When I preview houses prior to mortgage foreclosure sales or any type of auction there are two critical key things that I do.
There is no substitute for experience and I have done this thousands of times.
- First, I determine if this is the type of house I will buy and hold as a rental, or rehab and sell to an investor.
- Second, once I decide that it is a buy-rehab-flip, I make a determination of what I can rent the house for. Then, I determine the price I can sell it for.
- All of this has to be accomplished in two to five minutes as there are hundreds of houses I preview within five to seven days in advance of the auction.
By determining what I can sell it for and by calculating the rehab, it’s then a simple decision to determine how much I can afford to pay for this particular house. When you buy houses in subdivisions, it’s easy to determine values by looking up comparable sales in that neighborhood.
Sometimes, especially in prior foreclosure neighborhoods, there might not be enough current sales and sometimes there are none at all. In metro Atlanta, values have risen dramatically as hedge funds have driven up prices due to their appetite to hold on to long-term rentals.
Experience and common sense play an important role at auction
The cost to build houses of similar quality within an area is one of the common denominators I use to determine particular values at a given moment in time. Knowing what it costs to build is particularly helpful, but it is not the “end all” to determine value.
The setting of the house can impact sales value tremendously as some houses could be very close together while others are on cul-de-sacs which back up to trees and offer privacy. It’s these distinctions that I look at prior to determining my bid. I avoid houses that have steep sloped driveways and I prefer level yards in the front and in the rear.
I always ask myself upon looking at a house, “Who will pay more money for this house than me and why?”
You can get a lot of information just by driving through neighborhoods and looking at how people maintain their landscaping and home exteriors. We avoid neighborhoods that have a lot of neglect, are lower income, and/or not situated in a good area. These areas are slower to rise in value and typically require intensive management and maintenance.
A portfolio of these types of houses is more like a job than a real estate investment and you must count the cost in terms of time and aggravation prior to bid in these types of areas.
Research pays off at auction time
If you don’t know how to calculate a rehab, then you better get someone on your team who can. I’ve been buying houses at auction since 1979,
This house in the Atlanta metro area was purchased at auction.
and analyzing these properties is fun for me. This is the most exciting part of our business and is fun and invigorating when I am the successful bidder at auction and my research has paid off.
Determining comparable sales is as easy as getting on the realtor’s multiple listing service (MLS) and seeing what has sold and what is currently on the market. Be careful to compare similar houses as close to your house as possible with similar square footage. Look at the school system as schools drive values much higher in some areas.
Different subdivisions could have been built by different builders and potentially could have bigger yards, different floor plans, better or worse construction and different school systems. Once you cross a main road for a comparable sale or current listing, it’s imperative you look at these houses for a more accurate evaluation.
CoreLogic has a software program called “RealQuest” which I rely on for comparable sales and other data which is important to me: square footage, year built, subdivision and prior sale price. This allows me to act fast and efficiently to preview many houses in a short period of time. In addition, I drive the neighborhoods of houses I preview for auction and I call on every house listed for sale.
Just because it’s listed at a certain price, does not mean that it will appraise at that price and be a good supporting comparable sale in the future. Again, look at the setting; try and determine upgrades and then compare the information to your potential house to bid on at auction.
Zillow provides an application that you can “click on” when you are in front of a house. It will give you their estimate of value. We use this primarily to see what my competitors will be looking at. Often, Zillow is stuck in a time warp and gives values that are very low due to the lack of current sales. This will distort values for those that don’t understand the “time value of houses.”
When looking at all this information of comparable sales and inventory on the market, never lose sight of using your common sense. This is the most critical determining factor for me when I assign a value to a pre-foreclosure home. The value I assign is the value I can sell it for and this will determine the price that I will pay for a house, including the rehab.
I know to a lot of people reading this article that this seems like a lot of work and a lot of knowledge is required. That’s true and it’s also why most investors don’t acquire houses this way. You must be able to make fast decisions, do a lot of research and have the courage to take action at the auction.
One thing we do that could really help you is that we assign a range of values on each property that I would pay at auction.
That range could be $85-95,000, for example, as the price I would pay. This gives us a gauge of the auction as we see where the winning bids will fall in. In your case, if you’re a newbie, assign a range of values and only buy on the lower end of the value you’ve assigned.
By doing accurate research and knowing your exit plan in advance, you will protect yourself. When preparation meets opportunity can you be successful!
Above all things, use common sense.
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