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DEBT-TO-VALUE RATIO IS THE
NAME OF THE GAME!
Buying foreclosure property is purely
and simply boiled down to "buy low, sell high".
The question is, what are you buying? Most properties
go to foreclosure because the owner either became unable
to make his monthly payments, or the property had no equity
in it, worth saving it from the foreclosure process. The
answer is, finding those properties with significant equity
still in them!
The key is the Debt-to-Value ratio (DTV).
To determine this, you divide the amount of the current
debt (all debts including any tax, mechanic liens, and
judgments), by the current market value of the property.
The resulting number is the DTV ratio. The best deals
are those with a DTV ratio of less than 70%. This means
the property has 30% equity still in it. If you can purchase
that property for its current debts amount, you will pick
up that 30% equity for yourself.
Some investors say, they don't care what
the DTV ratio is, so long as they can make $10,000 to
$15,000 on each deal. That's fine if the investment is
under $100,000. But what if the total investment is over
$250,000 or even $400,000, then, your return on investment
is very low, and your risk is very high. You must look
to the DTV ratio for each property, and each potential
deal.
If you pay, 70% of the market value, (e.g.
the property is worth $100,000 in its current condition
and you only pay $70,000) then you have some room to profit.
On top of your $70,000 investment, you can expect to pay
$5,000 to $10,000 to fix it up, or make necessary repairs
and cosmetic improvements. You can also expect miscellaneous
expenses, holding costs, costs of funds, etc. to run about
$3,000 to $5,000 over a 3 to 6 month holding (flip) period.
And, you will need to pay broker's and either an escrow
officer or attorney fees and commissions to help you sell
the property. Those fees usually run about 7% (combined),
for a total amount on our hypothetical deal above, of
$7,000. In total, your cost will add up to $92,000 on
the higher end. You'll make a net profit of $8,000 on
your $70,000 investment. And on the lower end of these
assumptions, your cost would be $85,000, for a profit
of $15,000. If you paid more than 70%, there may not be
much profit left, if any!
Obviously, not all properties will work
out as nicely. Some will need more repairs, and some will
have significant added market value from your improvements,
that will go directly to your bottom line profit.
The problem is from the start, how do
you determine what the debt, and what the value is for
each foreclosure property, or opportunity? In most major
cities, there are hundreds to thousands of foreclosures
each month. You will burn a lot of tire rubber and shoe
leather running around evaluating each potential property.
Shark Bait - The foreclosure buyers' software
provides you with an at-a-glance calculated market valuation
for every foreclosure property in your area; the amount
of the current debt (the subject loan in foreclosure and
any additional liens); the number of sales comps within
the Shark Bait database that it has referenced; and the
critical Debt-to-Value ratio. Within seconds, you can
scan each property and determine what the DTV ratios are,
as well as the total amount of the debt to determine if
it is within your means, or your interest. From there,
you determine which properties are the most interesting
based on all of your criteria, from size, to bedrooms,
to specific area of town, to age, type, etc.
Whether you use Shark Bait, or just paper
lists and notices out of your legal newspaper, you need
to determine quickly what the DTV ratio is, and which
properties are worth your time (often more valuable than
money) and your investment. Buy low, sell much higher!
We
hope this tip was helpful in your foreclosure buying efforts.
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