Purchasing foreclosures, only a game for the rich?

Buying & Selling Real Estate
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Purchasing foreclosures, only a game for the rich?

Wes Peters
Birmingham, AL · Member since 2016 · 21 posts · 3 votes

So, the title really says it all. Am i wasting my time looking at foreclosure properties? I get that some properties can sell for much less, but just for the sake of this discussion,  I'm referring to foreclosures that are 100k+. I was driving around a neighborhood yesterday that i have been keeping my eye on, and finally i stumbled across a house that was in the process of being foreclosed on.  The average home price in the neighborhood is around 120k. I got all excited and contacted a Foreclosure attorney only to find out that payment must be made in full within 24 hours. 

So as someone who does not have access to 100k+, do i have options here? Perhaps I'm in the wrong circle of friends , but i do not know anyone who has access to that kind of money and would be able to purchase a house outright.  I work two jobs and make 60k a year and even if i made 100k a year its still hard to believe i could save up 100k + in cash. The only suggestion i have heard is using a hard money lender and since i was hoping to live in the property for a while, i was assuming that that type of higher interest loan would not make sense.  Is it possible to use a hard money lender to get the property initially and then somehow transfer to a more long term sustainable loan?  Or should i just forget about foreclosures all together and go find a property that will allow regular financing?

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
9y

@Wes Peters, buying at foreclosure auctions isn't necessarily for the rich, but it's definitely for the professionals.  It's laden with risks as many other posts have pointed out, and the casual buyer can be wiped out by a simple mistake where the professional can more likely absorb the hit.

In the 20+ years I've been attending foreclosure auctions I can count on my fingers and toes the number of times I've seen a property sell to a buyer intending to occupy.  Folks that have $100K (or here in CA maybe $500K or more) in cash to spend on a house don't want to buy a house sight-unseen (at least on the inside), take on title risk, endure endless sale postponements and cancellations, take on an unknown amount of repairs, deal with foreclosed-out occupants, etc and do all of that just to find out, once inside, that they don't like the floor plan or that the neighbor's dog barks endlessly at night (remember, there are no transfer disclosures in foreclosure auctions!).  The 20% discount isn't worth the trouble.  They have the money so they buy properties the conventional way.

It's true that you can buy at auctions with a funding partner.  I've bought hundreds of millions of dollars of real estate with funding partners.  But every transaction had a business plan, whether that was to buy, fix up and resell or buy and rent out and hold for future resale.  Buying with a funding partner for a personal residence is most likely a non-starter. There's no business plan, no exit strategy.  The only way I've seen this work is for family members to help out with some cash to get you into a house.  And those family members probably don't want to take on auction risks.

@Jay Hinrichs, auction.com started holding trustee's sales in CA a few years ago.  Worst thing to ever happen to this business.  They use their star power, as you said, to attract all sorts of folks that know nothing about the risks and they attempt to sanitize the business by making it appear to be an auction suitable for the uninformed.  To make matters worse, they cram all of their sales into one day instead of what everybody else does which is to spread them out all throughout the week.  This means that you have to do tons of prep work for an 80 house auction in one day instead of 8 houses per day for two weeks which makes the workload difficult to manage.  And worse yet, they post fake opening bids on houses they know are going to postpone and fake low opening bids on houses they are going to auction just to stir up attendance.  Then, once everyone is there, they postpone most of them and then jack up the opening bids on the ones they are selling.  It's really frustrating and makes the whole thing a total waste of time for the pros.

@Diane G., you can't trust the auction's website where it says "owner occupied".  They have no way of knowing who is in the house.  It could be the owner, in which case they can be served a 3-day notice to quit after the sale deed is recorded and can be evicted through the courts/sheriff if they don't abide by the 3-day notice.  But it could also be a tenant, and if it is, they are protected by the Protecting Tenants in Foreclosure Act which specifies that they must be served with a 90-day notice to quit, and if they have a lease for a fixed term, the lease has to be honored.  In other words if they have 6 months left on a one-year lease you can't serve them notice for 6 months.  I don't buy at auction in San Francisco so for properties located there I'd get some legal advice on how the just cause eviction ordinance effects evictions post-foreclosure.

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  • Sebastian MarroquinPro Member
    Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes
    9y

    let me ask you a very simple question? 

    Are you looking specifically for a "foreclosure" or simply a GOOD DEAL? 

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  • David VernichPro Member
    Investor · Brentwood, TN · Member since 2017 · 7 posts · 14 votes
    9y

    I purchased my first foreclosure 9 years ago and did not have $100k cash sitting in my checking account.  However, I did have good credit and was able to get a banker that knew me to set up a $100k line of credit to purchase the house.  My second purchase was partnering with my neighbor who is a doctor and he went to his bank and got a $100k credit line, just like I had.  The point is, don't think "I can't afford that price" but rather, "HOW can I afford that price"  That keeps the brain working so you will figure out a way.  Never give up, and you will win!

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  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y
    David Vernich good point
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  • Cooper Bert
    Harrisburg, PA · Member since 2015 · 43 posts · 52 votes
    9y

    Every market is different and I can only speak for my market (Central PA).  

    There seems to be an inverse ratio between the ease of credit/availability of investment capital and the margin of REI. This is expecially true at the lower end of the market. The potential margins on distressed properties have definately gone down and the availabilty of credit / capital has increased.

    A graph of this correleation would show a peak of REI margin in the period just after the financial recession that slopes downward to lower margins today. That graph's line representing ease of capital would display just the inverse with lowest availabilty post financial recession sloping up to the slush funds of easy money today.

    My takeaway is that you don't have to be rich to purchase forclosures TODAY ... but you have less margin for error in purchasing forecloseures TODAY.

    I keep this in mind as I read BP posts from years ago when the entry/risk/reward ratios were different.  

    Wisdom is ageless but strategies are timely.

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  • Sean OToole
    Investor · Truckee, CA · Member since 2013 · 546 posts · 445 votes
    9y

    @Jay Hinrichs, @Diane G. - We have relationships with title companies that offer the same service Jay had to our users. Doesn't work if you are just looking to buy one property for yourself. But if you are a regular buyer of even just 1-2 properties a month, and are willing to require buyers of your properties use your title company, you can usually get a "verbal" title check in exchange. They've made it cost effective to offer on their end by doing it for pretty much all of the bidders. Note that there are still no guarantees, and that there is still risk even with that check, but we highly recommend at least going to that level. Ultimately I recommend that any trustee sale bidder should become a title expert themselves. Not only for the protection, but for the opportunities having that knowledge brings (confidence to deals others wont).

    And yes, Diane, buying 1 for every 50 you research is probably about right, especially when you are getting started. Keeping the cost of that in mind, the margins really are tight.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Sean OToole  yes I learned of senior tax deferral in Oregon .. the hard way.

    I am bidding on this nice home on Council Crest  ( hot area) and no one is bidding against me.. always a worrisome sign.. I knew it was a first etc.

    well come to find out 90K in senior deferral  LOL... the largest amount anyone had heard of  my attorney (bless her heart) got it knocked down to 60k on a technicality... but what was going to be a simple fix and flip just became a Major reno project and of course the rising tide raises all ships so we did not lose.. but we could have big time.

    I have also witness many a newbie buy a second thinking it was a first.. and for those reading this.

    rarely will any of the regulars step in and try to stop you.. they want you to go away  and if you lose money you probably will.. this is a big boy/girl game.  Also if you try to be nice and tell someone they are making a bone head move.. many times they won't believe you any way.. as they think your trying to snake the deal for yourself..   court house steps has its own culture in all different markets.

    And for me when I was active we had about 4 or 5 of us that were collegues.. it was not uncommon if they ran short on a deal that we would hand over 100k chashier checks to them to allow them to bid then go to their bank after and get paid back... and maybe they buy you lunch LOL..

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