How to find the true market value of a foreclosure
Your bid for a foreclosure property has to consider so many variables including an accurate market value. Get it right and you’ll realize a good profit if your intention is to resell. If you’re not looking at it as an investment but as a home, you’ll want to maximize your available capital for repair and renovation work. If you get the math wrong you may end up in debt yourself or you’ll have to live with the leaking roof and the dangerous electrics.
Considerations in foreclosure buying
By their very nature foreclosure properties are likely to need repair and remodeling before they can be lived in properly or resold. They got that way because the previous owner found themselves into a financial hole. Rather than put money into maintaining their home their minds were on survival and life beyond the foreclosure.
Refurbishment
The sum of money necessary to cover this refurbishment work is not easy to estimate. Often you will not have access to the building prior to the auction to carry out a detailed assessment; so much of it could be guesswork or an experienced ball-park figure. There is sometimes a detailed Property Condition Report which can be accessed through sellers like the US Department of Housing and Urban Development (HUD). This provides a pro-forma check of the various services in the house and general descriptions of the condition of decor and the mechanical structure of the house.
The Market Value
The housing market is an ever shifting landscape. It is influenced by so much wire-pulling; the national and local economy, local developments, highway building, railroad and aircraft noise, fashion and crime, that it takes experts studying these factors permanently to arrive at a figure that can be used to position a particular property on the scale.
Well established auction organizers will provide a market valuation in the details of the property to allow you to compare their guide price. You can choose to accept this figure for your calculations but be advised that the figure may have been calculated months previously and the local market may have shifted in the meantime. In addition, if you are using the foreclosure property as an investment opportunity, you’ll be more interested in the predicted market value two or three months from now.
There are many online valuation sites, some free, designed to suck potential sellers onto the books of a realtor. They can be useful to obtain a ball-park figure but are almost certain to be out of date as soon as the information is keyed into the database.
This is not the province of the novice; you really need the help of a reliable professional. If you are new to the foreclosure market, it will pay you to strike up a relationship with a local real-estate agent. Their experience of the local conditions will pay dividends.
Profit
The final piece of the jigsaw is the expected profit that you can tolerate. Tolerate is the correct word because projects like this can eat into your profit margin unless they are strictly project managed. Decide on the minimum return that you would accept and then set yourself a realistic upper limit. This upper limit should be your target and you should feed this into your bid calculation.
Auctions are hot-beds of emotion and it is more common these days for foreclosure properties to sell for only a few percent below the market value unless they are truly dilapidated. Calculating a realistic bid price based on an accurate market valuation should prevent your heart from ruling your head.