{"id":127204,"date":"2020-06-29T10:00:04","date_gmt":"2020-06-29T16:00:04","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=127204"},"modified":"2023-09-25T13:13:03","modified_gmt":"2023-09-25T19:13:03","slug":"buying-foreclosures-auction-how-to-avoid-overpaying","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/buying-foreclosures-auction-how-to-avoid-overpaying","title":{"rendered":"Buying Foreclosures at Auction: How to Avoid Overpaying"},"content":{"rendered":"

Overpaying for property is one of the biggest risks of buying foreclosures at auction<\/a>\u2014and it\u2019s also one of the most common mistakes made by new investors. That\u2019s why it\u2019s important to have a solid system for valuating potential purchases in place before<\/em> making bids.<\/p>\n

For years, my partners and I have profited on foreclosure flips with a system based on the following simple equation:<\/p>\n

Resale Price \u2013 Cost = Max Bid<\/strong><\/em><\/p><\/blockquote>\n

While the system itself has evolved over time, the foundation (the equation above) has not and will not change. If you\u2019re able to accurately estimate a property\u2019s resale price and<\/em> the costs associated with getting it ready for resale, you can get some great deals at auction while avoiding most of the bad.<\/p>\n

Below, I\u2019ll cover the basics of what it takes to determine a property\u2019s resale price and outline the costs you\u2019ll need to consider in order to come up with the right figure for a max bid.<\/p>\n

Related: <\/em><\/strong>The 5 Biggest Risks of Buying Foreclosures at Auction<\/a><\/em><\/p>\n

Estimating a Property\u2019s Resale Price<\/h2>\n

Estimating resale price is a good place to start with any potential property flip. Resale price is what you believe you\u2019ll be able to sell a home for after<\/em> you\u2019ve completed any necessary work. In other words, it\u2019s what the property should sell for on the open market once it\u2019s in salable condition.<\/p>\n

That\u2019s easy enough to understand, but estimating resale price isn\u2019t always easy because it\u2019s dependent on a variety of factors, some of which are ever-changing.<\/p>\n

Location, for one, will have a considerable impact on price, as will surrounding properties and the current economy. Fortunately, in most cases, it\u2019s possible to come close with market-value calculations fairly easily as long as similar homes in the same area have sold recently. Sales of similar homes are called comparables, and they\u2019re the key to estimating resale figures quickly<\/em>.<\/p>\n

To find comparables, real estate data sites like Realtor.com and Zillow can be used to search for sales data. Recent sales are always best but not always available. Comparables should also be near the home you\u2019re looking to buy (in the same neighborhood if possible) and similar in size, style, and amenities for best accuracy.<\/p>\n

Unfortunately, finding these ideal comparables isn\u2019t always possible, but that doesn\u2019t mean you can\u2019t work with what you\u2019ve got to estimate resale price. In our upcoming book Bidding to Buy<\/em>, we detail the system we use to adjust comparables to account for differences between them and the subject property.<\/p>\n

\"couple<\/p>\n

Calculating Costs for Foreclosure Flips<\/h2>\n

Even if you\u2019re able to calculate resale value accurately, you\u2019ll make very little (or lose money) when the time comes to resell unless you\u2019ve considered costs and capped your max bid accordingly. Here are the most common costs encountered on the road to resale.<\/p>\n

Realtor Commissions<\/h3>\n

If you opt to have a Realtor list your property, you\u2019ll pay a commission. Typically, this will be between 3-4% of the sale price.<\/p>\n

Closing Costs<\/h3>\n

In order to finalize the deal, legal fees and closing costs will need to be paid. We generally assume these will add up to about 2% of the resale price.<\/p>\n

Past-Due Taxes<\/h3>\n

Back taxes are common with foreclosures. If the previous owner owed property taxes, you\u2019ll need to pay these after taking ownership. Fortunately, a title search will tell you how much is owed, so you won\u2019t need to estimate.<\/p>\n

Liens<\/h3>\n

While many liens expire after foreclosure, some will still need to be paid by the new owner. These can include mechanic\u2019s liens, federal tax liens, and city utility liens. Again, a thorough title search should tell you what, if any, liens need to be paid and how much it\u2019ll cost you.<\/p>\n

Related: <\/em><\/strong>Rapid Spike in Foreclosures Right Around the Corner<\/a><\/em><\/p>\n

Occupancy Costs<\/h3>\n

In general, we prefer to buy unoccupied foreclosures to avoid additional costs and headaches. However, you\u2019ll miss out on some great buys if you elect to overlook all occupied foreclosures. When working out our max bid on an occupied property, we add an additional 5% to account for costs associated with getting occupants out.<\/p>\n

\"Foreclosure<\/p>\n

Miscellaneous Expenses<\/h3>\n

There are certain expenses associated with researching potential property buys. Title research and drive-by inspections, for instance, will require an investment of time (if you opt to do it yourself) or money.<\/p>\n

Also, as with any home, you\u2019ll need to cover expenses like insurance and security until the property sells. These expenses tend to be fairly consistent from one property purchase to the next, so you\u2019ll be able to estimate them with better accuracy as you gain experience.<\/p>\n

Construction Costs<\/h3>\n

Since you never really know the true condition of properties offered at auction, you should bid with the expectation that work will be required to get the home back to salable condition. In Bidding to Buy<\/em>, we cover exactly how we calculate line-item renovation costs, so check that out for an in-depth outline of what we typically pay contractors per job.<\/p>\n

In a pinch, you can calculate these costs with the assumption that material and labor costs will be roughly equal. Simply double the price of material costs for a figure to factor into your max bid.<\/p>\n

Formulating Your Max Bid<\/h2>\n

After calculating the costs outlined above, don\u2019t forget to factor desired profit into your max bid<\/em>. In most markets today, a figure between 10-20% is reasonable.<\/p>\n

Now, with estimates for resale price, costs, and profit complete, you can formulate your max bid. Here\u2019s how the equation from the beginning of the article should look after expanding on it to account for expected costs and desired profit:<\/p>\n

Resale Price \u2013 (Realtor Commissions + Closing Costs + Past-Due Taxes + Liens + Occupancy Costs + Miscellaneous Expenses + Construction Costs + Desired Profit) = Max Bid<\/strong><\/em><\/p><\/blockquote>\n

Your max bid, the final figure in the equation above, should serve as your stop point on auction day. As long as you\u2019ve done your homework and don\u2019t exceed your max bid, you should stand to make a profit from your foreclosure flip.<\/p>\n

Have questions on estimating costs or calculating resale price? Let me know in the comment section below. Also, be sure to check out our upcoming book, Bidding to Buy<\/em>, where we detail our step-by-step system for investing in real estate foreclosures<\/a>.<\/p>\n

Bidding to Buy: A Step-by-Step Guide to Investing in\u00a0Real Estate\u00a0Foreclosures<\/strong><\/a>\u00a0by David Osborn and Aaron Amuchastegui is available now in the\u00a0BiggerPockets Bookstore<\/a>.<\/em><\/p><\/blockquote>\n

\"\"<\/a><\/p>\n

Questions? Comments?\u00a0<\/em><\/p>\n

Join the discussion below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Overpaying for property is one of the biggest risks of buying foreclosures at auction. It\u2019s also one of the most common mistakes made by new investors. That\u2019s why it\u2019s important to have a solid system for valuating potential purchases in place before making bids.<\/p>\n","protected":false},"author":612766,"featured_media":122537,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524],"tags":[],"class_list":["post-127204","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/127204","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/612766"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=127204"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/127204\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/122537"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=127204"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=127204"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=127204"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}