An essential part of the research necessary to purchase foreclosure property is obtaining comparables. Comparables allow you to determine the market value of the property.

Even though, a mortgage company will hire an appraiser to perform this task before providing financing, it is important for you to know the comparables before making an offer to the seller. The comparable sales approach is a method you can use to appraise the value of the property. What is a comparable? Ideally, it is an identical home in an identical location which sold in the prior 90 days. (In a sellers market where homes are selling quickly, the time period can be as short as 30 days and in a buyers market where sales are slow, the time period can be as long as 6 months.)

Rarely are homes so homogenous to obtain sales for three or five identical homes, so adjustments are made to the comparable properties for features included or missing in the comparable properties.

Sources for comparable sales can be obtained from Real Estate Brokers. It is important to have a good relationship with a Real Estate Broker who will readily share this information with you. Also, most local newspapers include a section listing recent sales. Additional, sale prices are a matter of public record and you can look up the information in the mortgage and deed room in the County Court House. The internet also includes many sites which contain sale data and more.

Some items to consider when making adjustments to the comparables for your target property are: total square footage, number of bedrooms and bathrooms, landscaping, views, location, added features like decks and patios. If you are purchasing the property for yourself, make sure you include all the features you ranked and rated on the housing needs profile (Refer to the book Focusing On Foreclosures Worksheet appendix B). If you are purchasing the property as a rental, put special emphasis on items which will command a higher rent in your area.

The Tax Assessor for the municipality is a good source of information. The tax assessor can tell you the number of bedrooms, number of bathrooms, any additions or improvements, etc. This is especially useful when you can not go inside the subject properties.

The chart below is an example of a comparable analysis. The chart illustrates adjustments to compensate for the features included or missing in your target property and provides an estimated market value for your target property. In the example, the market value of the target property is between $235,000 and $241,000.

	Target Property	Comparable 1	Comparable 2	Comparable 3
Proximity to Subject	123 Dream St.	Same Street	1/2 Mi. West	1 Mi. East
Sale Date	--	7/1/99 +1,500	5/15/99 +2,000	8/10/99 +1,000
Sales Price	--	$235,000	$205,000	$174,500
Sq. Footage	1,924	2531	2037	1910
Price/Sq.Ft.	--	$92.85	$100.64	$91.36
Lot Size	2 acres	200x200 +25,000	175x200 +30,000	100x200 +35,000
Location/View	above average protected woods	above average preserve +5,000	average +5,000	poor - cemetary +10,000
Design Appeal	average	average	average	average
Quality	good	excellent -2,000	good	good
Age	25	10 -15,000	15 -10,000	25
Condition	fair	good -2,000	fair	fair
Bedrooms/Bath	4/3	3/2.5 +1,000	4/3	3/2.5 +1,000
LR/Den Family	1/1	1/1	1/1	1/0 +2,000
Study Office	1	1	1	0 +2,000
Dining Room	1	1	1	1
Workshop Shed	1 in garage	1 in basement	1 outside	1 garage
Storage Closets	adequate	adequate	adequate	short +1,000
Functional Utility	average	average	average	average
Basement Finished	yes	yes	yes	no
AC/Heat	central	central	central	central
Garage	2 car	2 car detached	1 car +2,500	2 car
Porch Patio Pools	deck screened	deck screened	deck +2,500	deck
Landscaping	average	excellent -2,500	average	average
Fireplace	yes	yes	yes	no +1,000
Kit Equip./Pantry	average	average	average	average
Finance Concessions Net ADJ.	--	+6,000	+32,000	+60,500
ADJ Sales Price	--	$241,000	$237,000	$235,000

The example includes a single item for condition. Three properties were considered fair and one property was good with an adjustment of $2,000. This $2,000 is an adequate adjustment for minor repairs, cleanup and perhaps some painting. However, if more extensive repairs or remodeling are considered, I use the adjusted sales price as the base and subtract the cost of the anticipated improvements.

If you are able to tour the home and hire inspectors prior to making a deal with the homeowner in foreclosure, you can use the inspectors report as a basis for your estimate. However, this is rare. The homeowner in foreclosure needs a deal and is not going to be patient if you are measuring for carpeting! Resist the temptation to be exact. Make a note of defects and use ball park estimates for repairs and improvements. For example, you notice an antique heating system, figure $6,000 to replace, you also want to update the bathrooms figure $4,000, and interior and exterior painting will cost $7,000. Subtracting these numbers in the above example reveals a price of $218,000 ($235,000-$17,000).

If you are not able to go inside the property, you can still estimate many repairs. Use the information from the tax assessor to determine what items may need to be addressed and discount the price accordingly. Look closely at the outside of the property and judge for yourself what may need to be repaired. If you see a sag in the roof and worn shingles, assume you will need to replace the roof. If you notice water collecting by the foundation, assume the basement leaks.

Finally, discount the dollar amount you have calculated by 20% to 60%. This is your "Adjusted Market Value". The amount of the adjustment depends on the level of risk. If very few items will need to be addressed and the defendant has been cooperative and honest, then adjust by 20%. On the other hand, if you have not been inside the house and the tax assessor has not recently inspected, be wise and increase the discount toward 60% to compensate for the higher risk. This discount is your profit and your buffer for any unanticipated costs. In the above example, assume the 20% discount to arrive at your "Adjusted Market Value" of $174,400. This is the amount you are willing to pay for this property.

No matter how you structure your deal with the defendant this is the number to remember. If you are making a offer to purchase with the defendant, this is the sale price. If you use the short sale approach, your total costs must be less than or equal to this figure. If you are bidding at the Sheriff's Sale and there are superior liens (tax sale certificates), then subtract the cost of these to determine your highest bid amount. If you are buying/bidding on an investment property with tenants, subtract the cost of tenant security deposits from your adjusted market value.

Finally, keep in mind the basis of your calculations for market value is recorded sale prices. The record of sale prices do not always tell the whole story. A real estate deal is a bit of give and take not always captured in the dollar amount at the top of the contract.

For example, a developer for new homes sold all 25 homes for $300,000. This is a good source for comparables. But what it does not tell you, is the first 5 buyers got $5,000 credit at closing and upgraded appliances/finishes. It also does not tell you the last 5 buyers got a deck and porch. In effect, the first five buyers and last five buyers got a discount, not apparent in the sale price.

The recorded sale price for your comparable does not tell you if the property was sold in distress as a result of divorce, bankruptcy or foreclosure. In these cases, the sale price may be reduced for a quick sale. The fact that this information is more difficult to determine (unless you use NJPForeclosures.com) means you can only use sale prices as a guide.

Sometimes the sale price is overstated. The buyers of your comparable had to invest thousands of dollars to make the home comparable to the neighborhood properties. You do not know what improvements the buyers of the comparable were forced to make after purchasing the property.

Finally, recent sale prices from 90 days ago may not reflect the park and playground just completed in the last 30 days. This could also apply for newly developed nearby shopping, religious facilities etc. Sale prices which are 3 months old would not reflect the decrease in value due to the new assessments for sidewalks, or the news that the water in the town is contaminated from the gas leaking in gas station down the street.

Remember, the public record for sale prices, do not tell you the whole deal. The deal could have included $5,000 to buyers for closing costs-effectively reducing the sale price by the same. The deal could include all furniture. Every deal can include discounts, credits or concessions which are not reflected in a single figure called the sale price.

While sale prices are not a perfect predictor of value, they are a necessary starting point. After gaining experience in a neighborhood, you will gain a feel for the "market value". The sale prices which do not fit will stick out like a sore thumb. If you have several comparables and one is excessively high or low, throw it out, it may not reflect the whole deal. Accordingly, the deal you make with the homeowner in foreclosure may not reflect the whole deal!

Source: NJpforeclosures.com

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