When it comes to your property’s appraisal, it’s important to understand the components used by professional appraisers to arrive at their numbers.  As Scott commented, “Comps don’t lie”, which means that comparing other houses in your property’s area of similar size, market value, etc., is a useful tool to finding out what your home is worth.  There are several approaches that can be used for property appraisals.

• Cost Approach–this is what the property would cost if it were totally destroyed, which means an itemized list and cost rundown of what it would cost (with today’s construction prices) to rebuild the structure exactly as it was prior to the hypothetical catastrophic event.  This technique is used primarily for insurance purposes.  Just remember that the insurance is not basing your home’s full appraisal value on its potential or its special features–the home’s value is based on zoning.  Some real estate agents will try to sell you on a property’s potential, so just keep your eyes open.
• Income Approach–the income potential of the property in today’s rental market, multiplied by the Gross Rent Multiplier for that area (Seattle’s rent is higher than Lynnwood’s, so its Gross Rent Multipliers are not the same).  The problem is that it’s difficult to find rental info, because currently, there’s no database of house rents available.
• Sales Comparison Approach–mostly used by real estate agents, this evaluation has the most weight in determining the property’s value when the bank is reviewing your loan.  This is also referred to as the “Sales-Paired Comparison” (or “comp”), where they compare three homes that sold with a certain feature and three homes that sold without that feature.

When your property is being appraised, keep in mind that the appraiser’s scope of work (or job) is to validate the sale price for whoever hired him or her.  If the appraiser is working for the bank, he or she will make it a priority to submit an appraisal that validates the price that the bank wants to see.  However, if the appraiser is working for you and you’re trying to sell a property, your appraiser’s scope of work is to prepare an appraisal that gives you the highest sale price.  Scope of work is influenced by several factors.

• Refinancing–Full Market Value
• Purchases–Purchase Price
• Building Specifications (for future value)
• Fair Market Value (FMV vs. ARV–Full Market Value vs. After-Repair Value)
• Unique Properties (water frontage, land, workshops, barns, etc.)

When doing the comps (again, remember that just means “comparable properties”), a minimum of three different ones are needed, but ideally, you should have 5-7 comparables, in case of possible bank disputes.  Any home worth over $400,000 gets sent to the bank’s own review appraiser, and his/her job is to state that the initial appraisal was incorrect.  However, a good appraiser can appeal the bank’s review appraiser’s decision, which is why those 5-7 comps come in handy.  Criteria for the comps are as follows:

• Radius (distance from subject–another term for your property; radius will depend on the home density in the area)
  • The search can be expanded outside your area to nearby areas as long as properties of lower value are used as comps
• Land Use (must be the same)
• Transfer Date (the date a property was last sold–should be six months to a year)
• Square Footage (needs to be within 20% of the subject property’s square footage)
• Style of Construction (must be comparable)
  • One Story with Basement, Split Entry, and Tri-Level (Tri-Level is worth the most of these 3 because it has more square feet above ground)
  • Ramblers
  • 1.5 to 2 Stories
• Year Built
  • Must be within 10 years and its effective age is half the physical age or the last remodel date, because it’s assumed that you took care of the property during the time you owned it
• Sales-Paired Comparisons (view properties, unique attributes)
• Exceptions (some of the appraisal rules go out the window on these)
  • Homes worth $500,000 or more
  • Sparsely populated areas (the further out you go in location from the subject property, the closer of a match the comp properties should be to the subject property, for other details like Year Built, etc.)

Part of determining the value of your property is based on its additional features and upgrades, as well as extenuating circumstances.  Additionally, another aspect used for evaluating your property involves two types of assessment–potential assessment vs. risk assessment.  Potential assessment refers to the property’s potential to make you money.  Risk assessment means what would happen if you couldn’t sell the property for the amount you were hoping for, or if your repairs ended up costing you too much money.  This is important to keep in mind, because while repairs and remodel are a good thing and can increase your property’s value, just remember that you’ll never get your property counted as if it were a new construction, although you can really impress your appraiser, since appraisals do have a subjective element.  Also, when you have repair and remodel expenses, remember that you can get better deals on your service costs based on the volume of business that you offer the service provider–for example, if you need 10 roofs done, you can get a better deal than if you just needed one done. 

In order for your property to be counted as remodeled, your appraiser needs to see updated tubs, sinks, cabinets, knobs, hinges, and even floors, unless the floors are wood and have been refinished.  You don’t need to change out all the plumbing and electrical, because it’s a subjective call–it’s about visuals for when the appraiser takes pictures.  Most of the focus of your remodel should go to the kitchen and bathroom.  You can even tell your appraiser, “I’m trying to remodel it back to its original glory”, which doesn’t always work, but if you don’t like your appraisal, you can always hire a different appraiser.  It might cost you $400 more, but it can be worth it, and in case you’re wondering, the appraiser doesn’t get paid until the home loan closes.  The final document you receive from the appraiser is about 10-12 pages long, and it will tell you what their numbers were based on.

It can sometimes help to show your own comps or your own before-and-after pictures of improvements you’ve made to your property to the appraiser, but keep in mind that banks will keep an eye out if you’ve made 10% or more on your sale, beyond what you bought the property for, because they call this “equity skimming”.  You can also give your loan officer your own comps and your own pictures, and he/she can use that with the bank to try and get you the appraisal you want.

When you do your comps, you need to factor in adjustments, as well.  If you have a 3 bedroom/1 bathroom home, for example, you can compare it with 2 bedroom/1 bathroom homes, but you can’t compare it with a home with more bedrooms or more bathrooms.  Each bedroom affects the home’s value by $1,000, each bathroom by $2,000, and the square footage price can vary based on neighborhood (also, different professional appraisers will use different prices per square foot).  Square footage prices can be from $20-40 per finished square foot, $10 per finished basement square foot, and $7 per unfinished basement square foot.  Year built/effective age is $1,000 per year, acreage is $20,000 per acre, garage is $2,500 per car, and carport is $1,500 per car.  All of your comps must be adjusted equally.

All CMAs (Competitive Market Analyses) and appraisals are based on the past.  CMAs can be a bit more current than appraisals, because they can compare sales from 3-6 months in the past, but again, that’s still looking at past sales activity. 

There are a few things to keep in mind.  There are two types of CMAs, and both have their drawbacks.  Real estate agent-generated CMAs have some caveats, and so do automated CMAs.  Be careful who you work with, because some realtors are using comps for their CMAs that aren’t actually valid–they use different styles of construction, for example, which is not correct.  The only time that this would be acceptable is if there weren’t enough comparable properties of a similar construction style, but even then, they would need to add on lower value properties instead of higher value properties to the list of comps.  Real estate agents are not typically trained to do CMAs properly, and they will also sometimes mix size (square footage).  Real estate agent-generated CMAs generally use comps up to 5 miles away from the subject property. 

Also, area takes precedence before other property details, but be careful, because automated CMAs like Zillow.com have a few drawbacks–they don’t know which areas are considered more desirable than others, they only base property values on above-ground square footage, and they don’t assess proximity to bodies of water (which matters here in the Pacific Northwest).  Automated tools do work well for places like Arizona, but this is not to say that they don’t have their uses here in the Northwest–just don’t base your property’s market value only on information from Zillow.  As a result, remember that both types of CMA are not the best source of a true evaluation of what your property’s worth, but they are helpful. 

Your goal as a real estate investor is to buy the worst property in the neighborhood, make it the best property, and then sell it.  Remember that when you buy a property, you can do a deferred deposit of interest, where you make sure that the check doesn’t get cashed until after the inspection, and here at Real Estate Investment Firm, we can negotiate with the seller if the property has any problems.  You can get out of the offer at any time–you might lose $400 for the appraisal, but it’s worth it if you would have ended up losing thousands, but REIF works with you to make sure that this won’t happen most of the time.  Don’t be afraid to write offers, because contracts are based on contingencies, so you can get out after making your offer.  The two contingencies on offers are inspection contingencies and financing contingencies. 

A final note on investing–there’s fast, and there’s good, but not both, so you either take your time, or you just run and hope for the best.  We don’t want to do just one deal with you and then you’re gone–we want to do 10 deals a year with you.  We get paid when we provide for you, and while we do charge 3%, we charge less when we provide other services for you. 

We’ll be happy to sit down with you and analyze what you can and can’t afford, and we’ll also tell you what kinds of property you can buy–basically, what’s best for you in your situation, whether it’s foreclosed properties at auction, pre-foreclosure foreclosures, or even MLS properties.  You can always check out or website first, by going to http://realestateinvestmentfirm.com; just sign up and you can look at auction properties available in King, Snohomish, Pierce, and Kitsap counties here in Washington state. 

When you show up for the auctions, if you have cash, bring it, but if not, we have loans you can get, and we always encourage you to research the properties before you buy them (and we’re happy to help with that, too).

Be sure to come back next time, when we’ll talk in detail about how to invest in real estate using your IRA.

• Determine Your Project Budget–remember, do not overbuild the area, because if you have a property that you want to improve in order to increase its market value, you must be careful not to spend too much on upgrades, or else you’ll end up losing money. 
• Know the Immediate Market (what prices does the property’s immediate market support?)
• Foreclosure Auctions

When you start getting emotional, you have a higher chance of losing money.  After all, as an investor, your job is not to make the house perfect, but to just bring it up to a higher level of quality, and get out. 

As far as your project budget, be mindful of two things.

1. What increases your property’s market value.
2. What increases your property’s market appeal.

Obviously, you’d like to increase the home’s value if you’re interested in flipping it.  Once the repairs are complete, the home’s worth is now called “ARV”, which is “After-Repair Value”.  The whole point of flipping is to buy at the fair market value (FMV), and sell at the ARV, because it’s the difference between the two that makes you money.  However, you still must have a balance between your property’s market value (what it’s worth) and its market appeal (how much it appeals to people)–although it’s true that improving the home’s “wow” factor won’t increase its market value, it can actually make the property sell faster.  Just keep in mind the old maxim, “Buy low and sell high”, which still applies today. 

The market will eventually pay you whatever the home is worth.  Up to the first two weeks that the home is listed, you’ll have the most attention from agents and potential home buyers.  Of course, you want to make money, but if your list price is too high, nobody will come–if your list price is lower and you wait a bit longer, you might eventually end up with a bidding war later on.  Keep in mind that you don’t have to sell your property just because it’s listed–it’s only a marketing agreement.  Don’t chase the market, because when you lower the list price of your home, people will wonder what’s wrong with the property.  As far as buying a property, remind yourself that $20K in the bank is still worth more than $30K that you might be able to get from the property you’re buying. 

It’s important for investors to understand the factors that tell us the home’s value.  They are as follows…

• Tax Assessments (from the government)
• Appraisals (from professional appraisers)
• Competitive Market Analyses (”CMA’s”, from real estate agents)

Tax assessments are created by the government.  They are usually about 20% below market value for the suburbs, and 40% for cities like Seattle.  To arrive at the tax assessment, the assessors evaluate the home based on mass appraisal technique (2 years’ of sales data for that area), areas (over 65 areas in King County alone), frequency, weaknesses, and disputes.  There’s actually a 50% “win” rate on property owners’ disputes, but it’s a 6-12 month process.  However, when you buy below the tax-assessed value, you just need to show proof of this to the government, and they will immediately change the tax-assessed value to what you actually paid.  Of course, if you’re able to buy a home for the tax-assessed value or even below (which would be lower than the market value), that’s going to make you some money–the only caveat is that as a result of the market’s “softening” (translation–the market’s still going down), the difference between the asking price and the tax-assessed value is getting closer, which means you might end up making less.  Allegedly, the market will improve in 2010, so there may be some properties in your portfolio, or that you’re considering buying, that you may want to hold until then, just so that they can appreciate in value.  However, don’t bank only on potential appreciation of a property–that’s speculation, and it’s not actually investing. 

In general, Scott recommends October/November/December as the best time to buy property, because you can fix it up and then sell it in March.  Keep your eye out for snowflakes–buy those auction properties when it’s snowing, because that’s when nobody else is bidding on them.  Also, you can call the bank that owns the foreclosed property on December 1st, make them an offer, and you have a very good chance of successfully buying form them.  Scott doesn’t recommend buying property in the summer if you want a quick flip, because you may end up holding it for a longer period of time, from 9-10 months.   

Remember that now is an incredible opportunity to buy, if you know what you’re doing.  You have to know what you want to do, and how you’re going to do it, so you need to educate yourself.  With that in mind, go sign up on our website at http://www.reif-wa.com, where you can view foreclosure properties to be sold at auction, short sale properties, MLS properties, etc.  Using our website, you can view the tax value vs. the list price, and you can also set filters so that you’ll only see details of properties that match your interests.  More importantly, you can analyze the deal for yourself, without any other investors seeing your details.  If you feel like you need some assistance, click “Contact Rep”, and just let us know what type of analysis you’d like for the property you’re interested in.

Here at REIF, we love what we do, and that’s helping you invest in real estate!  Stay tuned for our next blog entry, where we’ll discuss how appraisals work.

His useful and timely advice stems from 10 years experience in marketing/online advertising, 6 years as a licensed agent(currently with Keller Williams in Lynnwood, WA), 5 years in appraising and evaluating properties, and 5 years working with real estate investors.  In addition, his previous work in the IT field (having worked with IBM and Hewlett-Packard) makes his knowledge invaluable to us, which is why we’re pleased to work with him.  In his career, Scott has seen lots of investors’ mistakes, so remember, it’s crucial to become educated about real estate.  Scott has developed his business around investors, which is what we do at Real Estate Investment Firm–working with our clients to help them succeed by providing them with the tools and education to invest in real estate.

When evaluating a property to decide if you want to buy it, you need to recognize a good deal when you see it; basically, as Scott explained, you need to know when to “pull the trigger”, because a good deal today in real estate is gone tomorrow.  Finding those good deals can be a challenge, but Scott reminded us that the MLS is one of the most under-rated tools for investors.  In fact, according to Gary Keller’s “Millionaire Real Estate Investor” book, although 42% of deals made by millionaire investors were made by networking, actually 32% of their deals were through MLS or real estate agents.  Only 10% of deals were from newspaper ads/marketing/etc.

Scott was able to make an investor $300K from a 2004-built home located in Mercer Island, which they found on the MLS–list price as $699K and tax-assessed at $840K, and Scott’s investor was able to purchase it for $675K.  When they ran the numbers and evaluated the property, they found its market value was $975K.  The MLS has a wide range of properties–bank-owned, probates, estate sales, landlords, Seattle Housing Authority, as well.  In fact, the Seattle Housing Authority has some amazing deals on their properties listed on the MLS.

Another excellent source of properties available is found over at REIF’s website, and the link is http://www.reif-wa.com.  Just sign up and we’ll create a user account for you so that you can have access to details on 874 distressed properties at the time of this writing, across 7 different counties in Washington state.  From the comfort of your own home, you can log in, analyze properties, and even place offers. 

We’re going to continue to post some of Scott’s real estate investment advice, so stay tuned!  Be sure to add our blog, http://www.distressedrealestate.org, to your list of favorites so you can keep coming back for more!

The investors learned that higher-priced properties (above $420,000) have less competition for them at auction.  If you have cash, then you’re in an even better position to buy, because most hard money lenders will only finance up to $425,000.  However, keep in mind that here at REIF, our hard money lenders will finance more than that.  And if you want even less competition, check out the higher-end properties in Snohomish County–there aren’t that many people bidding on them at auction.  Let’s take a look at a prime example of an excellent opportunity up there.

In Mukilteo’s Kamiak Pointe subdivision (near Boeing), at tomorrow’s auction, the actual opening bid on a 3 bed/3 bath home is just $334,800!  That’s a $60K drop bid on a property (ID # 11720) worth $489,500!  As Kristian Aasgaarden, one of our senior partners, commented, it’s a “screaming deal” on a nice property, with a pretty decent equity spread of $150K! 

Another example of Snohomish County deals is of the best kind–a deal in disguise.  Keep your eye out for a drop bid on property ID 7697, located in Lynnwood, which is potentially sub-dividable into 3 separate lots!  This lakefront property is a 27,442 square foot lot which currently has a 6 bed/2 bath, 2,411 square foot home on it.   Right now, there’s still not an actual opening bid on the property, but the estimated opening bid is $712,110.24, and the estimated market value is $577K.  Because the estimated opening bid is so much higher than the estimated market value, you can be sure that there will be a drop bid coming up soon on this one.  The last time it was up for auction, it had an opening bid of $585K, but the auction was postponed.  Watch this property closely–don’t miss this great opportunity.

Just remember that no matter what you’ve read or heard, now really is the best time to buy property–you always want to buy when nobody else says it’s a good idea.  Even in King County, where the usual cost of properties is high, at auction tomorrow, there are some great deals to be had. 

Have you ever wanted to own a house in Kirkland, but thought it was beyond your price range?  Take a look at property ID 1304525, in between Rose Hill and Totem Lake.  The actual opening bid on this 2 bed/2 bath, 1,060 square foot home on a 11,556 square foot lot, is just $266,857, and the estimated market value is $425,000!  It’s an excellent bargain with over $150K in equity!  Because the first mortgage is in foreclosure, the 2nd mortgage will fall away when you buy this home at auction tomorrow!

We’ll see you at the auction tomorrow! 

Self-directed IRAs (Individual Retirement Accounts) can be utilized to invest in real estate.  There are multiple strategies for doing this, including forming an LLC (Licensed Limited Corporation) and having checkbook control of these funds. 

To learn how you can invest in real estate using your IRA/401(k)/Roth IRA/SEP, without early-withdrawal penalty, contact our office at 425-968-5462 now!

The foreclosure timeline begins when the Notice of Sale (NOS) is issued. The NOS is a formal notice informing the home owner that the property has been scheduled for sale as a result of its default status. The pre-foreclosure period lasts up until the actual auction date.

WHAT YOU NEED TO KNOW

Tracking is critical

During this pre-foreclosure period there are a number of reasons that often can cause a property sale to be postponed. Examples that can cause a postponement include:

• Debtor files bankruptcy
• Owner disputes the debt
• Title Discrepancy
• Forebearance agreement

Therefore it is critical to track property status in order to know when the actual sale will take place.

Real Estate Investment Firm, through our partnership with Foreclosurepoint, provides real time status tracking that is constantly updated including:

• The actual auction date, time and location 
• The estimated opening bid
• The actual opening bid
• If Postponed - the new sale date
• Responsible trustee details

Research is Key

The pre-foreclosure period is the time to extensively research the property. Detailed research will help identify good opportunities and ensure success at auction.

The most important research elements are:

• Accurate date, time and location of auction 
• Property valuation analysis
• Title research showing all liens and encumbrances
• Bid info and Grantor, Trustee and Lender contact details

Real Estate Investment Firm provides a detailed property analysis for each property in foreclosure. This analysis report includes the following research elements:

• Property Details including current Photos 
• Preliminary Title Summary noting anything recorded against the property:
1. Voluntary liens
2. In-voluntary liens
3. Tax liens
4. Detailed Property Inspection
5. Judgments and comparable analysis
6. Construction liens or other encumbrances 
• Valuation Analysis (provided as a range), including auction bid calculator
• Property transaction history
• All foreclosure details, including opening bid details

NEXT: Stage 2

Pre-Foreclosure,Foreclosure Auction,Real Estate Investing