Foreclosure Sales – I need an education

34 Replies

I own several rental properties all single family homes and considering another. However, I want to expand my real estate experience by trying a flip. My strategy is to purchase a foreclosure at our County Court House try a flip or keep it as another rental in my portfolio if that does not go well.

I looked at a handful of homes listed and plan on attending the upcoming sale – not buying – to see how this process works. However, I noticed that many of the homes appeared to be occupied?

Before taking this plunge I want to educate myself as much as possible on the risks involved in such a purchase. Can anyone give feedback on your experience or guide me to resources that can educate me?

Thanks!

I would attend and watch it a couple times. what you are referring to is sheriff sale.

I stopped going bc it was too risky for me, the property I want always gets postpone, or bid up to the sky by bank.

the ppl who won seem to have inside track with the banks/lawyers. who opens bids at $45,779.61? and banks agrees aka sits silent and auctioneer says sold!!! happened 2x in my attendance.

you have to go for a couple of auctions. bring the list and write each result and how they are bid.

I found the proceed to be unfair. but that's me. and I have very low risk tolerance. you may be OK ;)

I started with books from Amazon even "foreclosure for dummies" etc.  You need to umderstand the process and make sure you are getting clean title.  You also want to have a smart strategy for getting possession of a house if you purchase one that is occupied.  This also azsumes you know enoughto not overpay.  Just because you bought it at auction doesn't means a house is cheap.

Right. Make sure you do due diligence such as check for tax liens, mechanic liens, law suits, drive by check for neighborhood status, location, location, location. also study the states foresclosure laws. The home owner may have the right to redeem his house as long as one year from the auction. Hate to see you get the house, spend many dollars to fix it up and then be slapped with notice the former owner has redeem the loan. Just be smart and protect yourself.

Mike Sedlacek, Real Estate Agent in VA (#0225223133)

I would bid on property that has equity based on current market sales for the area.  Ms Lee is right however,  as most of the time the Bank Wins.  However, you can get a partner the Bank can not in your fight to get the house.  I would try to make a deal with the owner of record.  The owner has control of the house until it is sold at Sheriff Sale.  Thus, partner the reinstatement of the property if the numbers look right, or purchase subject to the outstanding mortgage.  If the owner really has no money to hold the property, he will take cash from you on almost any investment strategy you offer.

I own one now that went to public auction. the high bid was 59,900. bank wanted 62K.  A short time later bank listed it at 42K I bought it and rehabbed it. I put 8k in it during rehab. Today it's still rented.  MV is close to 80K.    

What I understand is the auction, released all other liens, And the bank took possession as 1st lienholder. So they could sell. After that I stay away from auctions.  

I'm sure there are expert's on here that would buy a bunch of them, hasn't worked for me. 

@Jennifer Lee

  your perception is NOT correct there are no bidders at foreclosure sales that have inside tracks with the companies.. and if they do they are doing something very illegal that the FBI would be interested in.  what you described is a  drop bid... where your following a property and the opening published bid is say 100k you stop following it because its only worth 90K  so day of the auction your standing there and the bank opens at 47,500. and your thinking what the F... well that is called a drop bid.. the pro's I say that loosly the companies or investors that do this for a living and buy volume will understand that there are drop bids and be prepared to bid on every property going to sale.. that's the way you make money at the auction. and its one reason in most counties the casual investor is wasting time trying to compete with the guys that do it for a living.

some of my very best deals I got in Portlandia were this exact scenario I liked the property and even though the opening bid was way higher than anyone would bid.. I brought a cashiers check for what I would pay for it.. and low and behold a drop bid  all the other folks standing around are just looking at me as I walk my check up and snag screaming deal. But remember and you may want to look at Some of Brian Burkes posts on the subject to do this and make any money you need to usually have millions in cash.. it was not uncommon for me to take 2 to 3 million in one day to one sale and maybe only spend 500 to 700k that day but if the drop bid came in I was there to snag it.

So really tough for someone to hone in and want to buy one property.. and if they do they usually pay too much as the vets there run you up..

@Rod Fisher

  this is generally the case and a much safer way to do it and much more time management productive for the smaller investor.

Originally posted by @Jennifer Lee :

...

the ppl who won seem to have inside track with the banks/lawyers. who opens bids at $45,779.61? and banks agrees aka sits silent and auctioneer says sold!!! happened 2x in my attendance.

...

I found the proceed to be unfair. but that's me. ...

So did the bank's attorney announce the bank's bid first? If next bidder bids higher than the bank, then the bank is happy. If nobody bids higher than the bank, then the bank gets the property. So unless the bank failed to announce a bid, then your statement about "inside track" is unfounded. 

And then you say it is unfair - unfair to whom?  The bank, those that did bid, those that chose not to bid - I'll guess you meant those that chose not to bid. Well, they did get to make that choice to not bid, so how is that unfair?

@Steve Babiak

  now this one I never have gotten a straight answer on and that is the STEP  bid that one is the reverse of drop bid and equally frustrating not sure if it happens in your market.

But a bank advertises the opening bid way low... generates a frenzy... the crier opens the bid at the low ball.. 3P bids a dollar over and the crier bidding for bank jumps it up by a large margin and ends up bidding for the bank right back up to the amount that makes it not a deal..  I never quite figured out why the banks did that.

@Jay Hinrichs - not sure why that practice occurs either, but I have a couple of theories. In my area, there is a percentage of winning bid that gets paid to the sheriff as a sort of commission (they call it poundage) for conducting the sale; the lower the bid the less must be paid, but if there is a third party buyer the bank wants to recover as much of the debt as they can get. Then we have attorneys who represent more than one lender; in the case where they rep both the first and second mortgagees for the same property, the second is the one for whom they are doing that bidding, they just open for the first. 

Originally posted by @Frank S. :

I own several rental properties all single family homes and considering another. However, I want to expand my real estate experience by trying a flip. My strategy is to purchase a foreclosure at our County Court House try a flip or keep it as another rental in my portfolio if that does not go well.

I looked at a handful of homes listed and plan on attending the upcoming sale – not buying – to see how this process works. However, I noticed that many of the homes appeared to be occupied?

Before taking this plunge I want to educate myself as much as possible on the risks involved in such a purchase. Can anyone give feedback on your experience or guide me to resources that can educate me?

Thanks!

 Welcome to the BP community, Frank. That's in order as I see this is your first post!

Since this is your first post, I have no sense of your understanding about real estate beyond having owning a few rentals. Did you buy or inherit? How long have you owned them? Were they purchased with intent of being rentals or were they once your residence?

Buying forced sale property typically requires a solid understanding of real estate fundamentals, especially title. Familiarity with the laws as they relate to foreclosure sales and buying from a homeowner during foreclosure is critically important, too.

In my state, CA, most foreclosures are non-judicial, meaning that they are sold by a 3rd party trustee with court order. For the potential bidder at sale, the need to understand how to efficiently research title for loan position, senior liens, and condition of title when loan recorded becomes critical.

The other obvious is is that a potential bidder does not normally have access to inspect the interior of the property being sold unless an owner-in-foreclosure cooperates (rare) or the property is vacant and entry is easy (I.e., breached door lock, etc.). 

The thing to remember is if you are trying to buy equity at a discount or potential cashflow at a discount. During robust markets like our current one in many metro areas, buyers are paying very high prices and receiving minimal discounts for the work involved.

@Steve Babiak

  I understand the attorney bidding for both first and second.. the cases I followed their were no juniors.. just the first going... but I have not bought CT HS steps since 2012... competition like Rick states is off the charts in most markets.  and at the end of the day the stuff we generally fund or buy becomes a much better proposition for us once we let the banks filter it through the system and we can just buy get title insurance and go

@Jay Hinrichs

 @Steve Babiak

thank you for explaining that to me! 

for a newbie it felt weird :) I went on my own. no one to walk or talk me through it. I went with my clients and other investors. they are fun to watch ;) you do realize the same players bid ;)

these are my observations, this took place in a formal court house, 4 hours long :) 

1. most property are postponed or resolved, those up for bids mostly no one bids. and bank get it at cost. 

2. bidder vs bank, if bank out bids bidder.. bidder withdraws, bank buys at cost.

3. bidder vs bidder, bank waits til highest bid. then steps in, if bid higher than what they want winning bidder get it for end bid amount.

4. bidder vs bidder, bank wait til highest bid, steps in and if bid is under, bank bids higher. if bidder withdraws, bank buys at cost.

I think it's because bank wins most of the time. the unfairness I felt at the time was that bank wipes out the bidding and buys at cost.

----------

these are bids that stood out bc they were different

1. young couple with Realtor/lawyer? house come up, they bid with bank til bank said... if u bid $x more, you get it.... they were short by a few $, a fellow bidder gave them the cash to get house. they were only bidder for this house.

2. a Realtor? house came up, bid opens, she said $123,456.78 (I don't know it was an exact number) and bank accepted. I wasn't the only one confused that day. she was only bidder.

I am sure they all did proper due diligence ;)

@Jennifer Lee

  Remember the bank cannot bid any higher than they are owed  IE  principal , interest, late fee's and foreclosure and publication costs... once they reach that number they will not go any higher. the bank just wants their cash they do not want the asset.

Now a private lender may bid on a property as a 3P they can credit bid what they are owed and then bid higher...

Originally posted by @Jay Hinrichs

  Remember the bank cannot bid any higher than they are owed  IE  principal , interest, late fee's and foreclosure and publication costs... once they reach that number they will not go any higher. the bank just wants their cash they do not want the asset.

Now a private lender may bid on a property as a 3P they can credit bid what they are owed and then bid higher...

 Jay, no lender is entitled to more than they are owed. 

Now, I'm not familiar with the FC laws of western states, and we will ignore private lenders from installment loan transactions, but any bidding above what is due if allowed out there has some consequences. 

It will be more than obvious that a private lender has another interest in a property other than acting as a lender trying to buy it out of a FC. It's just plain dangerous for a lender to show having the intent of ownership rather than simply protecting their interest as a lender.

A borrower generally has 3 years to bring an action of a wrongful foreclosure. Getting over half way there may well be showing a profit motive or other motive of the lender other than simply loaning money, that is predatory lending. Individuals, brokers, banks, any lender needs to act at arm's length with collateral. It will certainly look like a private lender had the intent of loaning money as a means to obtain the property.

That opens the door to going through all the loan details to see if there was actually an event of default, if any effort was made to correct the issues, any attempt to modify the loan was made or if the lender just declared a default and moved forward. The private lender may need to prove they didn't simply toss a payment in the trash or several and just tried to acquire the property. (Why servicing is important for private lenders). 

Next issue is that a lender buying it may not be construed as seeking the highest equity to go back to a borrower, the advantage of out bidding another is that they already have a loan amount credited requiring less cash to bid, they may also taint the sale of it being an open competitive bid. Such matters can violate auction laws, much like an heir bidding at an estate sale not having to come up with as much as the general public....but may be allowed when it is announced that heirs may bid prior to opening the auction sale. 

A lender, any lender, can not ride two horses at the same time, demonstrating a motive to acquire ownership by a lender is not a good idea. That's what partnership interests are for with a money partner. 

Not saying Old Joe can't bid in some state(s), saying it's really not a good idea to, just get your money and go back to the office. 

I've acted as Trustee and have conducted FC auctions and a few times the private lender would ask if they could bid......answer was no! Go get your buddy Henry to bid and you can buy it from him later on. Still not real ethical but it won't hinder a sale. 

I imagine you have done this, or know others who did, but the question would then be, why would you buy your collateral ? :)

I have purchased 6 so far at Sheriff Sale in 4 counties in Wisconsin, possibly another tomorrow, I watch the opening bids every evening in the counties I look in, and analyze them. there typically will be one good deal for 100 over priced opening bids, but the ones I get tend to be home runs, I have had competition twice, one of them I paid the other guy $12K to stop bidding. worked out, I made $65k on the deal in 3 months, not complaining, but you MUST DO YOUR DU DILIGENCE  I have seen people buy seconds, and ones with government liens that they got stuck with. Here you need 10% cash or Cashiers Check at time of sale, and the balance is due within 10 days of confirmation. so you need your money in order. its not for the faint at heart, and you have to be wiling to lose your 10% but the rewards can be great!!!! Good Luck

Originally posted by @Rick H. :
Originally posted by @Frank S.:

I own several rental properties all single family homes and considering another. However, I want to expand my real estate experience by trying a flip. My strategy is to purchase a foreclosure at our County Court House try a flip or keep it as another rental in my portfolio if that does not go well.

I looked at a handful of homes listed and plan on attending the upcoming sale – not buying – to see how this process works. However, I noticed that many of the homes appeared to be occupied?

Before taking this plunge I want to educate myself as much as possible on the risks involved in such a purchase. Can anyone give feedback on your experience or guide me to resources that can educate me?

Thanks!

 Welcome to the BP community, Frank. That's in order as I see this is your first post!

Since this is your first post, I have no sense of your understanding about real estate beyond having owning a few rentals. Did you buy or inherit? How long have you owned them? Were they purchased with intent of being rentals or were they once your residence?

Buying forced sale property typically requires a solid understanding of real estate fundamentals, especially title. Familiarity with the laws as they relate to foreclosure sales and buying from a homeowner during foreclosure is critically important, too.

In my state, CA, most foreclosures are non-judicial, meaning that they are sold by a 3rd party trustee with court order. For the potential bidder at sale, the need to understand how to efficiently research title for loan position, senior liens, and condition of title when loan recorded becomes critical.

The other obvious is is that a potential bidder does not normally have access to inspect the interior of the property being sold unless an owner-in-foreclosure cooperates (rare) or the property is vacant and entry is easy (I.e., breached door lock, etc.). 

The thing to remember is if you are trying to buy equity at a discount or potential cashflow at a discount. During robust markets like our current one in many metro areas, buyers are paying very high prices and receiving minimal discounts for the work involved.

Court order? No they aren't. They are sold 3rd party using the power of sale clause, not by court order in California.

@Ron S. This is an old, stale thread.

Given that I've been working foreclosure deal in CA since 1978, I'm pretty confit table with all the non-judicial sale methods and probably done judicial sales that other will never disvover. 

If you wish to make a particular point, perhaps starting a new thread would be helpful. 

Originally posted by @Scott Schultz :

I have had competition twice, one of them I paid the other guy $12K to stop bidding. worked out, I made $65k on the deal in 3 months, not complaining, but you MUST DO YOUR DU DILIGENCE  I have seen people buy seconds, and ones with government liens that they got stuck with.

Scott,

To your first point, it's called collusion and you can go to jail for that. :>)

To your second point, buying seconds or ones with government liens do not mean that they are stuck with them. To me, people who buy these deals are 1) either clueless, or 2) they understand foreclosure laws more than you do. Based on my experience in the Bay Area, I'd guess it's the latter.  There's definitely more money to be made buying these deals over the straight forward deals. 

Please correct me if I'm wrong Master @Rick H. .  :>)

@Scott Schultz   now the genie is out of the bottle but you just on BP and for all the world committed a felony IE you colluded to defraud a lender in a foreclosure sale by discouraging bidding by paying off another bidder.. If caught you WILL go to jail. is it worth 12k.. and I can't believe you did this on BP that will go out into the internet.. you know that big bad internet that regualtors watch ..   @Minh Le   there was some good ole boys in the Carolinas the FBI stung  700k fines 3 years in the clink.

The Sheriff, the Attorney,(who was present) my banker, title company, and accountant had no issue with the way we did the deal, a broker to broker referral fee was all it was. 

Only time will tell. 

Even if you don't smoke, I suggest you begin stocking up on cartons of cigarettes.  I hear they are one of the few legal forms of currency that can be used during incarceration.

A little smoke in the face beats "services rendered".

@Scott Schultz   none of those people are the people that put colluders in jail... I am sure your fine.. but I would read up on it a little...  Plenty of attorneys get disbarded Sherrif does not know any better.. title company could care less same with banker.

and I know its a common practice.. but remember.. who  your hurting here.. if there was a second lender you just took money from them and gave it to some guy as a bribe to stop bidding.  what do you think the second lender is going to do or how are they going to feel  when this money should have rightly come to them not some guy you paid off 

. If there is no junior lender those funds should go to the poor person who lost the house. .many times folks don't know they get excess proceeds and it totally changes their lives.. were they just went through this tramatic experience of losing their home only to have it bid up and they get an excess proceed check for 10 to 50k or whatever the amount the property bid up past the opening credit bid.. so your taking food out of those folks childrens mouths when you engage in that behavior..   At least that's what the prosecuting federal lawyer will argue  :) 

@Rick H.