Investing in foreclosures for Resale is not so different
from Investing in foreclosures for Rental income. Many
of the same rules apply and many guidelines remain
constant. As with any type of investment the point at
which you enter will determine how profitably you exit.
The single largest distinction between real estate and
stocks, bonds, mutual funds or precious metal is that
real estate allows the Investor the opportunity to have
a more direct and immediate impact on the Investment
(the property) through rehab, paint, carpet, etc. This
article in this series on Real Estate Investing
will demonstrate how to quickly make an assessment of a
potential Real Estate investment.
The guide should allow the average investor to make a
rapid and well-thought-out decision. An informed
investor will not "lose out" because of
third-party factors such-as obtaining appraisals or
contractor/repair people. An aggressive, proactive
approach by the Investor can reduce the time it takes to
obtain properties. A passive approach or an offhand
attitude does not promote good opportunities. Remember,
work with your agent and get pro-active!
How to determine Equity
The old adage about the only three words in business
being "Location, Location, Location"
is as true as ever. In Real Estate, however, those three
words are "Equity, Equity, Equity".
The difference between what is owed on a property and
its Market Value is called equity. As an
investor, the goal is to buy for less than the full
value and sell for market value and make a profit in the
process. So at what point does caution balance against
risk to make a profit?
A strong equity position is generally targeted at 25%
after repairs. An equity position less than 25% can work
for rental investments, but for resale purposes 25% is a
safe figure. In order to determine if 25% after repairs
can be achieved there are only three variables that need
to be weighed in the mind of an investor.
■
How much can I get it for?
■
How much can I sell it for?
■
How much will it cost to repair it?
It is not difficult to obtain answers to these questions
as long as the readily available data can be quickly and
accurately distilled into usable information. By using
the following guide and examining each property in terms
of these three variables it should not take more than
fifteen minutes to determine if a particular foreclosure
is a wise investment.
How much can I get it for?
First,
ask what your agent knows about the particular
foreclosure property.
■
How long has it been on the market? (Not vacant, but
available for sale)
■
Can Investors bid on it?
(Some properties are for owner/occupants only)
■
What does your agent think?
(A good agent is worth his/her weight in gold.)
Second,
look
at the property yourself.
Is it a "fixer upper?" Is it "market-ready?" The cost to
make a property ready to sell has to be considered as
part of the cost of buying a property. Usually an
eyeball will tell you how much of a commitment in funds
will be required.
Third,
be sure that you are willing to own the property for the
duration.
While it is certainly possible to get in and get out
without a serious commitment of finances, be ready to
own the property until it is sold. Some banks have
regulations stating you must take possession of a
property before you can sell it again. If, for whatever
reason, your buyer is unable to complete his end of the
transaction, you need to be prepared to be the owner of
the investment property until it eventually sells.
Fourth,
Bid quickly and often.
Nothing is more frustrating than investing a lot of
effort into a project for nothing. When considering
Investments, do not hesitate and risk missing an
opportunity. If a deal looks so-so (only a 10% equity
position, for instance) BID LOW to achieve that 25%
potentiality. It could be a good rental, or even a
modest resale. And there is always the chance you might
win the bid. In Investing, as in life, "he who hesitates
is lost". After submitting a bid, start looking for the
next Investment. Don't delay a possible "big dessert"
while waiting on the first course.
How much can I sell it for?
As a general rule of thumb most Investors are motivated
to purchase with a minimum 25% equity position (after
repairs). This requires two separate deductions in order
to be sure of a 25% equity position. First the true
market value of the subject property (after repairs) and
second, the repairs.
In order to determine the true market value without
ordering a full-blown appraisal, (both time and
financially prohibitive) an Investor must look at
comparable sales. "Comps" are available from your
agent. While the online services may serve as a
general guide the comparables your agent can obtain will
take into consideration many more factors. Look at the
entire neighborhood in print format. Then consider the
most recent sales that reflect the style and
neighborhood of the subject property and compare them to
your Investment property.
Tip#1: The rewards are greatest when the investor
is a knowledgeable, pro-active force in the process.
Take an active roll in your investment. (Placing
Advertisements and selling your own properties is
covered in another article.)
Tip#2: The figure for how many days on market
(DOM) a property was available before its eventual sale
will be found on the MLS listing. Be sure to ask your
Real Estate Agent for these figures specifically so that
a determination can be made regarding the desirability
of a particular neighborhood, style of home etc…
Tip#3 Along with "Sold" properties a look should
be taken (in print) at other properties that are still
"available" or "withdrawn" from the market to determine
the health of the market.
Determining
"True Market Value"
The following should offer some quick factors for market
value adjustments on properties in the $100,000 range.
DOM (days on market):
No impact on market value under 180 days. Extended
periods in excess of 180 days approach with caution.
Think laterally, there could be possible rental
opportunities.
Sales Price:
"List Price" does not equal "Sales Price".
Bedroom and bathroom count:
add or subtract $3000 for each full bath, $2000 for ½
baths.
Garage:
add or subtract $4000 per car, divide by half for
carport.
Basement:
add or subtract $8000 for a full basement, additional
$2000 if finished.
Pools/Tennis Courts:
No Adjustment
Be careful not to come up with an artificially high
pre-determined value. Stay open-minded and objective. If
the math looks strange, remember to ADD adjustments to
the compared property to value it AS IF it had the same
features as the subject property.
How much will it cost to repair it?
After looking at the comparable sales the investor need
only reduce the repairs to understandable figures in
order to calculate if the property can be purchased and
repaired for 75% of it's market value (the 25% equity
magic number).
To estimate repairs one could have any number of
contractors offer bids and submit proposals, however the
time required for meeting with three contractors and
getting proposals may not be available. A
quick-thinking, fast-acting investor can estimate work
required by walking through the subject property and
tallying the figures without a second appointment.
These figures are not hardcore, written in cement
numbers but should allow a quick and easy comparison of
value allowing a decision to be made after the estimates
of repair have been performed.
The following should offer some averages for the more
common repairs to a 1200 square foot rancher without a
basement.
■
Paint
w/minor drywall repairs: $800.00-$1000.00 per house
■
Carpet (one grade above builders): $1000.00-$1200.00
■
Kitchen and Bath flooring: $300.00-$500.00 per room
■
New
Roof (try to repair first): $2,0000.00-$3,000.00 per
house
■
New
Heating and Air: $1,000.00-$2,500.00
■
Appliances (Save Money-buy used): $250.00 per appliance
■
Miscellaneous Expenses: add 10% to total
Tip: Be sure that you are true to your investigation
and do not allow passion or trepidation to sway your
decision-making either way. It is more important that
you swing than it is you hit a home run. (Bid often!)
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