The ins and outs of bidding on a foreclosure at auction.

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The ins and outs of bidding on a foreclosure at auction.

Justin Richardson
Engineer · Pueblo, CO · Member since 2015 · 3 posts · 1 vote

Hello All,

I'm new to BP and wanted to introduce myself as well as hopefully get some advice since I am just in the beginning stages of pursuing REI.

I work as an engineer and am currently enrolled in a MBA program at the local University. I realize that is not particularly important to the topic at hand, but just wanted to make it known that I have a propensity for being very analytical.

The market I live in as well as want to invest in is extremely depressed. The city consistently makes top ten lists for "cheapest places to live". The schools are also well known for being some of the worst in the state. Unfortunate, but it's the reality of the city I choose to call home. With that being said, I truly believe there is money to be made in real estate in this market. 

Anyway, to get to the point, since I am extremely new to the concept of REI I am curious about the process of bidding on foreclosures at auction through the County Public Trustee Office. It is my understanding that after placing a bid, if it is accepted, I would be required to provide a check for the total amount within a very short period of time. My wife and I are fortunate enough to earn enough from our 9-5's to make well above the local median household income, but are not in a position to start purchasing property for cash. Is it even possible to finance a foreclosed home that is purchased at auction? Are there better options I should be pursuing? I am interested in buying foreclosures at a greatly reduced price for flipping as well as buy and hold. Does anyone have experience with this particular technique? Preferably in a market that is extremely low-end compared to the rest of the state.

Thanks in advance for your feedback. 

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David MidgettPro Member
Real Estate Investor · Ocala, FL · Member since 2012 · 41 posts · 67 votes
11y

Justin-

I've bought hundreds of foreclosures "at the courthouse steps" (its actually all online now... not nearly as much fun) over the past 15 years. 

And we are in one of the most affordable areas in Florida.  

I agree they are great deals.

But PLEASE don't start your investing career with courthouse foreclosures. There are so many pitfalls and I don't know of any area of investing that is more "caveat emptor". 

-- You have to pay all cash.  You don't get title until after you pay the Clerk or Trustee, banks are funny about needing title before they give you the cash, and Clerks and Trustees don't close in escrow.  Hard money is always available... but hard money is, well... hard. And a hard money lender won't lend to someone without a track record.

-- You don't get clear title. You get bare legal title at a foreclosure sale... you do NOT get "clear marketable title free of all liens and encumbrances" like you would at most real estate closings. Just last week I watched a real estate agent bid on an HOA lien being foreclosed, who mistakenly thought the HOA lien wiped out the first mortgage. Nope.... you just paid $8k and will lose your new house next month when the first mortgage, already in foreclosure, schedules its foreclosure sale. That's a really painful lesson in title examination.

-- You don't get absolute occupancy rights. Federal law protects bona fide tenants in a foreclosure house.  You might buy the house thinking you are going to flip.... and you find out you have a tenant whose rent is not enough to cover your interest payment to your hard money lender.

-- You usually buy a pig in a poke. Nobody offers showings of foreclosures prior to the sale.  You can look through the windows, but breaking and entering is still a felony in most states. So you may have a gutted bathroom, missing electrical panel, rotten floors, water damaged cabinets, and on and on and on.  There is absolutely no reliable way to estimate repairs on a property you can't even walk through.

-- You have lots of competition. Every other investor in town got the same list you just picked up.  They like the prices as much as you do. But some of them do this full time.  Some of them (like me) have entire staffs of people to research each property, do a site inspection, take pictures, pull title reports, run comps.  You are working AND going to school... and you think you will find a deal at the foreclosure sale that your full time, experienced competitors are passing on? Hmmm.

Now, after all these warnings?

My very first real estate investment was a foreclosure house.

And it made money.

But I got so lucky... and had no idea.  I thought it was skill.

Since then I've learned 100 ways I could have lost money on that first deal.  And many of those lessons were only learned the hard way... by losing money.

But most of my lessons were learned watching people come to the foreclosure sale and buy their first property.

Caveat Emptor....


David

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  • Account Closed
    Lender · Anchorage, AK & USA · Member since 2014 · 57 posts · 16 votes
    11y

    Justin,

    When purchasing at the courthouse you will be required to have a certified bank check already made out to the Trustee of the property.  The auctioneer will verify your check amounts prior to bidding.  If the bid amount is say 100k and you think it might bid up I would bring a 100k amount and then the additional amount in smaller numbers.   The Trustee will keep your funds for a period of time and sometimes it can take days/weeks to get your refund amount back.

    Secondly,  you assume all "as is" for the property as well as any liens agains the property.   Very important to do your due diligence before stepping foot at the auction.   You can order a prelim title report or go to your local city property records department.

    I would recommend doing a joint venture with someone.   Setup all legal docs prior to any transaction and figure out how the partners would contribute to a deal.   For example: you bring the money and the partner brings the management/labor and time or vice versa.   Just make sure the terms are spelled out.

    I would also consult in a realtor prior to auction and get a good CMA price of the house. How many days on market for the average home in that neighborhood?? good comps that support the selling price?

    Just a few thoughts to help you.  What area of Colorado are you in?

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    11y

    You will need cash. If you can establish a line of credit with a HELOC or some other collateral, that's your best way to go.

    0Reply
  • Justin Richardson
    OP
    Engineer · Pueblo, CO · Member since 2015 · 3 posts · 1 vote
    11y

    Thanks Desiree and Wayne for the feedback. I live in Pueblo, a few hours south of Denver. 

    Have either of you had success pursuing any other options when purchasing undervalued properties? 

    Justin 

    0Reply
  • Randy Rought
    Involved In Real Estate · Elizabeth, CO · Member since 2014 · 24 posts · 8 votes
    11y

    One slight disagreement with Desiree. When doing your due diligence;  You can get a O&E from a local title company for $5-10, AND (not or) go into your county records. They are online for Colorado countries. Get all the information you can. There is never too much information. You have to watch the lien priorities. Also be aware that in Colorado, we have a "superlien" for HOAs. If they haven't been paid, you will have to pay up to 6 months back dues. The county where you are going to do foreclosures has online instructions.

    This website is great for just about all the Colorado counties. They have the foreclosures listed on here.

    http://publicrecords.onlinesearches.com/Colorado-F...

    Figure out your percentage of profit you are willing to take, develop you maximum bid, and stick with it. Take into consideration all your costs for renovation, utilities during renovation, taxes, insurance, HOAs, and any other costs you can think of. Decide if you are holding or selling (and all closing costs). I did my first foreclosure last summer. I decided to start off with a condo as a "starter" property. It was cheaper and I had the cash. We also didn't have to deal with externals (landscaping, exterior painting, roof, etc). I did all the renovation work myself because I had been laid off and had the time and knowledge. We probably overdid it on quality for our first flip, but its a great learning curve. In fact I just put it under contract tonight.  awesome feeling.

    Randy Rought

    2Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    11y

    Further reading:

    http://www.biggerpockets.com/forums/41/topics/6897...

    0Reply
  • Justin Richardson
    OP
    Engineer · Pueblo, CO · Member since 2015 · 3 posts · 1 vote
    11y

    Thank you Randy and Steve for the great advice. Congrats to you Randy on a successful flip. I hope to be able to say the same in the future. 

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    11y

    Welcome to BP Family @Justin Richardson  It is a great place to meet new friends and learn about various aspects of real estate and more. 

    Wishing you the best! 

    0Reply
  • Millie D.
    Davidson, NC · Member since 2015 · 34 posts · 6 votes
    11y

    Hi Justin,

    I found this document for Denver; perhaps there is one for Pueblo also. 

    http://www.denvergov.org/Portals/777/documents/For...

    I'm in North Carolina, perhaps the market is different in CO, but a word of caution. I've noticed that investors don't go to the foreclosure auctions to buy property anymore. I bought one at the courthouse auction but also won't anymore. Why? Because the auction price is usually quite a bit higher than what the property will be marketed at once it's in REO. So it is usually better to wait for it to come up for sale on the MLS after the auction-- at least in my market. You could test this theory in Colorado by picking a few foreclosure that are going to auction this week--if they are not sold to a 3rd party, they will be back on the market in about 3-4 weeks. Compare the auction price to the new sale price and you can get a handle on whether it's better to buy at auction or after auction. That said, once it's available on MLS, you have to pounce! Get your bid in at 12:00 on the day it becomes available to investors.

    Hope this helps!

    1Reply
  • David MidgettPro Member
    Real Estate Investor · Ocala, FL · Member since 2012 · 41 posts · 67 votes
    11y

    Justin-

    I've bought hundreds of foreclosures "at the courthouse steps" (its actually all online now... not nearly as much fun) over the past 15 years. 

    And we are in one of the most affordable areas in Florida.  

    I agree they are great deals.

    But PLEASE don't start your investing career with courthouse foreclosures. There are so many pitfalls and I don't know of any area of investing that is more "caveat emptor". 

    -- You have to pay all cash.  You don't get title until after you pay the Clerk or Trustee, banks are funny about needing title before they give you the cash, and Clerks and Trustees don't close in escrow.  Hard money is always available... but hard money is, well... hard. And a hard money lender won't lend to someone without a track record.

    -- You don't get clear title. You get bare legal title at a foreclosure sale... you do NOT get "clear marketable title free of all liens and encumbrances" like you would at most real estate closings. Just last week I watched a real estate agent bid on an HOA lien being foreclosed, who mistakenly thought the HOA lien wiped out the first mortgage. Nope.... you just paid $8k and will lose your new house next month when the first mortgage, already in foreclosure, schedules its foreclosure sale. That's a really painful lesson in title examination.

    -- You don't get absolute occupancy rights. Federal law protects bona fide tenants in a foreclosure house.  You might buy the house thinking you are going to flip.... and you find out you have a tenant whose rent is not enough to cover your interest payment to your hard money lender.

    -- You usually buy a pig in a poke. Nobody offers showings of foreclosures prior to the sale.  You can look through the windows, but breaking and entering is still a felony in most states. So you may have a gutted bathroom, missing electrical panel, rotten floors, water damaged cabinets, and on and on and on.  There is absolutely no reliable way to estimate repairs on a property you can't even walk through.

    -- You have lots of competition. Every other investor in town got the same list you just picked up.  They like the prices as much as you do. But some of them do this full time.  Some of them (like me) have entire staffs of people to research each property, do a site inspection, take pictures, pull title reports, run comps.  You are working AND going to school... and you think you will find a deal at the foreclosure sale that your full time, experienced competitors are passing on? Hmmm.

    Now, after all these warnings?

    My very first real estate investment was a foreclosure house.

    And it made money.

    But I got so lucky... and had no idea.  I thought it was skill.

    Since then I've learned 100 ways I could have lost money on that first deal.  And many of those lessons were only learned the hard way... by losing money.

    But most of my lessons were learned watching people come to the foreclosure sale and buy their first property.

    Caveat Emptor....


    David

    9Reply
  • Rick H.
    Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    11y

    Welcome to BP. Lots of insight here. That being said, these forums ought to be only a beginning of your real estate education as there's no substitute for books, real estate clubs (for inspiration), topic-specific training (later) and experience.

    If you posess the curse of the 'engineering gene' beware of any tendency to want to over-analyze. Analysis is not a substitute for action. 

    You'll get much more benefit from creating a deal flow machine after becoming a successful marketer. Learn to evaluate prospective deals quickly and only spend time on due diligence when an opportunity is solidly in your crosshairs and in contact with principal(s).

    Suggest you look for property owners in distress and negotiate super-bargains rather than buying at trustee sales or other auctions. 

    1Reply
  • Ryan Keough
    Denver, CO · Member since 2015 · 7 posts · 0 votes
    11y

    Something to be aware of is that, in Denver, you have to bring a check for each property that you plan to bid on. So if you want to bid on 4 properties at with starting bids of 125, you would need to bring 4 125k checks. They offer a way around that which is to bring a check for the highest property you plan to bid on. You can register for more than one auction, but as soon as you win one you cannot bid anymore. Example being a 65k property and a 125k property, you bring a check for 125 and can bid on both. You cannot bid further if you win any property though.

    Oh and in Denver, the water bill follows the property and not the landowner.... So be aware that there can be some huge water bills that you might have to pay to activate service.

    0Reply
  • David Mitchell
    San Luis Obispo, CA · Member since 2012 · 94 posts · 23 votes
    11y

    Hey Justin - 

    I have to say I agree with what Randy & David were saying regarding titles. I work for a title search company and speak to many foreclosure investors. Some people, unfortunately, either don't know to get a title search or choose not to spend a little money getting one before biding at auction and then end up losing a lot of money. 

    My advise to you, execute proper due diligence before biding. Make sure you know of any liens, mortgages, or encumbrances on the property. Either get a certified title search done on the property for you or, like Randy suggested, do the search yourself.  

    If you want to do it yourself, check out this video, it might help walk you through the steps https://www.youtube.com/watch?v=AIOt0MKlZFU .  You may also consider browsing though that youtube account / channel. It provides a lot of videos regarding foreclosure investing and property titles. 

    Good luck to you with your future investing! 

    0Reply
  • Michael Wentzel
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    11y

    @Justin Richardson Welcome to BP! You have come to a great place to learn. I live in Colorado Springs, but I'm actively purchasing properties in Pueblo. I haven't made it to any auctions yet, but I would like to try that in the future. I have purchased off the MLS with a Realtor, purchased from a wholesaler, purchased from Craig's List and purchase two from a guy I met on Bigger Pockets. I generally buy run-down places, fix them up, refinance my money back out and turn them over to a property manager. I believe the properties I'm buying are at a significant discount from market value. Usually because they need so much work, nobody wants them.

    I like Pueblo. It is allowing me to learn and make mistakes with smaller amounts of money. Send me a message if you would like to grab coffee some time. I'm generally in Pueblo every other week.

    Mike

    0Reply
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