Foreclosured auction, opportunity or mistake?

Question

There is an auction for a 2 bed 1 bath house (under 1000 square ft) building in 1985 in a very nice and popular area. The starting bid is around $6000. Comps in the area are showing $200k as a conservative sale price. There are many selling for more than that. I am not concerned about dealing with the previous owner, as I am an experienced property manger and have no issue with dealing with an eviction case. The question is the rehab... I am not able to see the interior of the house until after winning the bid and getting the owner out. Therefore there I will not be able to build a scope of work and get accurate pricing under after I own the unit. Is this a silly deal to consider? In my mind, its not a very old house and there for my not need a ton in the "bones". Even if we assume $100000 rehab as worst case scenario, if I were to win it at $50,000 we would still be at the 70% number. The question is taking the risk on the rehab and hoping for a higher sale price than the lowest comp.

Andy Sabisch · Answer

Kevin brings up a good point.  As I mentioned earlier, simply winning the auction may not clear all the liens against the property and you may find out that what you won it for is a fraction of what is owed.  The auction company should be able to answer that for you.  Also give the tax collector for the county a call and see if they have additional money owed that are not being cleared.  Last thing you want to do is get a great deal and then find out there is another $100K in debt you had not expected.

Kevin Ivey · Answer

for a $6,000 opening bid you need to verify that that is the first position primary loan.  It could be a second, HELOC, HOA or tax deed all of which do not give you full possession of the property without clearing the typically more debt on the first position mortgage.  Best of luck.

Peter Mckernan · Answer

This is fairly typical.. Couple things, you can try to go by the house and look in the windows with your contractor (do not enter). Get as much intelligence as you can on the house for work needed by going by and walking the property. Then go by all the comps that are solid comps too, drive by, and even if they are active and not sold yet go inside of those ones (you want sold comps to get your true out price).

Last thing but most important, there are people that maybe buying this for a rental, keep their crews going, or maybe even because they knew the house because a family member that owned it. I say all this because those people will pay way more than what you can/should pay for it so be strict on your price you will pay and do not get emotional about the purchase and go higher than that at all.

Andy Sabisch · Answer

We have done several of these and as you said, getting the current tenant out is the big challenge.  Then what they did do it before leaving.  Cash for keys worked in all but one case and in that one, the owner trashed every room (kicked holes in the walls), tore the kitchen cabinets off and broke several interior doors.  It could have been worse - have talked to others that had cement poured in the toilets and more.

Look at the auction related fees you will need to pay and ensure you get a clear title as some liens are not cleared through the sale.  Look at the exterior and see if you get a feel for how it was maintained.

If you get it at the right price they are good to purchase but assume the worst in terms of reno costs and hope you come in well under that

James McGovern · Answer

You need to figure out the personality of the current occupant and whether they are destructive or not to get a handle on rehab costs. You should also figure out any hard to eliminate odors that may be present