Debt to Equity Ratio!

Buying foreclosure property is purely and simply boiled down to "buy low, sell high". The question is, what are you buying? Most properties go to foreclosure because the owner either became unable to make his monthly payments, or the property had no equity in it, worth saving it from the foreclosure process. The answer is, finding those properties with significant equity still in them!

The key is the Debt-to-Value ratio (DTV). To determine this, you divide the amount of the current debt (all debts including any tax, mechanic liens, and judgments), by the current market value of the property. The resulting number is the DTV ratio. The best deals are those with a DTV ratio of less than 70%. This means the property has 30% equity still in it. If you can purchase that property for its current debts amount, you will pick up that 30% equity for yourself.

Some investors say, they don't care what the DTV ratio is, so long as they can make $10,000 to $15,000 on each deal. That's fine if the investment is under $100,000. But what if the total investment is over $250,000 or even $400,000, then, your return on investment is very low, and your risk is very high. You must look to the DTV ratio for each property, and each potential deal.

If you pay, 70% of the market value, (e.g. the property is worth $100,000 in its current condition and you only pay $70,000) then you have some room to profit. On top of your $70,000 investment, you can expect to pay $5,000 to $10,000 to fix it up, or make necessary repairs and cosmetic improvements. You can also expect miscellaneous expenses, holding costs, costs of funds, etc. to run about $3,000 to $5,000 over a 3 to 6 month holding (flip) period. And, you will need to pay broker's and either an escrow officer or attorney fees and commissions to help you sell the property. Those fees usually run about 7% (combined), for a total amount on our hypothetical deal above, of $7,000. In total, your cost will add up to $92,000 on the higher end. You'll make a net profit of $8,000 on your $70,000 investment. And on the lower end of these assumptions, your cost would be $85,000, for a profit of $15,000. If you paid more than 70%, there may not be much profit left, if any!

Obviously, not all properties will work out as nicely. Some will need more repairs, and some will have significant added market value from your improvements, that will go directly to your bottom line profit.

The problem is from the start, how do you determine what the debt, and what the value is for each foreclosure property, or opportunity? In most major cities, there are hundreds to thousands of foreclosures each month. You will burn a lot of tire rubber and shoe leather running around evaluating each potential property.

Shark Bait - The foreclosure buyers' software provides you with an at-a-glance calculated market valuation for every foreclosure property in your area; the amount of the current debt (the subject loan in foreclosure and any additional liens); the number of sales comps within the Shark Bait database that it has referenced; and the critical Debt-to-Value ratio. Within seconds, you can scan each property and determine what the DTV ratios are, as well as the total amount of the debt to determine if it is within your means, or your interest. From there, you determine which properties are the most interesting based on all of your criteria, from size, to bedrooms, to specific area of town, to age, type, etc.

Whether you use Shark Bait, or just paper lists and notices out of your legal newspaper, you need to determine quickly what the DTV ratio is, and which properties are worth your time (often more valuable than money) and your investment. Buy low, sell much higher!

We hope this tip was helpful in your foreclosure buying efforts.

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