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How to Determine the Foreclosure Discount in Your Real Estate Market

It was March of 2012.

I was in Denver at the BiggerPockets.com real estate investment summit to teach an evening session on fixing and flipping houses.

At this conference I met a very intelligent man named Steve Cook. He told me he used to work at the National Association of Realtors as the vice president of public affairs. As it turns out, Steve was also at the BiggerPockets.com summit to lead a discussion on the current state of the housing market.

In his speech, Steve explained the importance of understanding the foreclosure discount in each real estate market.

What exactly is a foreclosure discount?

As Steve explained, it’s the difference between what retail properties and distressed properties (bank owned) houses sell for. For example, if the median sales price of a retail house (not in foreclosure) is $100,000 and the median sales price a foreclosed property is $75,000, the foreclosure discount is 25%.

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At the time this metric could be found on Pro Teck Valuation Services website. Unfortunately, they don’t provide it anymore (at least for free).

However, you can get this stat on RealtyTrac.com’s website. Even better, you can do this research on a macro level (your state or city), or on a micro level (by zip code). Best of all, it’s free and fairly accurate.

East Bound and Down

Using this information, my business partner Manny Romero and I discovered that Milwaukee, Wisconsin had one of the largest foreclosure discounts in the country (about 60%), while Phoenix had one of the lowest (9%).

Needless to say, it made financial sense for us to build a business in Milwaukee, as well as Phoenix.

So now, whenever we’re asked why we fix and flip houses in Milwaukee I jokingly reply “because we love beer, brats and cheese”. Then I quickly add, “but seriously, it’s because of the huge foreclosure discount.

Check out the RealtyTrac.com info below for Phoenix:

 

 

Now have a look at the same data for Milwaukee:

 

 

As you can see, the Phoenix discount is only about 13%. Milwaukee, on the other hand is 51%.

The truth is you can find profitable fix and flip deals in any real estate market. But’s sure nice to know there’s a free resource out there you can use to find those areas of your city that have the widest margins.

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