Editors Note: This topic was last discussed in February 2006. The markets have changed dramatically in the last twenty months (we are no longer in a hot market), so it is time to revisit this important topic. In this month’s column we will start at the top. That is, before you buy a foreclosure to fix and sell for profit, you must first solve for your estimated RESALE price. Then in December 2007 (Part 2), I will review how to estimate YOUR COSTS (buying, fixing, holding, selling and profit) in a Soft Market. Then in January 2008 (Part 3) I will review how to pull it all together so your OFFER PRICE guarantees your profit is built in when you BUY THE HOUSE! Enjoy!
Over the last few years, the wealth created by real estate has been unbelievable. So many investors have made easy money. Most paid full market value for their property and simply sat back and waited for the market to go up. Everybody boasted how rich real estate has made them.
But today’s soft market is not the same. There is no room for error. The market will not fix your mistakes. You must BUY IT RIGHT and 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 don’t understand this will be washed out of the real estate market in 2008. I last saw this happen in the 1990’s, during our last price correction. (Make sure you read this months Reference Desk on past market trends.) I got better at buying houses cheaper, while my competition ran after their next “easy money” opportunity (e.g. the Nasdaq). And you know what happened to them after that….
But most new investors really don’t know what to pay for a foreclosure 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!
So where do you start?
My offer formula is really simple. Just like in any business, I first determine the resale value of my product. Then I deduct my costs (buy, fix, hold and sell) and my profit. What is left is what I can pay for the house. Next, your price needs to meet the sellers’ needs (his cash at close of escrow) so you have a win-win deal. Plus the seller needs to have enough equity (existing loans and liens must be substantially less than what you want to pay for his house), so you can do the deal.
(All of these issues (and more) are covered in detail in my “Six Steps to Mastering Foreclosures” CD home study course. Of course I will highlight the basics now in this 3 part series….)
So how do you determine the resale value?
On your ForeclosureS.com property list, we provide our members a “market value” amount and an equity amount (as well as equity percent). Our market values are averages of past sales in the area. These values should not be viewed as an appraised value. Instead, they are a great tool to help you filter those deals that are worth your time.
For example, in a “hot” market (where values are going up) your market value amount listed can be much lower than current values. Conversely in “cold” markets (where values are dropping) your market value amount listed will much higher than current market values.
So you must NOT bank on any average market value numbers! They are strictly starting point, guidance numbers for you to use while “weeding your leads”. Read more here: “Weeding Your Leads Has Never Been Easier!”
When you are about to write an offer, you need to know EXACTLY what you can sell your house for. Estimated market values will not be enough. You will need to conduct your own appraisal of the future value of the property. But you won’t have the time (or money) to hire it out. You must learn to do it on your own.
To begin, picture your house in 4-6 months, with all the repairs completed (new paint, flooring, updated kitchen and bathrooms, clean landscaping, clear pest report, good roof, etc). What is that fixed up house worth? That is where you start.
You will need to subscribe to a fee-based database to gain access to current comparable sales (this is the same data source that appraisers use).
I use SiteXData.com by Fidelity National Data Services (FNDS). Sitexdata provides a user-friendly, affordable Internet program for the most up-to-date, accurate county real estate data to make your job easier. FNDS information is compiled directly from the County Recorder and Assessor offices throughout the USA.
Sitexdata is updated daily and available 24/7 online. You will have access to the most current and comprehensive real property research and marketing information available. Full report includes: Profile on Subject property, history, comparables, map, etc. Our preferred rate is $125/month to get 150 property reports per month. For a FREE Test Account and More Information, please contact Carolyn Covington directly Carolyn.Covington@fnf.com and reference Foreclosures.com to get your preferred rate.
Once you are all set up, you will start by searching for all houses that have sold within ¼ mile radius (you can go out as far as 1 mile if needed) and sold in the last 3 months (do not go older in a soft market). These sold houses must be similar in size, age and style to the house you are appraising. Do not use “fixer comparables” with low market values. You are seeking what you can get for your house after repairs, not current condition.
Then check your local MLS (Multiple Listing Service using consumer websites like Realtor.com, Metrolist.com, Ziprealty.com, etc) for all actives (on the market) and pending sales (on the market and in escrow) with the same criteria, to see what your current competition is doing. Check out the average time on market and number of houses for sale in your area. You need to have your eyes wide open, so there are no surprises later when you try to sell.
Next, take your best comparables from the above data (solds, pending sales and actives) and drive by them. Eliminate any comparables that you cannot replicate. Put more weight on active and pending sales, than sold comparables. In a soft market, what matters is what your competition is doing now, not the past. You can’t replicate the past. You need to make sure your house is nicer and priced better than any other house in the area. And you need to minimize your holding time, so don’t be greedy. Price it to get in, get out and bank your profits!
For Example:
- Your Sold Comparables from Sitexdata has comparables in the $325,000-$340,000 range.
- Pending Sales from your local MLS has a similiar house listed for $310,000 in escrow, but you don’t know what it actually sold for until it closes.
- Active Listings in your local MLS show similiar houses listed for sale in the $310,000-$340,000 range.
- I would fix up my house to be as nice or nicer than those similiar in age, size and location as mine, on the Active List now. And I would price it at $300,000… below my competition. I will probably get multiple offers on this low priced, nicely repaired home. And I will cut my hold time in half.
Get in, Get out. That’s our Goal right now!
Of course until you’ve actually completed the rehab and re-checked your competition before you put it on the market, you will not know for sure what your property is really worth. But you will be much closer to reality than you were when you started!
The key is for you to minimize surprises and have your price projections come in as close to your actual numbers as possible. Remember, without direct access to the right tools (Foreclosures.com, sales comparables and houses for sale on the MLS) you will be working in the dark (and be quickly out of business). These are all essential tools for all real estate investors who plan to make their money when they BUY the house – so you can make profits in hot OR IN COLD markets!
Now that you have the resale value of your house – it’s time to calculate your costs. Stay tuned for next month’s column “Setting Your Offer Price (making money when you BUY the house) Part 2 of 3: What’s Does it Really Cost in a Soft Market?“
Here’s to making 2008 our Best Year Ever!
