Ralph R. Roberts - Foreclosure Investing For Dummies

When you buy a property at an auction in an area that has a mandatory redemption period, you may need sufficient funds to hold the property for several months to a year until you see your profit. (If you’re using your own money, you need just enough cash to insure the house and pay the property taxes. If you borrowed the money, you may need additional cash to cover the monthly payments. For more about financing your purchase, see Chapter 5.)

Throughout this book, but especially in Chapter 8and Chapter 11, I reveal tips and techniques for meeting these challenges and minimizing the risks of bidding at auctions. Only by being thoroughly prepared going into an auction can you confidently purchase properties that are almost sure to turn a profit.

One big mistake to avoid at an auction is getting caught up in the excitement of the bidding experience. I know the risks of overbidding firsthand, because I have trouble restraining myself at auctions. I hate to lose, so if someone’s bidding against me, I always win — the bid, that is. Only later do I realize that my obsession with winning made me the big loser for having spent too much for a property.

The trick to effective bidding is to research the property thoroughly and set the highest price you can afford to pay for the property and still make a profit of 20 percent or more. That’s your ceiling. You can bump your head on it, but don’t crash your head through it; if you do, you’ll have serious headaches in the future. For auction bidding tips and tricks, see Chapter 11.

Bidding on a property at foreclosure is a bit like sitting around a poker table and trying to figure out why a particular investor is bidding on a specific property for a certain amount of money. In some cases, the other investor may know more about the property than you do. In other cases, the investor knows less. The person may be bidding on instinct to drive up bidding or simply to toy with other investors.

The comparison of bidding on foreclosure properties with playing poker ends there, however. Bidding on properties is a high-stakes game in which you stand to lose as much as you stand to gain — or more. You may never know why a particular investor bids a specific amount on the property, but you always need to know why you’re bidding a specific amount, what you’re bidding on, and how high you’re willing to bid.

With a fully fleshed-out property dossier, which I show you how to assemble in Chapter 8, you hold all the cards in the deck. This dossier enables you to put on the dispassionate poker face required to win the bidding game. You know exactly how much you can afford to bid to earn the desired profit. Not everyone who’s bidding against you will have the same advantage.

The auction close doesn’t signal the end of your opportunity to acquire foreclosure properties. For investors who choose to focus on post-auction properties, an auction's close signals the beginning. These investors don’t want to deal directly with homeowners, and they prefer to avoid the sometimes-messy auction process. They’d rather buy properties from the new owners.

In the following sections, I list various opportunities and resources for tracking down post-auction properties, from bank-owned and government-owned repos to properties that have been seized because they were paid for with ill-gotten gains. You can make a good profit by focusing on any one of the categories I describe.

The opening bid at an auction is typically the amount owed on the property, plus attorney fees, plus a dollar. Contrary to what many people think, banks don’t want to be in the real estate business, so they rarely bid up a property to take possession of it. A bank holding a second lien, however, may bid on the first lien to protect the bank’s interest.

Auctions typically start with a minimum bid. If nobody in the room bids high enough, a representative for the bank that’s foreclosing offers a bid and takes possession of the deed. The bank transfers the property to its REO or Other Real Estate Owned (OREO) department, which prepares the property for sale.

Because preparing properties for sale and selling them costs banks additional money, they’re often willing to negotiate sales with investors rather than place the properties on the market.

Admittedly, the process sounds pretty easy, but it can be very challenging for any or all of the following reasons:

Banks don’t like to sell properties at bargain-basement prices just to unload them.

REO managers often pass the best deals on to their closest contacts and to investors with proven track records, so you may need to invest some time in building fruitful relationships.

REO managers may require you to buy two or more properties as a package deal. You must agree to take one not-so-promising property along with another that has more potential.

Properties are sold as is, so you can get stuck with a lemon, especially if you don’t do your homework.

Chapter 12brings you up to speed with the REO process, reveals ways to contact and work with REO managers, and suggests timing your offer to coincide with the REO department’s fiscal calendar.

The U.S. government sponsors several programs to encourage home ownership, including Department of Housing and Urban Development (HUD) and Department of Veterans Affairs (VA) financing. Often, borrowers default on these loans, and the government ends up with a property that it doesn’t need or want. In addition, state and local governments may seize properties for infrastructure improvements or as a result of unpaid taxes or criminal activities.

As a citizen, you have the right to purchase these government properties, and you can often pick them up at deep discounts. Following is a list of common resources for government-owned properties:

HUD and VA repos: When homeowners default on a HUD or VA home loan, like any lender, the government can choose to foreclose on the property. These deals aren’t always best for investors because HUD and VA homes are commonly listed at or just below market value, but by being persistent, you can often find some pretty good deals.

State department of transportation: The department of transportation commonly buys up property for road improvements and disposes of the property after completing the project.

State or county drug enforcement agency: If a homeowner is paying for a property with illicit funds, or if the house is home to criminal activity, the government may step in, take possession of the property, evict the homeowners, and sell the house.

County sheriff’s office: When your county sheriff’s office seizes a property, perhaps because it was purchased with proceeds from criminal activity, it may offer the property for sale through a broker or at auction.

A condominium association can also foreclose on a property to collect unpaid condominium fees. Remember, however, that a condo lien is just another lien. The senior lien (first mortgage) takes precedence.