Financing a Foreclosure Purchase and What to Look Out For?

2 Replies

Hi BP family!

I've spent the last couple weeks reading and listening and reading some more, trying to get my real estate chops up to snuff. The past week I've started looking at different properties in different places, and trying to start analyzing deals to get practice with it. 

During this process I came across what seems to be (potentially) a great deal on a house going up for auction this coming week. I was wondering, what are some ways of handling the financing issues surrounding a foreclosure auction (i.e. needing the cash up front to bid when I definitely don't have it ready, on hand). Additionally, if I were able to find a way to round up the funds, what are some specific steps I should take and specific things to look out for prior to making such a purchase?

The property has some pretty close and recent comps at at least $750K, if not closer to $800K, and I think with less than $100K in rehab costs it could be a great flip if I were able to get it for $500K-$550K. Does anyone here have experiences trying to pull together either hard money loans or full equity partnerships for a foreclosure?

Lots of information and lots of questions, but thanks in advance for your help everyone!

@Chad Eatinger - We have been buying foreclosures for years (though not in the last year because people have been bidding at almost retail prices!)

We were self-financed on all our deals. Our HML won't finance foreclosure purchases - too many unknowns (title, interior, taxes, etc). So we never bought purchases as high as you are proposing.

I'm sure there are people/institutions purchasing cash in that price range; I just don't of any.  So I would think that might be your biggest hurdle.

If the home is vacant, try to find out how long it has been vacant and how long the utilities have been turned off; turning them back on after a year or so can be another added expense and headache.

Also aim high on your rehab costs: there are so many unknowns in foreclosures.

Best of luck!

@Chad Eatinger

You can't get financing for live auctions.

Most will require cash payment that day. That means no inspections or appraisals, which will prevent financing...

You can raise your own cash in advance. But it needs to be in a bank cashier's check on the day of the auction. People usually bring several checks in different amounts because you never really know the final amount. Like 4 for $100,000, a few for $50,000, $20,000, so on. There is no time to run to a bank and get the difference if you're short.

What to look out for?

Most auction properties come with the liens attached. Some don't. Depends on the type of auction. So, it's recommended to do a title search and know the lien rules for the particular auction you'll attend.

Occupied properties will make it nearly impossible to get title insurance, which also prevents financing.

Each state has various redemption rules, so you have to know those for the state and the type of auction.

People like to damage the properties before vacating, so it isn't unusually to go in and find the copper missing, the wires cut, water flooding the basement, the HVAC missing or cut, and holes punched in the walls and the floors. So, if you do win an auction, make sure you head over right away to secure the place if it is already vacant.

You also have a difference between dealing with prior owners versus squatters. So, you have to know the rules for both.

If the property is occupied, you'll be responsible for legally removing the occupants. How long that takes varies depending on each state.

Sometimes you can offer cash for keys, but I've seen some people take the money and then still not leave.

Most auctions don't meet the reserve requirements and the banks are forced to buy them back.

Auctions aren't where you go get a house pennies on the dollar. Many are over priced because the bank is trying to get their money back. Any real "deals" will be scooped up by corporate level bidders with large staffs and deep pockets. So, it's advised to set your maximum offer before going to the auction and making sure you don't over pay.

Liens can come in all kinds of forms, not all will be obvious. Mortgage liens, property tax liens, liens from mechanics will usually be obvious. IRS liens, liens from municipalities, HOA liens, judgement liens from child support or alimony might not be attached in a way that's obvious and can appear after closing...

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