Dean Graziosi

There’s a story on the news or in the newspapers almost every day about how foreclosures are almost an epidemic but fortunately for investors, foreclosures are a great way to pick up a bargain and continue to develop your real estate portfolio.

Foreclosures happen when the homeowner goes into default on the mortgage payments and stops making payments to the bank. The whole time you’re dealing with the bank and the seller, payments aren’t being made and that works to your advantage.

When a person is in pre-foreclosure, they are extremely motivated to get out of the house and save their credit score. In other words, they are motivated to sell and get the bank off of their case.

Of course there are owners who will counter your logic for selling to you with a number of arguments. For example:

·         What do you say when a homeowner tells you that they were promised an amount by another investor?  You might reply to them that how can an investor make a promise of a certain amount of money without first speaking with the bank that holds the mortgage. You would also be frank and tell them that you can’t promise them any money at the moment but once you speak with the bank and get the details you would be able to make an offer.

·         Some owners will insist that they be allowed to stay in the house. Your reply would remind them that if you should buy the property, you are not able to rent to them and actually leaving the property and the problems that have come with not being able to keep up with the payments would be a blessing in disguise.

·         If the seller asks how you as the buyer can be trusted it is a good idea to be able to show them how much time and effort you’ve spent on other home foreclosure purchases and reassure them that you are not playing games but are serious about buying and rehabilitating this property.

Keeping these simple ideas in mind when you’re ready to start purchasing and rehabbing foreclosure properties should go a long way to giving you success in the foreclosure real estate market.

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Because there’s no Edmonds Blue Book for real estate property values, it’s important that investors understand how to accurately estimate a property’s current market value. Overpaying for a piece of real estate can be costly later on. Knowing the accurate value of a piece of real estate property is probably one of the most important parts of the whole real estate investment business.

According to the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice, market value is defined as “The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the sale price isn’t affected by undue stimulus.”

Here are three commonly used methods for estimating real estate property values:

·        Comparison Sales Method – This method uses the recent sale prices of properties within the same area and similar in size, quality, amenities and features.

·        Income Method – This method is used to estimate the value of an income producing property by figuring out the net income the produce produces.

·        Replacement Cost Method – This method is based on what it would cost to replace the improvements on a piece of property with similar construction methods and materials.

Here is an eight step method for figuring out a rough estimate of a potential real estate property’s current market value.

1.         Log onto your county’s property appraiser’s web site to get the tax assessed value of the property.

2.         Search the county’s property tax rolls of three to five recently sold properties.

3.         When analyzing properties you find, make price adjustments for differences in amenities, special features and the physical condition of the property.

4.         Verify the income and expenses that are listed on the income and expense statement of the property you are considering.

5.         Analyze the income and expenses for the prior twelve months to figure out the net operating income potential.

6.         Figure out the property’s capitalization rate by dividing its potential operating income by the estimated value that you calculated from analyzing recent sales of similar properties in step number three.

7.         Estimate the property’s value by multiplying its net operating income by the capitalization rate you came up with for the real estate property.

8.         Figure the cost of replacing the improvements on the real estate property by using the same building materials and means of construction.

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