Good morning, BP. I have a question on a foreclosure that is scheduled for auction on the courthouse steps in November. We are in a bit of unique position (I think) because the property in question is the house next door to us. There are only 42 homes in our neighborhood, all built around the same time. We have lived in the neighborhood since the year all the homes were built, so we have been able to keep a close watch on sales (we actually have had several this year), rents, etc. We are very comfortable with our estimate of the FMV of this home, and with the rent amount that it would command.
Additionally, before the homeowner was served a notice of foreclosure, we actually got to see the house with our agent. It had been on the market since March, with the price gradually dropping to a point where we became interested in making an offer. After we saw the house, we asked our agent to write up an offer, only to find out the seller had already accepted an offer (well below what she owes on the house - I'm assuming she was starting the process of short sale). Within a few days of finding this out, I discovered that a notice of foreclosure had been served.
We are aware of external repairs needed on the house (some of the same things we have had to do in the last few years - woodwork needing to be replaced, etc). The interior definitely needs revamping (carpet, paint) but there were no major visible defects when we saw it, other than the fact that it was filthy and hadn't been maintained well. Of course, the big unknown is what an inspection would reveal.
Anyway, the starting bid on the house is $110K. We believe on the low end, the FMV of the home is $180K and that is a very conservative estimate (3 sales have been above $200K this year, although these homes were a few hundred square feet larger). We would budget around $30K for repairs, knowing that this is high for the visible work needed but allowing for unknowns.
I have done a preliminary search for liens and did discover a FIFA lien from 2011. We would do a title search before going to auction to make sure we understand the full scope of any liens against the property. We know there are no HOA liens, as our HOA is defunct as of about 8 years ago and only solicits voluntary donations.
Our neighborhood is well-maintained (this one is the eyesore on our street) so I feel confident about investing here.
One negative - as far as we know, the neighbor is still living in the house with her daughter. As of a month ago (when we saw the house) there were boxes packed, giving the impression that she was making plans to move. But obviously, evicting a neighbor would be extremely unpleasant and not something we would ideally want to do.
So, given this information (sorry for the length of it), does it seem like we have enough information to move forward (obviously, the title search would be key)? Oh, and our max bid would $120K. If we were able to get it for this amount, does this seem like a good deal?
What's your plan for the property? Rental? Fix and flip?
$120K purchase plus $30K rehab vs. ARV of $180K isn't a great deal. That's 83% of ARV, which leaves almost no profit at all as a fix and flip assuming hard money and a six month hold. If you have your own cash (auctions are typically cash, but I don't know about GA) then you could turn a profit. But that's really just from the cash investment. As a fix and flip, this is too thin.
If the neighborhors fight you, you will have to evict them. That will involve time and expense.
Do not get to heavily invested in the thoughts of owning this property.
Foreclosures in GA are generally conducted the first Tuesday of every month. The auction is a cash sale. Do you have 120,000 cash??
These are not typical regular auctions but where the lender is foreclosing at the courthouse steps. When the property goes through foreclosure it wipes out most liens although some will survive.
The seller might have no intention of selling and simply used the short sale process as a way to stall the bank. For instance the bank does a foreclosure date but then if the seller goes into the short sale program the foreclosure department will send a stop foreclosure to the banks attorney halting it while the short sale department considers the offer. That might delay the sale for 4 months or so here ( couple months considering the short sale, refilling FC if it doesn't work out). Has the owner filed BK chapter 7 or 13 lately?? If not that is another card they can use for another 4 months even if the plan is not approved etc.
Effectively some owners have been able to milk living in a property for years for free without paying the bank a dime. Now they have had some costs with BK filings and other things but it pales in comparison to their savings of paying no mortgage payment.
Are you trying to flip this or hold long term as a rental??
No legal advice.
Yes Jon GA is an all cash sale for properties being foreclosed on.
I want to add the difference for other posters here. Some people get confused with the term AUCTION.
An Auction can be anything from any company to include regular sales, banks selling property etc. Those typically are you become the winning bid and have some earnest money deposit down.
FORECLOSURE auctions are different where the property is actually being taken back by the mortgage holder through a legal process. Those types of auctions are generally all cash sales.
@Jon Holdman and @Joel Owens , thanks for the info. Sorry, I should have specified - this is for a buy and hold, not a flip. And yes, we do have the cash for up to $120K plus the $30K for repairs. I understand this might not be a great deal for a fix and flip, but for a long-term strategy of buy and hold, we would essentially be looking at a 17% "discount" off FMV (and that's with conservative estimates on both FMV and repairs). Does that change things at all, in your opinion?
Joel, I understand the chances of this property actually going to auction in November and our being able to get it for our max bid amount are slim. We are pursuing quite a few different strategies (working with a buyer's agent/MLS, some off-market options through networking, etc.) but given this scenario, I wanted to find out if we are on track with our numbers/thought process or if we are way off.
And if we have reason to believe the neighbors are still living there just prior to auction, we would steer clear of it. That's not something we want to get in to - emotionally or legally.
Thanks to both of you for taking the time to reply. That's exactly what I was looking for!
OK, then for a buy and hold what rent can you get? For a $150K investment I'd want to see rents around $2500 a month. That would generate a 10% cash on cash return on your investment, assuming you're using a PM. If you self manage (which I would be reluctant for a rental next door) then you could earn the PM's cut, too.
Jon Kennesaw here for most of the areas is a premium location. Hitting close to 2% rents generally doesn't happen.
I would venture to say a 150k house you are likely hitting 1% for a 3 bed 2 bath in Kennesaw.
The difference here in GA versus Cali with the premium areas is rents are 1 to 1.5% of sales price but the barrier to entry is much lower. So the debt on one Cali house you could get multiple houses here and spread the risk more.
You can hit 2% or more here but they would be areas I would not ever touch.
I don't like the 2% rule so that wasn't want I mean to apply. I do want a 10% cash on cash return on a rental investment, though. With $150K invested, that means an annual return of $15K. Applying the 50% rule, that means gross annual rents of $30K or $2500 a month. That's how I came up with that number.
If I was willing to self manage for free, that number could be lower. I use a ratio of 36% for self managed properties. With that ratio, rent would need to be about $1950 a month for me to invest in this house. I'd be reluctant to self manage the house next door for the same reason I wouldn't live in a multi with tenants in the other units. The tenants are just too close to home.
Now, if there's a possibility to refi and get some of this cash back, it might be possible for the rents to be lower because of the leverage.
Or, there may be a speculation play here.
But @Julie Kern asked:
If we were able to get it for this amount, does this seem like a good deal?
As a buy and hold that's impossible to say without knowing the rent. Just getting the property at a discount to its fair market value doesn't make it a deal.
Yes I agree.
My clients and I are hitting 12 to 20% coc with retail strip centers NNN putting 25% down with debt. Can still get great yield for the cycle.
Most of my friends that have houses are either holding them and staying in that space or selling off the gains from buying 3 to 4 years ago and doing a 1031 into something else. It seems most SFR is overheated right now. Lots of people with a little coin to try and buy a house to rent. I think the herd bug is starting to rear it's head again with not enough thought to if the property makes sense or not.
The refinance pulling the cash back out makes sense. For all cash like that I would want more of a discount because you never know how hard it will be to get it back out and how much you can get.
Julie maybe you can call the local banks and try to talk to their troubled loan department. Sometimes you get advance notice of the bank working with a problem property or loan but they have not moved to foreclose yet.
There is gold out there but you have to really, really dig for it and do what most people will not for the deal.
You have 120,000 plus now. Make sure you put it into the right property to spring off into others. If you buy a marginal property it can cause neutral to negative growth before you have the capital to invest again. I see it all the time where investors buy one property wrong. Then they go through h$ll for years and sell off and never do RE again.
The first few being really good ones are critical for long term success. As you amass a portfolio having an occasional property not work out or being neutral can be absorbed by the total portfolio and still be positive. The goal is to buy right on all of them but as you get more properties you can average out all the percentages.
It's kind of like owning 50 Dominos Pizzas versus one. If it's one you need it to make a lot of money. If you have 50 you can have some really good ones, some neutral, and some losers but be positive overall. Now the hope was that all of them were winners when buying but that doesn't always happen even with the most experienced investors.
@Joel Owens and @Jon Holdman , wow, thanks for the great discussion. It has given me a lot more to think about. FYI, rents would be $1400 - $1500. I don't really have warm fuzzies about this particular scenario, and even less so after hearing what you guys have to say. That's why I'm asking the questions - to learn as much as I can so that, as Joel said, we put our cash in to the right property initially. We are definitely willing to be patient and learn as much as possible while looking for a deal. Thanks again!
Many investors would consider paying $150K for $1500 in monthly rent to be OK. My math says that's a 6% cash on cash return, assuming you use a PM. Unless there's a strong speculation play that's too low for my taste.
Now, if you can get into it for $150K, hold it a year or two and refinance based on, say, a $180K value, you could potentially get almost all your money back out of it. That would significantly improve your cash on cash return.
As Joel says, don't get married to this house. Or any house. This is a numbers game. If you want to buy good rental deals you're going to have to get out and make LOTS of offers.
We just sold a house where we paid $105k that we were getting 1400/month. Sold it because we did a cosmetic flip to move the house. A REIT bought it for $160k. They were willing to take less ROI. If I can't make 10%, I'm not buying it. The numbers are close on this one, but unless it has 4BR, I can't see it renting in Kennesaw for $1,500 depending on the area/school district.
PS...I agree with John's statement earlier, the margins are pretty thin for a pure cash fix and flip. One issue and you may not make money, or not enough to make it worth it. You must know going into it that you can make money no matter what issue arises. I purchased a vacant house recently that sat empty for 5 to 8 years. It's a mess, but I knew, without question, at the price I purchased that it would be profitable. Use that as your guide. Don't get emotionally attached to a "deal". I say that because I'm constantly reminding myself not to do the same. :)
Thanks for the insight @Terry Burger . It is a 4 bedroom, 2.5 bath. School district is Pitner/Palmer/Kell. It would be for a buy and hold. There is a rental a couple of houses up from us that is renting for close to $1500. Of course, this whole discussion is assuming we could get the house at auction for $120K or less, which is doubtful. I doubt we will even pursue this although we may go and see what happens with it at auction for the experience. This whole thread has been very educational though!
An update on this - and a question. I got a notice today that the minimum bid has dropped from $110K to $105K. What would the reason be for this?
FYI, we are NOT considering trying to buy this house if it does make it to auction. I'm just wondering for future reference why the bank would drop the bid 5 days prior to the auction date.
Another update - This is what Zillow is showing for the house next door now. Does this mean the homeowner was able to delay the auction (it was scheduled for 11/4)? The homeowner IS still living in the house.
DATE EVENT PRICE$/ SOURCE
11/03/14 Price change $155,000 RE/MAX Town an...
10/28/14 Price change $105,000 Auction.com
10/20/14 Price change $110,000 Auction.com
Looks like the bank took it back (does auction.com run your actual foreclosure auctions there?), and listed it as a REO with REMAX, although that seems awfully quick. You'll get better info about legal events from your local county records and court case files.
@Wayne Brooks , foreclosure auctions here are listed with auction.com and I believe you have to register with them prior to the auction, but the are live on the courthouse steps.
The original listing was with REMAX and the list price of $155K is what the property was listed at prior to the auction.com price change of $110K.
That's why I was wondering if maybe the homeowner was able to buy some more time.
Originally posted by @Julie Kern :
Another update - This is what Zillow is showing for the house next door now.
I have found Zillow's numbers to be out of date and not relevant. What about all of you?
Mark Forest , based on new/updated listings, I am finding that Zillow lags the MLS by about 2-4 days. When we see a property come across the MLS that I want to look at on Zillow (for price history, recent sold's, etc.), I add it as a favorite on Zillow, which triggers a notification when there is a status change. The 2-4 day lag might just be in my area (not sure if it would be region-specific) and it may not be the case 100% of the time, but it does seem to be the trend.
As for sales, though, I'm not really sure what the lag is since I haven't really monitored it. Maybe someone else knows?
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