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So you have decided to start investing in foreclosures? Fantastic! There is so
much opportunity in this area that it is mind-blowing. Foreclosures are at an all
time high, and they are climbing. People get stuck, and you can make a great
deal of money helping them out.
There are a few things you should know before you jump in. Just like any other
investment, you want to get familiar with the product you are investing in; in this
case it's houses.
To be a good investor, you will need to accurately gauge property values and
repair costs. The market price or fair market value (fmv) of a house is
determined by, among other things, recent sale prices of similar properties in the
same area. Let's say you are interested in 500 Main St. and want to know the
current market value.
You need a source for comparable sales (comps) from the last 6-12 months.
Realtors can provide Multiple Listing Service (MLS) comps for a given area, title
companies can provide comps from tax records (though they are pretty much
worthless) and there are a few on-line services that can do the same (ie-
Zillow.com).
Taking your list of comps, you drive by each property noting condition, size,
appeal and location. Your last stop will be 500 Main St., the subject property.
How does it compare to the comps in condition, square footage, lot size and
number of bedrooms and bathrooms? Is there anything near the house that
would detract from its value?
From your comps, you want about three neighborhood properties that closely
match the square footage, bed/bath count and lot size of 500 Main St., your
subject property. If those three are all pretty close in condition and there are no
outside factors, the sale prices should be close together. Making any
adjustments for size and/or room counts, the market value will be in the range of
the 3 close comps.
So you know what the FMV of the house is, but is that what it is worth as it sits?
Probably not. Rehabilitation (Rehab) is often a requirement to bring a property
up to its FMV. Obviously, no one is going to pay market value for a property that
needs significant repair. That's where you, as an investor, come in with the
knowledge and ability to rehab the property and sell it at its fair market value.
Your goal is to get the property at a price low enough to allow for rehab and
holding costs until the property can be sold, earning you a profit.
So you have a house picked out and it looks like a pretty good deal. You should
know what you are going to do with a house BEFORE you buy it. You should
know almost exactly what it is going to take to fix it up and get it sold.
You can get a foreclosure house at the auction, but a better way is to buy it when
the homeowner is in pre-foreclosure. These present the best deals, but you
need to know how to work with the homeowner. Interested?
The objective when doing a quick cost-effective rehab is conformity with the
neighborhood. If the neighborhood has shingle roofs, vinyl floors and basic
amenities in the homes, you don't need a tile roof, hardwood floors and gold
plated fixtures. If there are any homes for sale in the neighborhood, go see them.
Take a look at the interiors to gauge where you need to be. Carpet, paint and
some landscape are almost always a requirement for a rehab. After that,
your rehab should focus on getting the most improvement for your investment
dollar.
How much will it cost?
In order to figure this out, you'll need to know the prices of things used in
repairing a house. Go to a local hardware store and get prices for knobs, hinges,
switches, outlets, cover plates, light fixtures, bulbs, mailboxes, plumbing
supplies, sinks, toilets, water heaters, faucets and paint. Write the prices down
and keep a quick reference sheet. Always figure on carpet, paint and fixture
replacement. Then you'll only have to add specific items as needed for individual
properties.
NOTE -Unless you have some construction experience and know what you are
getting into, I strongly advise against a new investor purchasing properties
needing structural repairs. If there are sagging floors, cracked foundations or fire,
water, or dry rot damage, stay away from the property. While these kinds of
properties can be purchased way below market value, inexperience can shoot
the rehab cost higher than expected.
How long does a rehab take?
That depends on how much time and work you personally are going to put in,
and how much you want to contract out. Rehabs shouldn't take more than a
month or a month and a half. If you think it will take longer, be prepared to pay
those additional closing costs.
Starting The Rehab
Now that you have a pretty good idea of what the house should look like, how do
you get it there?
Start on the outside by trimming overgrown trees and shrubs and mowing the
lawn. If it's dead, rake the heck out of it (you can use a power rake if it's really
bad), remove all the dead grass, throw some fertilizer down, and water like crazy.
Bringing back a dead lawn will add a ton of curb appeal to the house and make
the neighbors like you! Start with vegetation first, because it takes time for plants
to grow.
A freshly painted exterior on a home greatly improves its curb appeal. Don't go
too crazy here; stick with what is normal in the area. If you have aluminum or
steel siding that needs to be touched up, you can take a sample of the siding to a
hardware store that does paint matching and get a near match. Beats residing
the house!
Finishing The Rehab
It's time to finish the front of the house. Flowers should be planted where
appropriate, either rehab or replace the mailbox, porch light, house numbers and
doorbell. At this point, you need to clean all the windows in the house, inside and
outside.
Take a critical look from the street, is there anything that stands out as being
unattractive? Is your property now the best or one of the best looking on the
street? If it's one of the best, there's nothing unattractive and you've priced right
for the area, it will sell quickly.
Smoke detectors need to be installed and you need to check all the systems
(electrical, plumbing, heating and air conditioning) to make sure they work
properly.
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