When buying Foreclosures some people have mentioned a 20 - 30 % rule of thumb. What does that apply to?

Question

I'm guessing it means that you only buy a foreclosure at 20-30% less that what the actual market value is. Is that correct? Or do you apply it to the assessed value from the county, or the estimated market value from somewhere like zillow.com (even though zillow usually underestimates by 10-30 K).

I understand that you need to cover closing costs, loan payments, and any repairs that need to be made, I'd think that 30% below the actual market value would be about right, but just wanted to find out from any seasoned veterans out there.

Thanks in advance.

Answer 1

County assessed values are rarely the actual value. The REAL value of the property is determined by actual sales in the area. An appraiser will look at 3 similar properties, preferrably within a close radius, do some adjustments, then average the values out to determine the actual value of the property.

You'll want to buy 30% below THAT value.

Answer 2

Yes, it is correct. It should be below "fair market value." In my locality property taxes are based upon actual appaisals. The county has the same appraisal software as commercial appraisers and updates the database continuously as sales occur. That said, Pennsylvania's assessments, for example have no relation to market values.

One county last assessed in 1950 so it values all homes according to 1950's building costs. This radically inflates the value of new homes as they would have cost a fortune to build using 1950's building technologies, wage rates and materials. Likewise, old homes are valued at what they really cost. This is a boon to old county residents who are likely to vote and a penalty to new residents. If you use an assessment understand exactly how they are arrived at.