How to determine Equity
The old adage about the only the three words in business being "Location, Location, Location" is as true as ever. In Real Estate, however, those three words are "Equity, Equity, Equity". The difference between what is owed on a property and its Market Value is called equity. As an investor, the goal is to buy for less than the full value and sell for market value and make a profit in the process. So at what point does caution balance against risk to make a profit?
A strong equity position is generally targeted at 25% after repairs. An equity position less than 25% can work for rental investments, but for resale purposes 25% is a safe figure. In order to determine if 25% after repairs can be achieved there are only three variables that need to be weighed in the mind of an investor.
- How much can I get it for?
- How much can I sell it for?
- How much will it cost to repair it?
It is not difficult to obtain answers to these questions as long as the readily available data can be quickly and accurately distilled into usable information. By using the following guide and examining each property in terms of these three variables it should not take more than fifteen minutes to determine if a particular foreclosure is a wise investment.
How much can I get it for?
First, ask what your agent knows about the particular foreclosured property.
- How long has it been on the market? (Not vacant, but available for sale)
- Can Investors bid on it? (Some properties are for owner/occupants only)
- What does your agent think? (A good agent is worth his/her weight in gold.)
Second, look at the property yourself.
Is it a "fixer upper?" Is it "market-ready?" The cost to make a property ready to sell has to be considered as part of the cost of buying a property. Usually an eyeball will tell you how much of a commitment in funds will be required.
Third, be sure that you are willing to own the property for the duration.
While it is certainly possible to get in and get out without a serious commitment of finances, be ready to own the property until it is sold. Some banks have regulations stating you must take possession of a property before you can sell it again. If, for whatever reason, your buyer is unable to complete his end of the transaction, you need to be prepared to be the owner of the investment property until it eventually sells.
Fourth, Bid quickly and often.
Nothing is more frustrating than investing a lot of effort into a project for nothing. When considering Investments, do not hesitate and risk missing an opportunity. If a deal looks so-so (only a 10% equity position, for instance) BID LOW to achieve that 25% potentiality. It could be a good rental, or even a modest resale. And there is always the chance you might win the bid.
In Investing, as in life, "he who hesitates is lost". After submitting a bid, start looking for the next Investment. Don't delay a possible "big dessert" while waiting on the first course.
How much can I sell it for?
As a general rule of thumb most Investors are motivated to purchase with a minimum 25% equity position (after repairs). This requires two separate deductions in order to be sure of a 25% equity position. First the true market value of the subject property (after repairs) and second, the repairs.
In order to determine the true market value without ordering a full-blown appraisal, (both time and financially prohibitive) an Investor must look at comparable sales. "Comps" are available from your agent or online from services like HomePriceCheck. While the online services may serve as a general guide the comparables your agent can obtain will take into consideration many more factors. Look at the entire neighborhood in print format. Then consider the most recent sales that reflect the style and neighborhood of the subject property and compare them to your Investment property.
Tip#1: The rewards are greatest when the investor is a knowledgeable, pro-active force in the process. Take an active roll in your investment. (Placing Advertisements and selling your own properties is covered in another article.)
Tip#2: The figure for how many days on market (DOM) a property was available before its eventual sale will be found on the MLS listing. Be sure to ask your Real Estate Agent for these figures specifically so that a determination can be made regarding the desirability of a particular neighborhood, style of home etc…
Tip#3: Along with "Sold" properties a look should be taken (in print) at other properties that are still "available" or "withdrawn" from the market to determine the health of the market.
