Calculating the Value of Foreclosures

Any real estate investor who wants to purchase foreclosures should bear in mind that banks don’t necessarily list their REO (real estate owned) property at discounted prices, and in fact, could be asking too much.

It’s important, therefore, that the real estate investor make his own calculation of value to be sure the foreclosed property meets with his or her own real estate investing objective.

Here are three things investors can do to evaluate the worth of a foreclosure property in order to avoid missing out on a good deal, and at the same time avoid from over paying for a property.

1) Estimate Repair Costs – Bear in mind that repair estimates computed by the banks may not be complete. For example, whereas they may add the cost of replacing a broken HVAC unit or appliance, they may not add the cost of new paint, carpet, or updating an outdated kitchen. You want to be sure what it will cost to repair a property so you can sell it for top dollar.

2) Do a Comparative Market Analysis – Be sure you know the sale prices other similar real estate in the area sold. Include recent sales (perhaps within the past six months), generally within the same neighborhood, with the same number of beds, baths and square footage, and in a similar condition. If created with meaningful numbers, this will give you an idea of what you can expect to sell your foreclosure.

3) Tailor Your Profit – You don’t want to take the risks without making an adequate profit and rate of return. Whether you plan to sell the property quickly for a profit or keep it as a rental property, remember that the foreclosure has little value to you unless you profit.

Complete all three steps for each foreclosure you preview and don’t hesitate to use your documentation to negotiate a deal with the banks. The banks could yield to reason and accept an offer less than what they expected and more consistent your real estate investing objective.