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The housing market is hot and everyone wants in. If you are an investor, of course you want in too. But you have your work cut out for you. You don’t want to pay “market value” and then hope that prices go up so you can make your profit. That’s not smart investing, and should be avoided at all costs.

Knowing you need to buy below market value, the first question you must answer is “What is Market Value?” In today’s hot market, even appraisers are being challenged to determine the proper value. With a scarcity of homes and buyers bidding prices over the asking price – is that the market value? Or are those homes that recently sold the market value? And what about the motivation of the seller? How does that come into play? Let’s answer these questions and more…

What is Market Value in Hot Market??

In a normal real estate market, market value is defined by three things – 1) the price that the home will sell for; 2) the resalable condition; 3) the market in the next 30-60 days.

However in a hot market, like we are in right now, how do you determine today’s market value, when everything is selling over list?  With prices moving up quickly, you will need a keen eye to accurately price and project your rehab budget and profit potential, before you buy your house.

How to Predict Market Value in  Volatile Market

1. Your House

When you determine market value, you must always remember that you  are estimating the market value of one particular house. The location, or neighborhood, of this particular house is the starting point for your  investigation. The exact same house in the next city, or even on the other side  of the same city, is not relevant to this determination.

For example, a  house located in Fair Oaks, Sacramento, California is worth $300,000. But  if the exact same house were located in Citrus Heights, Sacramento, California, a neighboring zip code, it is only worth $200,000. That’s a big difference in price for just one zip code away right? But it’s more than just a zip code.  The Fair Oaks house is in quiet neighborhood, walking distance to the American River Natural Parkway and has cool delta breeze every hot summer night. The Citrus Heights is in a dense neighborhood, with lots of traffic, higher crime and higher summer temperatures. There is a reason for the price difference.

Although this may seem like an extreme  example, house prices throughout the country fluctuate significantly from neighborhood to neighborhood. Therefore, whenever you determine  the market value of one particular house, you must compare it only with similar  houses in the same , equivalent neighborhoods.

2. Resaleable Condition

Next, you must review the condition of your particular house upon future resale.  How well your property will look and show once you list it for sale in 30-60 days will determine the number of buyers who are interested, and will affect the amount of time the house remains available for sale, before it is sold.

Home buyers are picky. They want to buy the prettiest house they can afford. Is the house gorgeous and ready to move into?  Or is it lacking curb appeal in your neighborhood? First impressions are everything! You need your house to be as nice, if not a bit nicer, than the houses that surround you. Your house must have a “wow” factor when buyers drive by, so they stop to come in. The more buyer traffic you have early on, the more offers you will get, the more aggressive buyers will be with their offers. You cannot afford to make mistakes here. You must “do your rehabs right” and your house will sell quickly in less than 30 days.

You must also “do your right math” when calculating your rehab budget and profit potential, before you buy the house. Simply subtracting the  amount of estimated fix-up costs from the selling price is not an accurate way to determine current market value. If your house in good condition could sell for $300,000 but the house you are interested in needs $20,000 worth of repairs, that  does not mean the current market value of your house is $$280,000.

Why? Because you haven’t taken into account your time or return for both financial and market risk. Remember, fewer buyers want to buy a house that doesn’t look pretty. When a house attracts fewer buyers, it takes longer for the house to sell. To attract more  buyers and sell the house sooner, the price must be reduced by much more than just the mere cost of repairs.

Although the current condition of the house is an essential element of market value, you must first determine  exactly how much the physical condition of the house affects its value. This is not an exact science. As an investor, the way I calculate this is by finding comparable repaired homes and then deducting a rate of return to compensate me for my risk to rehab and flip this house.

So what is a “fair rate of return” for me to buy, fix and flip project? Don’t ask your Realtor, he will tell you that should make your money when the market goes up. By the way, that is not investing – that is gambling. You should not take that advice! Remember, they are trying to get your offer price up so yours will be accepted and they will get their payday. You must watch your back here!

Also, don’t forget your Realtor is paid 6% commission to simply help buy and sell real estate without any financial risk on their part. Shouldn’t an investor make 2-3 times that? Yes, they should and that is why I build in a 15% profit deduction on all of my purchases. It is also how I came up with my “70% Less Repairs Offer Formula” for all my “as is” purchases in my 8 Steps to Mastering Foreclosures course.

3. Next 30 Days

In a normal real estate market, if a house doesn’t sell  within 30-60 days the reason is simple: The price is  too high.  Even perfect houses don’t sell within this time frame if the price is  too high.  In today’s hot market, your house will most likely sell in one week with multiple offers. That’s great news for flippers, as we can now build in a very short hold on our deals, which lowers our costs and raises our offer prices – so we can buy more deals. It’s also great when your house sells over list… you get your built in 15% profit ($30,000+ per deal) AND the extra. Like icing on the cake…

Imagine this scenario. You have a fixer foreclosure you want to buy, fix and sell in the next 60 days. You start looking for comparable sales and find a home that sold for $275,000 in June 2013. That home went pending sale back in May 2013. It is now August 2013 and the market has moved up in price. There is another comparable home that just went pending sale in just one week at $295,000. You call the agent and they won’t tell you what it went pending for, but did say they had multiple offers and it went over. Next there is an Active comparable listing new to the market at $325,000 in the last 7 days. What is the correct predicted resale value for your home?

I’ll review the above scenario and explain exactly which “comparables” to use and how to estimate the proper market value of a particular foreclosure home in my next post ”Pricing Your Foreclosure Deal in a Hot Market. Part 2“.

Do you want to get your “foreclosure offers priced right”?

If so please join me in my next Live Strategy Session, August 7th, Wednesday at 6pm Pacific (9pm Eastern).  I will be reviewing clients live foreclosure deals and be offering my professional opinion on how to properly price your wholesale foreclosure offer so it gets accepted – even in today’s competitive market.

Let Me Help You Get Your Deals Accepted. Here’s How…  

• Start by Searching Foreclosures.com Listings for a Great Wholesale Home Lead.
• Pick a Pre-Foreclosure with Equity or a Short Sale (no Equity) You Want to Buy.
  (REO’s are NOT where the deals are in most states right now).
• Do the Research and then Send me Your Property Details
  (address, city/st, asking price, loan amounts, square feet, lot size, year built, etc.);
• Include 3 Comparable Homes Sold (Last 60 Days within 1 mile);
• Include 3 Comparable Available Actives and Pending Sales (within 1 mile);
• Include Estimated Repairs Needed (Price/Foot and Explanation);
• Determine Your Potential Wholesale Offer Price (Include Your 15% Profit);
• Submit the above to deals@foreclosures.com by Monday, August 5th, Midnight.
• Make sure you Register Here and then Join me next Wednesday to Learn the Answers.