How To Calculate Buying Foreclosure

Allison wants to buy a foreclosure home, and Dave uses his formula to keep her from paying too much.

QUESTION: Allison found a home in foreclosure that she wants to buy. She discovered what the bank bought it for (a little over $100,000) and the listing price is $120,000. She thinks the fixed-up price is $127,000. It might need about $20,000 in repairs, and Dave tells her how drastically that affects the price, and how he figures that when you buy foreclosures.

ANSWER: This house is worth $80,000. Let me tell you how I did that. When I’m buying a deal to keep the house and move in it like you are, I buy at 80% of market value minus repair costs. In this case, 80% of $127,000 is $101,000. When you subtract repairs of $20,000, the house is then worth $80,000. That is a good, solid offer on this house. If you can buy between $80,000 and $100,000 then buy it. If you have to spend more, then don’t buy it.

You need to make sure that the actual value you’re working from is correct. Have your real estate agent pull some comparable values of other houses for you, then get some real-world estimates instead of your wet finger in the air as far as repairs. Build on a bid estimate from the carpet guy and the flooring guy and the other guys. Get some bid estimates on everything you need to do to it, then subtract that from the actual market value that is fixed, not market value busted. Market value means pristine and in great condition.