Foreclosure Forecast Newsletter

Editors Note: This is the final part of 3 Part Series. In February’s column “What is it Worth?” we started with the bottom line. That is, before we buy a foreclosure to fix and sell for profit, we first solve for our RESALE price. In March’s column “What Does it Really Cost?“ we reviewed how to estimate YOUR SOFT COSTS (buying, holding, selling and profit). This month we will discuss how to determine your repair costs and how to pull it all together so your offer price guarantees your profit when you BUY THE HOUSE! Enjoy!

There has been a change. “Foreclosure activity is up across the country.“ Investors who have made “easy money” – by paying full market value sitting back and watching their values go up – will be washed out of the market. Only those investors with the right knowledge and skill set will be successful in 2006 and beyond. Will you be one of them?

If so, you must BUY RIGHT to lock in your profit at your purchase.

To wait (and hope) for home prices to go up will, in this market, prove to be financial suicide. Many investors who didn’t understand this in the 1990’s lost a lot of money. I know this because I saw it happen to many wannabe investors. This didn’t happen to me or those who followed my advice. We all just got stronger at buying houses cheaper (while the competition ran after their next “easy money” opportunity).

But most investors (and Realtors) really don’t know what to pay for a distressed property. They think if it’s in foreclosure, I’ll just give the seller as little as I can (like just moving money) and take over their loans, right? WRONG! You must know how to structure win-win deals to give your sellers the MOST you can! That way they say YES to your offer and you get to buy more houses and make more money!

Now at this point you should have:

1. “Accessed your local foreclosure listings“
2. “Weeded your Leads” to keep those with the most potential equity.
3. Determined your top resale value in “What is it Worth?”
4. Determined your soft costs (buying, holding, selling and profit) in “What Does it Really Cost?”
5. Estimated PROFIT! Make sure you pencil in at least 15% of the resale value or $30,000 (whichever is higher) on every deal. That 15% factor is important. Sometimes things go wrong. Your costs exceed your budget. Your hold time was longer than expected. Your resale value was lower than budgeted. All of these items will come out of your 15% profit. So do not make this margin too thin! You have a risk, and you must be rewarded for it!

Now you must decide what repairs will get you the most “bang for your buck” and how much it will cost you (versus what will you gain in resale value) and deduct those costs. They vary greatly based on the age and condition of the home and how well it will compete with other homes on the market when it is time to sell.

Here is my top list of “must haves” for my typical fixer house:

1. Termite: Section One Clearance; Section Two work negotiable
2. Roof: Repair for 3 year roof certificate; or Add another layer of Composition (check your local rules on how many layers you may have); or Replace with a new 30 year Composition roof.
3. Landscape: Cleanup, spruce up and fix any broken fencing
4. Paint: Inside and Outside
5. Flooring: New carpet, padding and linoleum
6. Kitchen: New applicances; New (or reglazed) counters; Cleanup cabinets
7. Bathroom: Reglazed tub/shower; New (or reglazed) sink/vanity; New toilet (or seat)
8. Air Conditioning/Heating: Repair or Replace
9. Make sure you also read “10 Inexpensive Ways to Spruce-Up Your Rental Or Rehab Property”.

There are many resources to help you with repair cost estimating. I personally like HomeGain’s Home Sale Maximizer tool. Their free web based tool will help you improve your home’s appeal, increase the selling price and even shortens the days-on-market, all by helping you choose the right touch-ups and repairs.

You will then create a budget and calculate the potential return-on-investment, for every house when you evaluate and plan your pre-sale effort.  You START HERE by entering your zip code and answer a series of yes/no questions about your property. The results are displayed below, using an example report for my zip code area 95628:

In my 3 Day “Mastering Lab” program on Day Two, fourteen of my clients go out in my “Limo Bus” to tour local fixer/foreclosure deals. We actually go inside a couple of houses and estimate what repairs we should do and how much they will cost you. I then give each student a copy of my working Excel file, including all my soft and repair cost formulas built in. This allows those clients to have a working budget in place, on every offer they make, with the confidence that the deal will be profitable. This has been a huge jump-start for my clients when they return home from the program.

Let’s pull out our calculator and see how this all pencils out:

1. Determine Resale Value (after repairs value)
2. Deduct: Soft Costs (average 15% of your Resale Value)
3. Deduct: Profit (15% of your Resale Value)
4. Deduct: Repairs (Actual dollar for dollar estimate — NOT a % guess)
5. What is left = Your Offer Price to the Seller
6. Deduct: Loans, Liens and cash to stop the foreclosure (bring all current)
7. Net left = Cash to Seller at closing for their Equity

Now you know the basics of “Doing the Math” so your offer makes you a handsome profit and provides cash to the seller at closing. The key is finding a motivated seller who wants your cash and services more than they want to keep their property. As our Senior Consultant, Andy Anderson has said many times, “It’s an art, it’s a technique.” Too many investors try to copy from those who haven’t mastered it themselves. Be wary about whom you’ve selected as “your mentor”

Here’s to making 2006 our Best Year Ever!