Foreclosure Real Estate Investing: How NOT To Lose Your Shirt At The Foreclosure Sale
For real estate professionals, this past year has been one of the most painful in recent times — defaults are up, homeownership is down, foreclosures have soared and the poorly performing housing sector is starting to create negative ripple effects in the broader national economy. Since all projections indicate that 2008 will be equally as challenging, should property investors run for the hills, put all their money in AAA rated munis, and ride out the storm until the next boom? Absolutely not!
Thereâs no question that 2008 will bring reduced housing demand, lower prices in some areas, and fewer loan options, yet 2008 looks strong for treasure hunters. At HMB, weâve been seeing investors scoop up bank REOâs for 40 to 50 cents on the dollar and selling them off at nice profits. After all, people will always buy property if they can get a great deal, no matter what the market conditions. Your job is to simply find the best deals.
Many great deals will most certainly come from foreclosures over the next 24 months. If you intend to jump into foreclosure auctions, follow these tips to help insure a profitable transaction:
Â·Â Â Â Â Â Â Â Â Do your homework: I recently had one of my investors call me and ask me if he would be risking anything greater than his security deposit if he simply walked away from a house he purchased at auction. Because he was intimately familiar with the neighborhood, he didnât bother to visit the property. After the auction, he learned the damage to the property was more extensive than he anticipated. In a âhotâ market, price appreciation could have bailed him out but, in todayâs market, he was sunk. Lesson? Never buy a property sight unseen, and make sure to get the best contractor estimates possible prior to auction day.
Â·Â Â Â Â Â Â Â Â Read the advertisement carefully: The devil is in the fine print. You could buy a lot of trouble if you donât read and understand every word. Examples: Many auctioneers require a Buyerâs premium. In my area, it could be as much as 10%. If your bidding on a $120,000.00 property, thatâs an additional $12,000.00 expense! Even worse, you may be required to pay interest on the prior ownerâs defaulting Note from date of auction forward to the date of settlement. Thatâs an additional 30-45 days of interest expense (or more in some instances). Worst of all, in some cases the auction purchaser could be responsible for certain outstanding liens due at the time of sale, such as water, taxes, or even condo liens. Do you really want to be responsible for the prior ownerâs $3,000.00 past due HOA bill because you didnât read the ad?
Â·Â Â Â Â Â Â Â Â Be careful of flipping: Flips are still possible in this market but could be dangerous to the financial health of an unseasoned or careless investor. If you intend to flip to another investor, remember he or she will be leery of buying anywhere close to retail because of the likelihood of additional price erosion over the next few years. Did you properly discount your bid price for this?Â Â Will the property cash flow at your proposed sales price? Many investors use the 1% Rule as the âgold standardâ â a $100,000.00 purchase price should yield a renter at $1,000.00. If you donât carefully account for these factors, you could get stuck in the property. If you are using short-term hard money and your credit is weak, you even run the risk of loan default because you wonât be able to refinance out of your hard money loan.
Â·Â Â Â Â Â Â Â Â Setting property values: In addition to recent comps, you may want to go back to 2004-05 tax assessment records to review pre-bubble pricing. Is it possible for prices to retrace back to those levels? Maybe yes, maybe no, but it doesnât hurt to bid based upon worst-case scenarios.
Â·Â Â Â Â Â Â Â Â Keep your cool: Donât get caught up in the emotion of the auction. Know your absolute high price going in. Once the bidding has exceeded that price, donât even think about it anymore. Walk to your car and leave. Thereâs always another deal tomorrow.
Â·Â Â Â Â Â Â Â Â Get finances in order before bidding: You will be required to bring to the auction a cashierâs check for the advertised deposit amount. But you may also be asked to increase the initial deposit to 10% of total purchase price within a certain time period after the auction date. Check with the auctioneer the day of auction. Also, get lender approval prior to the day of auction. A hard money lender can be your best friend in these situations, as an approval from a hard money source accomplishes 2 things: 1) youâll know up-front whether youâll be able to close on the property, thereby reducing any risk of losing your deposit; and 2) youâll get a second, and often expert, opinion on the conservative value of the property. Even if you end up using conventional lending, the hard money approval can give you great peace of mind.
Â·Â Â Â Â Â Â Â Â Insurance: It is critical to get a hazard insurance policy in place the day of auction. Many times, the risk of loss is contractually passed to the successful auction bidder. If you donât have insurance and the building burns down, you lose!
Â·Â Â Â Â Â Â Â Â Bankruptcy: Call the auctioneer the night before (for early a.m. auctions) or the morning of the auction to make certain the foreclosed-upon borrower has not filed a bankruptcy. A bankruptcy filing stops the foreclosure process, even if it is filed one minute before auction. Probably 90% of foreclosure auctions get cancelled this way, so youâll waste a lot time if you donât call beforehand.
Â·Â Â Â Â Â Â Â Â Default: Always remember that the re-auction of a property is almost always âat the risk and expense of the defaulting bidder.â This means if you bid on a property and donât follow through, you could be sued for a lot more than just your deposit.
Good luck in 2008 and happy bidding!
Jeffrey Shiller is a Maryland attorney specializing in real estate. He is a principal of Hard Money Bankers, LLC. His services include nationwide settlements, loan document production, and structuring creative real estate transactions and hard money deals.