foreclosure acquisition questions - please help :D

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foreclosure acquisition questions - please help :D

Mark UpdegraffBusiness Member
Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 690 votes

I'm getting ready to jump into the foreclosure market. I've got a couple questions before taking the plunge. I've gone to a few to see how they work, so I'm comfortable there, and I've spoken with my attorney regarding the costs associated with doing this.

So, let us say that Mr. Homeowner is underwater on his home, and for whatever reason it makes it to foreclosure. Mr. Homeowner paid 43K for his home in 1995. The judgment is for 92K. I've driven by it and here is how it stacks up:

Good:
GREAT location
Double lot
up-and-coming area
hot area for MLS listings
Large Home 2050 sq ft.
Off Street parking

Bad:
There is plywood in a couple windows
Have not seen inside

Comps: a 800 sq ft home sold on the same street, a few houses away for 80K, just last week.

I would say, that in good shape this would sell on the MLS for 130 - 140k

As it is, I'm not sure this is the BEST deal NOW (foreclosure wise anyway). That said, I'm wondering if this is still a good deal for buy / hold / rent because
1. Possibility of adding a second structure to the lot.
2. Long term appreciation (very up and coming area, lots of new development etc).
3. Same neighborhood as my other rentals, creating a coherent property portfolio.

Would you say this property is over priced?
What will happen if it goes to foreclosure and there isn't enough meat (ie no bidders). Is it then REO and the bank will list on the MLS? Will they start it higher than the judgment? I'm basically trying to decide if I should get it at auction, or wait and see if I can get it cheaper as REO (if that is what happens) - my concern is with the RE area being hot right now, I may run into more opposition as a REO than as a foreclosure...

Any suggestions would be MOST appreciated!
Thanks much!!
Mark

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y

You don't say where you're located and the procedures for these auctions vary widely. Here the bank submits an opening bid two days before the auction and that's the end of their input. I see the banks most commonly set the opening bid at what they're owed. But in some case, maybe a quarter, they set it much lower and file a deficiency. Those are usually the ones that get purchased. You say you've been to the auction there, and so you should have a feel for how it goes.

Even for a buy and hold I want plenty of equity. I apply two formulas for buy and hold. One is the 70% of ARV, less repairs. So, if you think its worth $130K, 70% is $91K. So, if the bidding starts at $92K, its not a deal. I assume there are some repairs, so it would need to be that much under $91K to be a deal.

I also figure out the rent and back into a max P&I payment. (Rent*0.6) is my absolute max permanent P&I payment. A more conservative calculation would be (Rent * 0.5) - desired cash flow. I then turn that into a loan amount, back off my rehab, hard money and acquisition costs and come up with a max price I can pay.

One property is a start, but you need to find a few dozen more to add to your funnel. The odds of buying this one are small. If you have 20 or 50 candidates in your funnel, odds are good you'll get one of them.

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  • Account Closed
    Real Estate Investor · Cincinnati, OH · Member since 2009 · 93 posts · 26 votes
    16y

    Mark,

    Based on my experience in my market (Cincinnati, OH), it's a bad idea to buy during FORECLOSURE AUCTIONS. Why? The bank will be there and will bid up the price to what they're owed.

    It's better if you can buy BEFORE the foreclosure auction - and negotiate a SHORTSALE - or AFTER THE AUCTION when the bank bought it and it becomes an REO. You will get discounts when you buy before or after the foreclosure but not during the auction itself. Only the amateurs bid at auctions. The professional investors get the good deals before the foreclosure or they buy the REOs in bulk from the bank.

    On your question on whether the house is overpriced...at $92K and it sounds like it needs repairs, it probably is. What's the days on the market in your area? If it's 90 days, here's the formula I use:

    Maximum Offer = 0.9 x ARV - Repairs - Profit

    Say the repairs are $10K, your ARV to be conservative is $130K...

    If you're going to renovate the property and then sell it, your profit should be at least $20K. With these numbers, your maximum offer should be $87K.

    If these are the numbers, I will start my offer to the bank at $70K.

    If the days on the market is longer than 90 days, you need to use an even more conservative formula. If you're going to just sell the house to another investor/ rehabber or landlord, I will start my offer to the bank at $60K.

    The bank will accept an offer lower than the loan balance if you can prove to the bank that it's in their best interest to do so. Read about shortsales in the forums here at BP for more details or email me if you need help.

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  • Mark UpdegraffBusiness Member
    OP
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 690 votes
    16y
    Originally posted by Trace Trajano:
    Mark,

    Based on my experience in my market (Cincinnati, OH), it's a bad idea to buy during FORECLOSURE AUCTIONS. Why? The bank will be there and will bid up the price to what they're owed.

    It's better if you can buy BEFORE the foreclosure auction - and negotiate a SHORTSALE - or AFTER THE AUCTION when the bank bought it and it becomes an REO. You will get discounts when you buy before or after the foreclosure but not during the auction itself. Only the amateurs bid at auctions. The professional investors get the good deals before the foreclosure or they buy the REOs in bulk from the bank.


    >>>> Thanks Trace, Let me interject here for some clarification. I know for sure that these are professional investors on the court house steps. Do they buy everything? No, only those properties they can make money on. I first ran into this when dealing strictly MLS, tried to get a Short, but the bank would not accept - went to foreclosure, my agent bought it for 45k and tried to resell it to me for 90, I was pissed and refused. He sold it to someone else for 110. He held it for less than 90 days and did nothing to it at all. I'm pretty tech savy, so after getting to know the players, I watch what / where / when they buy and when there is a foreclosure with location and equity, they are there bidding.

    like I said, my target area is VERY HOT right now. It wasn't so when I first got in a couple years back. For correctly priced properties, the average days on the market is like 1 day! That is why even the 80k property sold very fast (1 week), and I thought it was priced a little high...

    >>>>>>>>

    OK, so let us assume that you are right, and this property is overpriced. I go to the auction and it starts at the judgment amount (or the bank bids it to there automatically). No one wants to pay that price, so the bank gets it.

    What is my next step? Wait for the Bank to get a broker / agent and list on MLS?
    Contact the bank directly and try to get it under contract myself?
    I watch the MLS religiously here, so this never was posted for sale, or as a short previously.
    Is there anything I can do now to get a short sale approved before the foreclosure?

    Thanks again!!
    Mark

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  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    16y

    For starters, I couldn't disagree more about auctions being for amateurs. If anything, it's the opposite. Here in SoCal, it's where the big boys play because you are talking about purchase prices well north of 300k in many instances. One of the most successful guys on this board buys at auction. Yes, in most instances the bank will bid up to its loan value and take the house back. That's where due diligence comes in. Look for properties where there is still plenty of equity at close of the sale to you. You don't want to rely on the future for your gains.

    If the property is taken back by the bank, there are a number of possibilities that can happen to it. Typically they have an agent put together a BPO on the property and have the property re listed on the MLS. This can take weeks or months depending on the foreclosure volume. Often times, the good properties never make it market as someone in the pipeline snaps them up.

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    You don't say where you're located and the procedures for these auctions vary widely. Here the bank submits an opening bid two days before the auction and that's the end of their input. I see the banks most commonly set the opening bid at what they're owed. But in some case, maybe a quarter, they set it much lower and file a deficiency. Those are usually the ones that get purchased. You say you've been to the auction there, and so you should have a feel for how it goes.

    Even for a buy and hold I want plenty of equity. I apply two formulas for buy and hold. One is the 70% of ARV, less repairs. So, if you think its worth $130K, 70% is $91K. So, if the bidding starts at $92K, its not a deal. I assume there are some repairs, so it would need to be that much under $91K to be a deal.

    I also figure out the rent and back into a max P&I payment. (Rent*0.6) is my absolute max permanent P&I payment. A more conservative calculation would be (Rent * 0.5) - desired cash flow. I then turn that into a loan amount, back off my rehab, hard money and acquisition costs and come up with a max price I can pay.

    One property is a start, but you need to find a few dozen more to add to your funnel. The odds of buying this one are small. If you have 20 or 50 candidates in your funnel, odds are good you'll get one of them.

    2Reply
  • Mark UpdegraffBusiness Member
    OP
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 690 votes
    16y

    Thanks Brian & Jon for your input!!

    Originally posted by Jon Holdman:
    You don't say where you're located and the procedures for these auctions vary widely. Here the bank submits an opening bid two days before the auction and that's the end of their input. I see the banks most commonly set the opening bid at what they're owed. But in some case, maybe a quarter, they set it much lower and file a deficiency. Those are usually the ones that get purchased. You say you've been to the auction there, and so you should have a feel for how it goes.

    Yes, here banks do the same - most often set the opeing bid for what is owed plus expenses. A very small percentage of the time they start at a discount (10 - 25%).

    Originally posted by Jon Holdman:

    Even for a buy and hold I want plenty of equity. I apply two formulas for buy and hold. One is the 70% of ARV, less repairs. So, if you think its worth $130K, 70% is $91K. So, if the bidding starts at $92K, its not a deal. I assume there are some repairs, so it would need to be that much under $91K to be a deal.

    I also figure out the rent and back into a max P&I payment. (Rent*0.6) is my absolute max permanent P&I payment. A more conservative calculation would be (Rent * 0.5) - desired cash flow. I then turn that into a loan amount, back off my rehab, hard money and acquisition costs and come up with a max price I can pay.

    How do you "back off" rehab, hard money etc?
    Originally posted by Jon Holdman:

    One property is a start, but you need to find a few dozen more to add to your funnel. The odds of buying this one are small. If you have 20 or 50 candidates in your funnel, odds are good you'll get one of them.




    Thanks again Jon, I subscribe to the local biz pub here, and do daily analysis on ALL the foreclosure listings. So, I would say "They are all in the pipe" - that said - for my first acquisition - I'm hoping for the following:
    1. Find one with good location
    2. Find one with good amount of equity
    3. Find one for max 200K, but preferably around 100K - since I need to close with cash, I'm looking to ease my way into this.

    Some final questions:
    Do you add value (and how) for an area that you believe will be subjected to considerable appreciation within the next decade?

    Do you add value for properties with a double size lot? If so, what is your due diligence regarding these properties?

    And finally, perhaps the more difficult question:
    How do you assess the value of a property in a rapidly appreciating area - an area that has been building momentum for over a decade, but has finally gained traction. Developers are actively building retail, and market rate housing? Within the last year alone, more than 10 new business have opened. This "hot area" has a limited amount of housing. There are still distressed homes to be had, and I'm sure there will be more foreclosures, but the demand from investors is not slowing, and average days on the market is the lowest in the area, despite the terrible city school district.

    Thanks so much for taking the time to help out!
    Sincerely,
    Mark

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  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    16y

    Some final questions:
    Do you add value (and how) for an area that you believe will be subjected to considerable appreciation within the next decade?

    Do you add value for properties with a double size lot? If so, what is your due diligence regarding these properties?

    And finally, perhaps the more difficult question:
    How do you assess the value of a property in a rapidly appreciating area - an area that has been building momentum for over a decade, but has finally gained traction. Developers are actively building retail, and market rate housing? Within the last year alone, more than 10 new business have opened. This "hot area" has a limited amount of housing. There are still distressed homes to be had, and I'm sure there will be more foreclosures, but the demand from investors is not slowing, and average days on the market is the lowest in the area, despite the terrible city school district.

    Thanks so much for taking the time to help out!
    Sincerely,
    Mark




    I think those questions have pretty subjective answers. I don't believe in paying a premium for property in an appreciating area. At that point, imo, you are speculating. It's certainly nice to buy in that type of area, which I try to do every time but I won't ever pay more than I think it's worth (subjective).

    To figure land values you can take the tax assessed value or rely on the traditional formula of 80% structure/20% land. Being on a double lot does not always mean you double the land value. Try to be more conservative so you don't overpay.

    Lastly, I would be very careful about buying in a rapidly appreciating area. Typically, new construction is more expensive than existing housing, except in hot markets where the inflation in housing prices has made it cheaper to build new homes. In this type of environment you are guessing when to get out. It may go for years or even longer, but it will eventually cool off and prices will fall. It's very easy to overpay in that kind of environment.

    1Reply
  • Mark UpdegraffBusiness Member
    OP
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 690 votes
    16y
    Originally posted by Brian Levredge:

    I think those questions have pretty subjective answers. I don't believe in paying a premium for property in an appreciating area. At that point, imo, you are speculating. It's certainly nice to buy in that type of area, which I try to do every time but I won't ever pay more than I think it's worth (subjective).

    To figure land values you can take the tax assessed value or rely on the traditional formula of 80% structure/20% land. Being on a double lot does not always mean you double the land value. Try to be more conservative so you don't overpay.

    Lastly, I would be very careful about buying in a rapidly appreciating area. Typically, new construction is more expensive than existing housing, except in hot markets where the inflation in housing prices has made it cheaper to build new homes. In this type of environment you are guessing when to get out. It may go for years or even longer, but it will eventually cool off and prices will fall. It's very easy to overpay in that kind of environment.


    Thanks Brian, the only thing I would like to point out is that this area was once very run down (10 years ago). The housing stock was very deferred, and deteriorating. There was much crime (killing even). This really put a lot of negative pressure on the homes for a long time. Most of this appreciation we're seeing now is just getting the neighborhood back to normal levels. IE - a house at this location in the city is worth 100K, move it to the best neighborhood in the city and it could fetch up to 200K. Even if the area "cools off" why would housing prices drop? They still are not in-line with other safe / good city neighborhoods.

    With the double lot - yes, I can compute a "value" for it, and I understand not overpaying for it. But as a landlord, wouldn't you work in some sort of build out on the extra land to increase CF? (IE, build another rental on the extra lot) Would this calculation be added into the evaluation of the CF of the property?

    Also, I agree that my thoughts of appreciation are speculative at best, and they should not go into the deal analysis. I think my primary concerns are not overvaluing the property & not undervaluing it either.

    How does one value a property where home sales are "non-typical"
    Average days on the market = very very low. Lots of SOLD on the first day of listing, with multiple offers.
    Stock of houses is diverse, investors have begun to work this area over, buying distressed properties, rehabing, and flipping / renting. Now comps are diverse. You'll see price / sq ft all over the map. You'll see home values all over the map (ranging 40K - 200K for SFHs).

    I know what my gut tells me, but I'm not a broker, or a realtor, so can I really trust my gut? I'm comfortable saying something like: The house is worth between 90 - 140, but that just seems like too big of a spread. I know at 90 it would sell immediately, and maybe at 120 it would sell (not as fast), and at 140 for the right buyer? Every time a new property in this hood is listed, the price is higher than the comps, and it sells pretty darn fast... I keep saying, man look at that, can you believe they want that much for that house?!? (and then it is off the market).

    Sorry, newbie at work :D

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    16y
    Originally posted by Mark Claire:
    ...

    Originally posted by Jon Holdman:

    Even for a buy and hold I want plenty of equity. I apply two formulas for buy and hold. One is the 70% of ARV, less repairs. So, if you think its worth $130K, 70% is $91K. So, if the bidding starts at $92K, its not a deal. I assume there are some repairs, so it would need to be that much under $91K to be a deal.

    I also figure out the rent and back into a max P&I payment. (Rent*0.6) is my absolute max permanent P&I payment. A more conservative calculation would be (Rent * 0.5) - desired cash flow. I then turn that into a loan amount, back off my rehab, hard money and acquisition costs and come up with a max price I can pay.

    How do you "back off" rehab, hard money etc?
    ...


    I'd guess by "back off", Jon means that you "subtract from your offer". So, you mkae a determination of some of those additional costs you would incur, and reduce the offer (or bid) appropriately so that you don't overpay.
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  • Greg Morris
    New Albany, OH · Member since 2009 · 10 posts · 5 votes
    16y

    sounds like it depends upon your market because I have to agree with Trace. The situation at the auction he describes in Cinicy OH is the same in Columbus OH. At least for properties in franklin county (Surrounding the city). Sometimes you can get properties at the 70% equity level in the surrounding rural counties at sheriff auction but most of the time in franklin county the banks are driving up the prices hoping someone bids them out. Best deal are short sale from my experience in this area.

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  • Mark UpdegraffBusiness Member
    OP
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 690 votes
    16y

    Thanks everyone,

    Is there anything I can do to get this property under contract before the foreclosure auction (end of month)?

    Is there a way to convince the bank to do a short sale?

    Is there any option other than waiting out the foreclosure?

    Also, does this then become a REO that the bank then markets on the MLS (given no bidders)?

    In your experience, is there anything that can be done after the auction (no bids) and before it becomes REO?

    Like I mentioned previously, this home was never marketed on the MLS.

    Thanks again!

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  • Ron Singh
    CA · Member since 2014 · 244 posts · 47 votes
    11y

    @Mark Updegraff would you be able to share how do you do due diligence before going to the auction ? have you ever missed any lien on the property you won in any past auctions ?

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