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Pre-Foreclosures: A Guide To Evaluating Your Potential Profit Before You Purchase

Jan 10, 2008
Now that you know the default amount; based on the information gathered from the legal notices or from the foreclosure list provider that you have used, you can begin to research and analyze the potential in the properties.

First, let us look at the properties estimated market value. To determine the gross estimated equity in the property subtract the default amount from the properties estimated market value. The results reflect the potential gross profit in the property. If the resulting amount is low or very little between the properties market value and the debt then move on to the next pre-foreclosure. However if the amount is large, the property may yield enough equity to result in a sizable profit.

The profit potential in a specific property must yield a potential profit in order to achieve success in the foreclosure market. You must keep in mind that you may have carrying costs, interest, and broker and real estate agent fees. These costs and fees can add up very quickly and a home that has very little equity to offer can result in a substantial loss.

Let us cover a little more detail about the carrying cost, interest, broker and agent fees. Carrying cost can include utilities such as gas or electric. Leaving a home without these can cost you even more in the end. Repairs of equipment and damages done to the home; vandalism is very common in homes that are not occupied for extended periods of time. The interest on the loan, especially with "hard money lenders" can be a significant expense to owning a pre-foreclosure; remember then previous homeowner was more then likely in trouble for this exact reason. The last one, which most first time investors forget about, is the closing cost when you sell the home to someone else. Most agents charge between 3-6% of the sale price as there commission, do the math; it is very costly to sell your home.

Repairs that need to be made immediately are often overlooked as well; the majority of foreclosed homes are in need of some repair. While some only need minor repairs that do not cost much, others require close to a complete remodel in order to get the house ready to sell. Make sure that your potential profit allows for a far amount of repairs; you will learn more about the extent of the repairs needed at a later time. However, if the foreclosure that you are looking at does not have a substantial profit in this preliminary evaluation then you may be wasted valuable time and effort for nothing.

Just remember that the preliminary evaluation is a quick look at the "potential" profit or equity in the property, some of these may be taken off the list at a later time, but for now, if the "potential" is not there it does not make much sense to research it any more.

Investing in pre-foreclosure can yield "built-in" equity in a property, so it is vital to make sure that you have room to make some money after the repairs and carrying costs. After you contact the homeowner, you will be able to evaluate the property even further to ensure that you will not come out the ""loser" in the end.
About the Author
Thomas Bladecki is the author and can provide additional information about foreclosure listings and the current real estate markets visit Home Foreclosure Help. You should also see his Foreclosure Blog for all the latest information about the real estate foreclosure market.
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