My Strategy for buying Foreclosures
I thought I'd share my approach and strategy to buying foreclosures that has served me pretty well.
Foreclosures – Assessing Value
When you buy a foreclosure, not only are you assuming liens on the property, but you’re also assuming other risks as well. You’re assuming the risks of an unknown property, because it’s impossible to fully inspect a foreclosure before you buy it, barring some lucky circumstance. This risk premium is what can make foreclosures such a bargain, but it’s also something that you can guard against by understanding clues that tell you the story of the house, and what repairs you’ll have to make.
First off, if you’re buying foreclosures at the sale you’ll need to see the property before you buy. Never buy a property that you can’t see for yourself before purchase! Later on as a more-experienced flipper you might have a knowledgeable craftsman look at houses for you, but in the early stages of your flipping career it is absolutely crucial that you spend the time to look at the house yourself. I’ve personally learned this lesson, sending in someone that I trusted who turned out not to be able to recognize a huge problem in a house. I had sent my friend to look at a house for me, and he told me that everything looked fabulous, it was already finished, painted, and looked good. I trusted him, and bought the house at auction. It turned out that the foundation was sinking into the ground, and I had to pay a tremendous amount of money to lift the house, and re-do the entire foundation. His untrained recommendation cost me thousands of dollars, and we lost money on that house.
What you want to do in a foreclosure is simple. Go up to the house, and ring the doorbell. If someone rings the doorbell, you have a chance to talk with them, and potentially learn more about the house. Introduce yourself, and have a little chat with them if you’re able. Ask them about the house, the neighborhood, their life. Some people are willing to talk, and they might even invite you into the house. Others will respond angrily, and shoo you out.Regardless of what happens, you’ll have gotten more information about the house and the person within.
If the person gives you permission, you might even be able to poke around the house, crawl in the crawl space, check out the foundation, and get an up-close look at the condition of the inside. If you don’t, you’ll still be able to make a good assessment of the house from the outside.
When you’re at the house, step across the street and take a good look. Does the roof look new? If the roof is in good shape, that’s a big-ticket item that you won’t have to worry about. Take another look at the house. Are all the lines straight? A crooked house or a sagging roof can betray significant foundation work that needs to be done, which is another huge charge. As a beginning flipper, you’ll want to avoid that.
Now take a look at the yard and condition of the house. Is the yard weedy and overgrown, or is it neatly manicured? Oftentimes, a neat yard means that someone cares about taking good care of things. They might not have the best and nicest, but they’ve taken care of what they had. If you spot peeling old paint and a lawn that looks taken care of, that usually means that the inside is in good shape. If, on the other hand, you spot broken windows, damage to the outside the house, or any more significant exterior damage, that usually means that the owner has applied a similar level of care to the inside of the house.
You’ll want to move in closer, and look at the house where you can notice finer details. If there’s wood siding, is it in good shape or is there dry rot? What’s the condition of the porch steps? If there’s a fence, what’s its condition? Is the driveway going to need repaved? Knowing beforehand if you’re going to have to replace any of these items allows you to add that cost to the mental price of the house. The major item that you can look for as you’re also examining these smaller items is the condition of the foundation. If the foundation is exposed, or if you’ve got permission to go into the crawl space, you can look for significant cracks or defects in the foundation. If you find any large cracks or damage to the foundation, that’s a red flag. You can also look for other signs of potential cost or value, such as illegal square footage, large garages, or huge yards.
Now it’s on to the neighborhood. What was it like? What are the houses on your block like? Are they nicer or less nice than the surrounding neighborhood? Is there graffiti or trash readily visible? Are the houses falling down or in good shape? Are there unfriendly-looking people lingering in the street? Are there any cool restaurants, shopping or parks in the area? Who are the people in the neighborhood, are they families with young children? Elderly? Young couples? Singles? Is it a mixed neighborhood, or is there only one dominant culture? Each of these questions will bring you closer to understanding who is living in this neighborhood, and understanding why they’re in this neighborhood. Each of these groups has extremely different tastes, so you will have to customize the house according to the taste of whatever group is most likely to buy in the neighborhood, which will factor into how much you will need to spend on the house to get your highest value.
Foreclosures - Occupants
You remember your conversation with the occupant? Because that is going to come in very handy. Was the occupant an owner? A renter? Some cities and states have different sets of rules regarding occupants of foreclosed houses. In some states you’re allowed to take possession of any house with 30-days of notice, regardless of whether the person is a renter or occupant. In other places you’re not legally allowed to kick out renters, you’re required to honor the full rental contract unless they sign a cash for keys or other deal.
Beyond knowing whether they’re a renter or owner, knowing the occupant and their attitude can help you determine whether they are willing to leave, or whether they will make things difficult if you’re trying to work on the house. Because regardless of state law, if a tenant or owner decides to stay in the house, it’s going to take you at minimum two months and a thousand dollars to evict them. If the tenant seems willing to move out or accept a cash for keys offer, that’s valuable time and money that you’re saving by not dealing with the issue of possession.
Now, let me spend a little time clarifying your options with a difficult tenant. These options will vary from city to city, and state to state, but your options are usually similar. If a tenant is putting up resistance towards moving out, you can create a cash for keys offer. It’s usually cheaper and quicker to give a tenant cash for keys than to pursue a long legal process. Better to give them a thousand dollars than your lawyer, right? Sometimes a tenant is reticent towards moving because they have physical difficulty, in which case you can offer them the services of a moving truck and men to help them pack. Sometimes they don’t want to move because they don’t know what to do with their stuff. Whatever the problem is, you can come up with a creative solution that costs you little compared to 60 days and a thousand dollars in legal fees. Paying for a storage unit for three months is a small price to pay.
If cash for keys and offering other help does not work out, you’ll have to look into your other legal options. If you’re in a state where there is no tenant protection, you can hand the occupant a 30-day notice to move out. If they fail to move out at the end of that time, you can start eviction proceedings.
However, if you’re living in a state where they have many layers of rental protections, you’ll need to resort to more extreme measures to free up the property. In California there’s a law called the Ellis Act, which enables you to pay the tenant a set amount of money and legally requires them to move out within a set time period. Other states have similar legal protections. Unfortunately these measures are long and protracted, and cost a significant amount of money. In California you’ll have to pay around $10,000, and wait anywhere from six to nine months for the tenant to leave. It is infinitely preferable to strike a deal using cash for keys.
Suppose that you find yourself in a fortunate situation where you’ve got no tenants. The foreclosure that you’re looking at does not appear to be occupied. That’s ideal-it’ll save you lots of time and money. However, you’ll still have to take certain steps if that is the case. If you do end up buying this property, each state has their own set of laws regarding taking possession of a foreclosure. In California for instance, you’re required to advertise in a paper for seven days that you will be taking possession of the property, to give the former occupant time to collect their possessions. There’s also a waiting period, only after which are you able to legally discard items that are left behind in the house. Know the law wherever you are before you simply march in and start throwing things out.
Now that you know how to go about looking at foreclosures, how will you go about figuring out just what will go to sale? To figure this out, you’ll need to contact the county that is conducting the foreclosure sale. Sometimes counties will point you to the resource that you will need to use, sometimes they will give you a list of what properties will be going to foreclosure sale and when. In Alameda County, California, there is a newspaper that comes out that has a listing of each of the foreclosures that are scheduled to be sold every week. There are likely other resources wherever you’re looking to buy foreclosures. I highly discourage against using websites to track foreclosures. I’ve gone through many websites, and there’s only one that has proven remotely accurate—and that one covers only the west coast.