Actives and Pending Sales (within 1 mile);
  • Project Estimated Repairs Needed (and Costs);
  • Determine Your Potential Wholesale Offer Price (Include Your 15% Profit);
  • Submit the above to by Monday, March 11th, Midnight.
  • Make sure you Register Here and then Join me next Wednesday to Learn the Answers.

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One Comment

  1. Hector says:

    Hi there,

    I have one burning question that needs an answer; How/Why would anybody with 30% equity in their home end up in a pre-foreclosure or worse lose their home at the auction.

    Just sell it. You have 30% equity…It would go a very long way if I could get some realistic feedback on my question.

    Thank you