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Planning on Buying a Foreclosure?
Don’t just look at list price alone. It is really all about market value.There are several strategies for investing as seen below, but first is purchasing the home and its relationship to market value.
3 DATA POINTS:
1. List price versus market value ~ Some homes are listed under market value while others are listed at market value.
2. Repair Costs ~ Assess overall repairs needed. What will it take to make the home livable, rentable, and attractive to a potential buyer?
3. Market value after all repairs are completed ~ What is the value on the home after you made such repairs, also known as the After Repair Value (ARV)? This should be a realistic number that you could sell for in a short period of time. Be Conservative not Optimistic! This is extremely important in a declining market.
ASSESS THE RETURN ON INVESTMENT:
Take the ARV and subtract the cost of repairs and purchase price this equals the potential earnings.
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List Price |
$100,000 |
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Market Value before repairs |
$ 90,000 |
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Purchase Price |
($ 90,000) |
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Repair Costs |
($ 15,000) |
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ARV |
$120,000 |
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Potential Profit |
$ 15,000 |
*Estimated 13% equity or roughly 87% Loan to Value (LTV) of ARV once completed.
Investors should look for an estimated 30% equity or come in at about 70% of ARV or less once repairs are completed. In fact Hard Money lenders will lend money to purchase and make repairs of up to 60-70% of ARV only. This creates an even stronger benchmark to achieve when shopping for a home.
If a Hard Money lender or private funds are used for purchasing the home and making repairs, the ability to refinance into a traditional loan at a 30 year fixed rate at no more than 80% LTV of appraised value are safe rules to live by. This will get the best payment for a long term hold of the home. This will also put create a profit for rental property use.
So what is one of the most important things one should do? Buy it at the Right PRICE! In the example above a good purchase price would have been $57,000 to $69,000.
| 60% of the $120,000 ARV |
$72,000 |
| Then deduct the cost of repairs |
$15,000 |
| Purchase at |
$57,000 |
With that purchase price, those repairs, and then:
| Refinanced at 80% of the ARV |
$120,000 |
| Obtain a loan for |
$96,000 |
| Minus the costs |
($72,000) |
- Your are left with cash of $ 14,000
- As well as 20% equity
THE LONG TERM HOLD! RENTING OR LEASE OPTIONS:
Now if the monthly payment was an average of $770, could you secure a tenant for $770 or higher? (Ask us how to calculate that monthly rental rate- it varies by situation)
If you are planning to own 1-3 homes, you will be ok with minimal cash flow. If you are planning to own more than that you need to keep future mortgage qualifications in mind. Bank lending factors that into your Debt to Income Ratios (DTI). They give you income credit for only 75% of the rental payment or as they would put it, they build in a 25% vacancy rate.
So the simple math is to take $770 and divide by 75% (yes please divide or it not calculate correctly). As a result a rental payment of $1026 is needed. To check your work, multiply 75% into $1026 and you will get $770
So now you assess, is the rental market going to give you a renter for $1026? If so, you have yet another strong reason to purchase this home. It means you can rent and hold, and sell when you so desire.
If you could not, would refinancing at 70% or 65% get you to target market rent? See how the flexibility is increased by getting the right price at purchase? This is critical in avoiding the pitfalls and managing the unexpected items such as an unanticipated repair!
Good deals are 80% LTV or less of market value!
CONTACT US FOR MORE TIPS AND ADDITIONAL INFORMATION
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