Properly valuing a pre-foreclosure property is critical to your ability to make money from it when it comes time to exit or monetize the property. Also, since you are most likely to use borrowed funds to finance a pre-foreclosure deal, most lenders and financiers will demand an appraisal of the property value by a qualified party. In any case, valuing a pre-foreclosure property involves three main steps.
Step 1: Market Research
The first step is to compare the home with other properties in the neighborhood. Research the prevailing per square foot rates in the area and determine the average in order to multiply it by the area of the home. Factor in any obvious repairs that may have to be carried out and deduct the cost of these from the valuation figure.
When doing such a comparison make sure that you compare the home only with similar properties. Broadly speaking, a similar property is one located in the same area, and which is the same size plus or minus two hundred square feet, the same number of bathrooms, the same number of bedrooms, is of the same type of construction, and is in a similar condition.
Step 2: Physical Inspection
The second step is performing the physical inspection. The idea here is to examine the property carefully and extensively to not only determine the true worth of the home but to determine any damage that may require repairs before the property can be sold or made inhabitable. Calculate the approximate cost of any repair work required and reduce that from the value of the property you arrived at during your market research. Also factor in the outstanding mortgage amount and bank charges on the financing that will have to be paid.
Step 3: Rental Yield Potential
The third and final step is to calculate the capacity of the property to earn rental income in the future. This can be calculated by assessing the demand for rental properties in the area compared with the current supply plus new project plans. This will tell you how much both the property value and the rental yield are likely to appreciate in the future. Since this calculation is based on the future value of the property, you need to discount it using the prevailing interest rate to arrive at the current value.
After working through these three steps you will have a fairly good idea of how much the property is worth and how much is a reasonable offer to make. Other considerations affecting your ability to make an offer are how much you can afford to take on in terms of a mortgage, your proposed exit strategy, whether or not you will gain clear title to the property, and whether there are any liens or liabilities that need to be paid off.
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