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Homeowners Beat Investors Every Time When Shopping for Foreclosure Property

By
Home Builder with New City Construction

If you are a homeowner looking to purchase and renovate a foreclosure property, you have a HUGE advantage over real estate investors. Even though you may not have the experience, contracting team and lenders lined up like a real estate pro, you have one advantage they can't match. You can afford to pay more and still come out way ahead.

Here's why. Cash-strapped homeowners often let their properties fall into disrepair, and unhappy borrowers sometimes vandalize properties from which they are being evicted. These challenges for lenders create tremendous opportunities for buyers who are willing to take on major renovations. While foreclosed properties in good condition can be sold quickly at decent prices, heavily damaged houses must be deeply discounted to sell. That’s where you come in. Most homeowners don’t want to do a large renovation project. So, the typical buyer for a damaged property is an investor.

How Real Estate Investors Value Property

When a real estate investor calculates what an old house is worth today, he or she "backs into" the offer price using a best guess for what the property will sell for once it has been fixed up.

Look at the chart below as an example. This investor expects that a certain property will be worth $500,000 on the open market once it has been repaired and spruced up. To determine the price he will offer the lender, he makes some assumptions and then does simple subtraction:

  • First, he estimates that it will cost $100,000 to fix the property up well enough to sell for full price.
  • Then, he determines that there will be $30,000 in closing expenses and carrying costs during the renovation.
  • Then, he calculates that it will cost $50,000 to sell the property once its completed.
  • Finally, he notes that a 10% profit ($50,000) is the least he will require to make it worthwhile.
With this information, determining the offer price is simple subtraction: $500,000 - $100,000 - $30,000 - $50,000 - $50,000 = $270,000.
Therefore, $270,000 is the most that the investor can pay for the property and make the deal worthwhile.

Chart that shows how homeowners beat investors every time when shopping for foreclosure properties

Homeowners Always Win

As a homeowner, you have a clear advantage. You only need to buy the house, fix it and carry it. You don’t need to sell it, and you’re not calculating a profit. So that extra $100,000 the investor needs to make his or her business work becomes built-in equity for you in your new home. When you buy a home like an investor, you always come out ahead.

Now, imagine a different situation where you as a homeowner are competing with an investor for a certain property. As we calculated above, the most money the investor will be willing to spend for the property is $270,000.  If he pays any more, he won't be able to make enough on the property to be worth the risk. But, you can spend more and still get a great deal. After all, let's say you increase your offer to $280,000 to outbid the investor.  Now, your equity is reduced to $90,000, but you still have a ton of extra value in your home, and you won the bidding war.  As a homeowner, you will always win the bidding war over an investor because you can pay more and still come our ahead.  That''s why homeowners beat investors every time when shopping for foreclosure property.

Comments(4)

Olympus Executive Realty Inc.
Olympus Executive Realty INC. - Orlando, FL
Home Of The Top Producers

Welcome! Welcome!! Welcome!!! To ActiveRain! Lots of opportunity here to generate and grow your business, have a good look around and jump in!  You can really get your name out in to the world more efficiently then any other way on the internet with ActiveRain!

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Mar 22, 2011 05:17 PM
Dan Edward Phillips
Dan Edward Phillips - Eureka, CA
Realtor and Broker/Owner

Good Morning Joey, another very informative post.  There is very good potential for the buyer in purchasing a 'forclosed' property.  If the buyer is in for the 'long term' it is a win-win situation.  Now all we have to do is figure out a way to keep the contractor afloat while they wait for the 203K funds.

In this area of California we still have a reasonable amount of new construction and major remodeling of older homes.  That is where the experienced contractors head and avoid the problems of the 203K payment delays.

 

Keep up the excellent posts and Welcome to Active Rain!

Mar 23, 2011 03:49 AM
Letitia Stevenson
BHHS Fox & Roach | www.DelawareValleyRE.com - Greenville, DE
Listing Agent DE/PA/MD, Digital Marketer & Coach

Joey, Thanks for Sharing & Welcome to the Rain! Active Rain is a great place to share your knowledge, expertise and thoughts, as well as network and learn so much from the vast pool of talent already onboard. If you would like to connect with me on ActiveRain, please subscribe to my blog!

Welcome Aboard and Much Success!

Mar 28, 2011 04:47 PM
Dale Lucas
eXp Realty - Kingman, AZ
GRI 928 377-7779 Specialist Residential, Foreclos

 

Greetings Joey.... Thanks for the informative post.  As a new addition to Active Rain I am quickly finding out that there is a tremendous amount of talent out there.  As a person who is always striving to share and receive any information which can be helpful to my clients, peers or business associates I would like to thank you for taking time to share your expertise and knowledge.

As a small growing community in NW Arizona we find many investors in our area reentering the market but the important thing for buyers to take away from this is that they to have the ability to benefit from purchasing a foreclosed property in need of repair too, as long as they realize the effort involved. 

 

 

Apr 03, 2011 06:01 AM