When preparing to enter the real estate niche of buying and selling foreclosure properties, it is important to have a foundational understanding of how the values and worth of foreclosure properties are determined. It all comes down to equity. A good working definition of equity is the difference between the current market value of the property and the amount that is still owed on it. In other words, if you were to sell a property and then use that money to pay off the remainder of the loan, the money that you had left over is the equity. This is the most vital piece of information that you can glean from making an accurate estimation of the current market value of a pre-foreclosure property.

As you are working to determine the current market value of the property that you are interested in, you need to keep in mind that there is a difference between a property’s assessed value and its appraised value.  The assessed value is the municipality’s assessment of what the property is worth for tax purposes. They use the number to determine what the property taxes should be compared with the other properties that are in the immediate area. The appraised value is what the bank thinks the property is worth. This number is used for financing purposes.

A property’s current market value then, is determined by a combination of factors. If the assessed value is what the local government thinks the property is worth and the appraised value is what the bank thinks that it is worth, then the current market value is what potential buyers think the property is worth. This of course, is ultimately the most important number. As you analyze whether or not a foreclosure property is going to be a good investment, the estimated current market value will be a number that is at the core of all of your studies. If this number isn’t accurate, then the entire basis for you decision will be faulty.

One way that the current market value is useful to you is in determining the debt to value ratio. This is a baseline ratio of how the difference between what the current owner still owes on the property versus what it is actually worth. The bigger the spread on the ratio, the better the investment.

As you complete your due diligence on potential investment properties, you need to become adept at building replacement cost estimates. For every dollar that you need to spend repairing and replacing things on the property to prepare it for resale, you need to consider whether that dollar added to, or subtracted from the worth of the house. While it is often worthwhile to invest some money into improving the properties before sale, you need to make sure that you aren’t putting more into it than you will be able to get back out of it.

Measuring the return on investment is a key component in running any business. This metric answers the question of how much money you are making on each dollar that you spend. It is important to set a goal and then strive to achieve it. If you planned return on investment is only one or two percent, then you might as well put your money in a savings account and save yourself the trouble. If however, you enjoy tracking every penny and want to maximize the power of your dollar, investing in pre-foreclosure properties can be a great tool.

Ultimately, the goal of any investment is net profit. This is the measure of how much you actually made in the deal after all improvements have been made, the taxes have been paid and the attorneys have taken their cut. Being able to estimate a current market value with some degree of accuracy will have an affect on this number, and this is the one that matters most.

Keep in mind as you invest not all properties need to be turned over quickly. The appreciation in value can be greater over a long period of time, and if you are patient you can capitalize on swings in the market. If you buy properties and hold on to them, they will appreciate in value and your liquid assets will give the ability to stockpile property until you are ready to sell.

If you’ve bought multiple properties, the equity value of all of them combined is referred to as equity buildup. The equity that you attain in just one piece of property may not be a very flashy number, but as you accumulate more, that equity value grows. As the equity value grows, so does your purchasing power.

As a final note, it is important to remember that current market value of pre-foreclosure properties doesn’t include the after repair value. Take this number into consideration when estimating your net profit and return on investment. Renovations and improvements can add value to the home, but basic repair costs are rarely recouped.

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