Calculating The Value Of A Foreclosed Home
If you are like most investors or homebuyers looking into buying a foreclosed homeyou are excited about the idea of getting a really good deal on a home. Unfortunately you may also be like many real estate investors and assume that the price the bank has listed the foreclosed home at is a good deal. It must be right, it is a foreclosed home and the bank wants to sell it fast.
I hate to burst your bubble but banks do not normally list their foreclosed homes on the MLS (Multiple Listing Service) at a significant discount. Instead after years of looking for foreclosed homes I have found that most banks list the homes for far more than I would be willing to pay for a home.
So how do you know what a foreclosed home is really worth? I have 3 quick ways to get an idea of the true value of a home and protect yourself from over paying for a property and just as importantly make sure you arent walking past a good deal.
Repair Costs Before I even look at the value of the home I make sure to check out what needs to be fixed in the home to make it retail ready. The number one mistake I see banks making in coming up with the retail value of their foreclosed homes is properly understanding and documenting the repair costs. Most banks ask a realtor to perform a BPO (brokers price opinion) that tells the bank what the home is worth in its current condition. The problem with this is that most realtors are not general contractors and may not be able to accurately estimate repair costs.
Just as importantly as not being able to estimate the repair costs is the broker and the bank often look at what it costs to fix up the home so that it is in working condition. For example they will add the cost of a new HVAC unit if it is broken but they probably will not add in the cost of new paint and carpet or updating an outdated kitchen. Once you calculate the cost to repair a home to the point it can sell at top dollar it will be your job to explain to the bank that a home will not sell at top dollar until it is in top condition.
Market Value Foreclosed homes are often in poor condition but the question you should be asking is what is the home worth in good condition like the other homes in your neighborhood. There are a lot of ways to do this but as a newer investor the fastest and most accurate way you are going to get this done is to partner with your buyers agent and have him or her perform a CMA (Comparative Market Analysis).
A proper CMA will tell you what the other homes near your foreclosed home sold for recently. The important part of a CMA is the homes included in it should be near your foreclosed home, have already been sold, have the same number of beds, baths and similar square footage, and should have been sold recently. Knowing this information can give you a decent estimate of what your foreclosed home would sell for if it were in similar condition.
Whats in it for Me? Ok now this probably will not be something that is in the CMA or on an appraisal form but we are trying to figure out the value of the foreclosed home to you and not just the retail market value of this foreclosure. As a real estate investor after all is said and done you are going to want to make a profit off of the sale of the home or have a monthly payment that is low enough that the home cash flows as a rental property.
Once you have come up the market value and the costs you will have to outlay to get the home in top marketable value you will add that third ingredient, your secret sauce to calculating the value of your foreclosed home to you. The Profit!
Take these three easy steps and you will find time and again that you are able to find and negotiate good deals with the banks on foreclosed homes. Always keep in mind that people run banks and people need a reason to take an offer that is less than what they originally thought they would get for their foreclosed home. Provide the bank with a reason and numbers and they may just come around to your way of thinking.
by: Allison McArthurAbout the Author: