Went to foreclosure auction today

[Runum]

Alright, I went to the county foreclosure auction today. I learned some things and got rid of a few misconceptions. I did see 2 of my target properties sold.

Prop 1

3/2/2 2135 sq ft.
Tax appraisal 155,500
Zillow 156,000
Sold for 106,000

Prop 2
3/2/2 2190 sq. ft
Tax app 170,100
Zillow 173,000
Sold for 121,000

These properties are gone so now I'm planning for the future. I see the potential to make money here. I wouldn't want to rent them out if I don't have to. So, the profit would be made on the sale. I don't have the resources to buy these properties. They have to be paid for with cash on sale(cashiers check).

Who do I pitch this to in order to get backing? Banks?

 

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[andviv]

Glad you made it to the auction. It was quite a learning experience for me the first time I went to one.
So, what is your plan? Buy a property cash next auction and sell it the next day?
I'm surprised they make you pay cash right away. The ones I've been around here give you a few days to pay, as to give opportunity to the buyers to arrange bank financing, but it also gives the bank that owns the property the right to reject/approve your wining bid, which becomes more like just an offer for them. I assume then that this one was an absolute auction (they get sold for the wining price, no chance for the seller to reject the price).

In the case you are mentioning, I don't know of any bank that would give you a cashier check to pay the house the same day.
Probably private lenders would work better in that case. The hard money lender route sounds like the perfect alternative in my opinion.

 

[Runum]

Thanks Andres. Yes they are absolute auctions. They warn you up front that if you can't pay now, don't bid. I did see one property go back through because the winning bidder couldn't pay.

I thought about hard money too. Good idea. Sure I would like to buy and sell the next day or week. How do you determine if there is a market for that quick of a sale? I would assume you would resell it for a real discounted price for quick sale. How do you minimize your risks of having to carry the property?

 

[andviv]

Well, it hasn't worked for me, but I approach it like this:

* Advertise as FSBO in the area of the property, sell price at a big discount. This will help you get a feeling for the interest the area and price will get.
When people call to ask for details tell them you will be able to show the property the date after the auction (of course, don't say you are buying it, just that the house will be available X date, one day after you get rights to the property).

* Advertise it for rent as well, doing your research about how much the rents are in the area for comp. properties.

* Determine the max price you could pay for it based on those pieces of information, the FSBO interest and the rental interest. Of course, leave a margin for refinancing the property if you can't sell it quick as to pay the hard-money loan.

* No matter what happen during auction, don't bid one dollar more than the price you determined with the data you defined in the previous step.

This has been the similar approach I took for the auctions I went to, but I did not win the auctions, I was not willing to go a dollar higher than my previously determined max price.

 

[Runum]

Thanks Andres. How do you get all your thoughts together so quickly? I have had most of those thoughts at one time or another but can't seem to put them into any logical order or plan. I am impressed my friend.

I agree with you about knowing your top dollar. I had about 12 properties selected to watch. I actually saw 2 of my 12 be auctioned. They each had the opening bid and one other bid for a dollar more. Then they were sold. I want to see the strike list now to see what was sold and how much it went for. I may work on my plan for the July auction. Thanks again.

 

[andviv]

In general, would they cashflow at the selling price you saw?

 

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[Runum]

I haven't covered that base yet. That would have to be determined before bidding as well. That would be one way to minimize risks.

Those two properties are really out of my "farm" area. I would have to do a deeper investigation of the property and the neigborhoods.

 

[Yankees338]

Have you been working with a realtor? See what they would you about the average time on the market for similar properties. Also, try contacting property managers to see if they have any other input.

Andres, are you suggesting putting an ad on the properties before you purchase them? Would you do this through something like Craigslist or the local newspaper?

 

[Runum]

OK here's the plan. I just talked to my banker about this and came away with some ideas.

I should get the July listing in about a week. I will pick out my selections for possible buys based on paying no more that 70% CAD(tax appraisal).

Then I will do my DD on each property. Rent rates, comp sales, 2nd liens, delinquent taxes, and anything else I dig up. This all can't take more than about 3 days.

I will then make up a proposal outlining how I intend to dispose of each property and back up plans to mitigate risks.

I will make multiple copies of the proposals and submit them to all the financial institutions around here. Out of that, maybe I can get a line of credit to back me for this opportunity.

This all came about from Adres' responses and talking to my local banker and rcardin. Thanks to all of you for your input.

PS:Thanks Ryan for your input as well, I have those things on my list to check out.

 

[Bilgefisher]

I learned a lot at my first foreclosure auction as well, but the biggest things I got out of it were the contacts I made. I met the investors I did my first property flip with.

I would suggest figure out who the investors are and the looky loos are. At our auctions there were around 12 people on average with only 4 serious investors. Talk to the investors. Even if its just casual conversation. Being its a foreclosure auction, the conversation will naturally drift to that subject. You may pick up some helpful tidbits of information in your area. Ie Law changes, neighborhood improvements etc etc. Then you can go verify. Helps you keep your ear to the ground. You also may even encounter new business partners. Happened to me.

Only about 10%-15% of the properties initially listed in my area actually go to auction. For one reason or another they are removed from the list. Be ready for that.

As a final note, when you are looking at those properties with liens, see if its possible to get a hold of the 2nd. Both properties I dealt with involved the 2nd. On the first property we purchased the 2nd for pennies on the dollar. When the 60 day redemption period was up (since changed in Colorado to 5 days) we had first rights to the property. On the 2nd property we bought the 2nd for about .60/1. The owners were attempting to sell anyway, when they did sell we got the full value of the 2nd. No effort at all. Some options for you.

 

[CactusWren]

Nothing much to add to the above, except...

The only property we actually purchased at a Trustee sale (24 hours to fund here in Tucson, AZ) was our own home. Please know that it might take you a while to get the occupants out and that they might damage the property on their way out.

It can get to the point that you have to go to court to have the Sheriff get them out of what is already your property. This takes time and money. We hired a lawyer and offered the occupants "moving" money. In the end they moved out without the "help" of either the lawyer or our "moving" money, but they did take all the appliances and some wrought iron gates/fencing. Food for thought.

Good luck!

 

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[Runum]

Thanks for the input Bilge and Cactuswren. I guess I show how green I am. I get an idea or see an opportunity and I get so doggone excited I can't think straight. It's good to have such knowledgeable people to approach about the unknowns. +++speed.

 

[Bilgefisher]

This takes time and money. We hired a lawyer and offered the occupants "moving" money.

Cash for keys is very useful and works in many cases. My business partners offer $1000 cash or to move them anywhere in town. Its saved them far more money and headaches. Think how simple it is to cause 1k worth of damage.

Just make deadly certain you don't pay them until they are out. If not, you may just have lost $1000 and still have occupants to deal with.

 

[andviv]

Well, maybe you can add to your criteria that you will only bid on those properties that are empty (I assume you will drive by those that fit the numbers, right?)

 

[Runum]

You bet Andres. In order to make my pitch to lenders I have to gather all the facts and cover all the bases that I possibly can. I wouldn't want to deal with a long term eviction as well as all the other pressures. Thanks

 

[Allthingznew]

This is slightly off topic but relevant. If you're depending on the Zillow values be very careful, at least in this current market. My experience has been that the values are inflated. Your examples above show a $50k difference, and I'd wager that's how far Zillow may be off.

In April I was applying for an equity line to use for my business development and the Zillow value of my home was at $200k. The appraised value was $125k. That was a huge shock and is a huge difference. Zillow still doesn't reflect that amount 2 months later. (it's at $180k)

The explanation I got from the bank was that there have been so many short sales etc that Zillow is behind, and that not all the properties end up in the Zillow database.

Don't know that this is always the case with Zillow, but since it is now, at least for my area, I thought I'd give you a heads up.

 

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[Runum]

Thanks for the info. I'll bring that into consideration. I'll really be basing the retail value of the propety on the sold comps. I failed to do it on this occasion. ++++ speed

 

[tbsells]

This is slightly off topic but relevant. If you're depending on the Zillow values be very careful, at least in this current market. My experience has been that the values are inflated. Your examples above show a $50k difference, and I'd wager that's how far Zillow may be off.

In April I was applying for an equity line to use for my business development and the Zillow value of my home was at $200k. The appraised value was $125k. That was a huge shock and is a huge difference. Zillow still doesn't reflect that amount 2 months later. (it's at $180k)

The explanation I got from the bank was that there have been so many short sales etc that Zillow is behind, and that not all the properties end up in the Zillow database.

Don't know that this is always the case with Zillow, but since it is now, at least for my area, I thought I'd give you a heads up.

This is very relevant. I have never seen an accurate Zillow estimate. Please do not rely on their guesstimates. In the example above the zillow estimate was $75k higher than appraisal. The guy who works the midnight drive thru shift at taco bell can do better than that. A joke.

 

[hakrjak]

Good info here on Foreclosure auctions.

I have not been to a Foreclosure auction yet, as I've bought most of my foreclosures as bank REO's -- But I would like to go to buy 1 property I've had my eye on, which is due to list in August.

Someone mentioned that you should try to get ahold of the 2nd... Are you saying to buy the 2nd, but don't attempt to buy the 1st?

If you want a house, do you need to bid on both the 1st & 2nd?

Doesn't that make it kinda hard to be sure you're getting your right price? I mean, what if you want to pay $100k for a property, and you secure the 1st for $80k thinking that you'll buy the 2nd for $20k, but instead you end up having to go to $40k just to get ahold of the 2nd?!

Thanks in advance to anyone who has been through the process that could explain these points I've raised....

- Hakrjak:cheers:

 

[tbsells]

Hakrjak,

There is just one bid. Its an auction just like any other auction. Most of the time you are bidding against the bank and other investors. The chances of getting a buy are pretty good. It moves quick so have your notes prepared as to what you would pay for each property ahead of time. The disbursement of money between 1st mortgage, 2 mortgage, and other leins is determined by the court. Make sure you have your attorney do a title exam prior to closing, and if there was ever a time for title insurance this is it. Good luck.

 

[Runum]

tbsells is correct. One bid and it's fast. My examples are only in Texas so it may be different where you are. There are multiple auctions going on at the same time. It's chaotic. You have to know the property, have done your title searches, know the trustee and the approximate time they will be on the courthouse steps. With all that done you have to be about 2-5 feet from them to hear them. I did a lot of lip reading. I had my list, did my DD, and was still left out by some trustees. The reason was identification of the properties. Some will call a property by its physical, mailing address. I had my list set up for that. Some trustees called the property by its legal description. I was not prepared for that. I was totally lost. The trustees will not speak up. They will not elaborate. They are usually pleasant but get down to business, auction business, and then go home.

As far as 1st, 2nd, etc. Here in Texas, when it goes to auction, it usually goes for the first lien. Subordinate mortgage liens are wiped clean. However, tax, IRS, and municipal liens are still intact.

Good luck.:cheers:

 

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[CactusWren]

The 1st wipes out the 2nd. that is why sometimes people that are owed the 2nd may payments on the 1st...

 

[hakrjak]

Wierd... I've heard 'horror' stories over the years of people going to auction and accidentally buying the 2nd because they had no idea what they were doing. The result was that they didn't get the house -- because then they didn't have enough money left over to buy the 1st.

- Hakrjak

 

[Runum]

You can buy a second if you aren't careful. You need to do a title search to see who is the first and who is foreclosing. I too have heard lots of stories and faree tales about foreclosure auctions. I took a 1 day class about preforeclosures and foreclosures given by a local guy. He told us how it all worked and what to expect. Then I went to check it out myself. He was pretty much dead on.

hakrjak it's just like any other investment. You can get a bad deal. You will have to do your DD. The title search is the key here. Good luck.