If you are a homeowner looking to purchase and renovate a foreclosure property, you have a HUGE advantage over real estate investors. Even though you may not have the experience, contracting team and lenders lined up like a real estate pro, you have one advantage they can't match. You can afford to pay more and still come out way ahead.

Here's why. Cash-strapped homeowners often let their properties fall into disrepair, and unhappy borrowers sometimes vandalize properties from which they are being evicted. These challenges for lenders create tremendous opportunities for buyers who are willing to take on major renovations. While foreclosed properties in good condition can be sold quickly at decent prices, heavily damaged houses must be deeply discounted to sell. That’s where you come in. Most homeowners don’t want to do a large renovation project. So, the typical buyer for a damaged property is an investor.

How Real Estate Investors Value Property

When a real estate investor calculates what an old house is worth today, he or she "backs into" the offer price using a best guess for what the property will sell for once it has been fixed up.

Look at the chart below as an example. This investor expects that a certain property will be worth $500,000 on the open market once it has been repaired and spruced up. To determine the price he will offer the lender, he makes some assumptions and then does simple subtraction:

• First, he estimates that it will cost $100,000 to fix the property up well enough to sell for full price.
• Then, he determines that there will be $30,000 in closing expenses and carrying costs during the renovation.
• Then, he calculates that it will cost $50,000 to sell the property once its completed.
• Finally, he notes that a 10% profit ($50,000) is the least he will require to make it worthwhile.

Homeowners Always Win

As a homeowner, you have a clear advantage. You only need to buy the house, fix it and carry it. You don’t need to sell it, and you’re not calculating a profit. So that extra $100,000 the investor needs to make his or her business work becomes built-in equity for you in your new home. When you buy a home like an investor, you always come out ahead.

Now, imagine a different situation where you as a homeowner are competing with an investor for a certain property. As we calculated above, the most money the investor will be willing to spend for the property is $270,000.  If he pays any more, he won't be able to make enough on the property to be worth the risk. But, you can spend more and still get a great deal. After all, let's say you increase your offer to $280,000 to outbid the investor.  Now, your equity is reduced to $90,000, but you still have a ton of extra value in your home, and you won the bidding war.  As a homeowner, you will always win the bidding war over an investor because you can pay more and still come our ahead.  That''s why homeowners beat investors every time when shopping for foreclosure property.

The Department of Housing and Urban Development designed the 203k Loan Program to give home buyers the opportunity to purchase a house and turn it into the “home” they want. Because we’ve completed many projects funded by this program, New City Construction understands the complexities of 203k loans and their unique process.