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How to Evaluate Potential Profit Before You Buy a Pre-foreclosure

You've put together a killer pre-foreclosure list. Now it's time to decide which opportunities to pursue. Research the properties on your list and analyze the information to evaluate the profit potential of each home.

Estimated market value

Start with the home's estimated market value. Estimated market value is the amount for which the assessor believes the home could be sold in the current market. You'll need this number in order to determine the property's potential gross profit.

The formula is simple: Estimated market value - default amount = gross estimated equity

The number you come up with represents the property's potential gross profit. If the number is low, meaning there's very little difference between the property's market value and the amount of debt, then it's not a good opportunity. If the number is high, there's a good chance that the property will yield enough equity for a tidy profit.

Other costs and fees to consider

When you're determining the profit potential of a property, there are certain other costs you need to factor in. For instance, you have to consider carrying costs, interest and the fees charged by real estate agents and brokers.

If you neglect to consider these various fees and expenses, your estimate will be inaccurate -- and could lead to your investing in a property with poor profit potential. These costs are particularly important if you're considering a home that has little equity to begin with.

Carrying costs

"Carrying costs" is a catch-all term for the various expenses you incur while maintaining a property. For example, as an investor, you'll need to keep certain utilities turned on. You can't see a house in the pitch dark, after all. You want potential buyers to be comfortable. No one will want to spend time viewing a house that's too hot or cold.

Repairs

Foreclosed homes are typically in need of more repairs than occupied homes. Vandalism is also a concern. Even a house with substantial equity might be a losing deal if you're facing costly repairs. You won't know the precise repairs until you evaluate the property in person, so just leave yourself a cushion as you perform the initial potential profit assessment.

Interest

You'll also have to pay interest on the loan. That interest can be quite high, particularly when you're dealing with hard money lenders. The fact that a home was foreclosed on is a sign that the interest rates are sizeable.

Closing costs

Last but not least are closing costs. As the seller, you pay the real estate agent's commission. The commission can be anywhere from 3% to 6% of the sales price. You could be looking at several thousand dollars.

Just a quick look

Right now you're just performing a quick evaluation. You're crunching the numbers enough to narrow down your list of potential properties. Seeing a home in person can swing the profit potential in either direction. Once you've given a property a tentative thumbs up, contact the homeowner and make an appointment to view the home.

Don't be tempted to skip over this important step. Time is money, and this profit analysis could save you from sinking both time and money into a bad deal.

About the Author

Robert Lam is a successful real estate investor and author of http://www.ForeclosuresUnleashed.net which teaches investors how to maximize the profits from the booming foreclosures in the marketplace today without using your money or credit.



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