All Forum Posts by: Jim K.

@Philip Williams

Getting access to the shadow REO inventory has been one of the more vexing issues in my approach to real estate investing. I have HEARD that some banks have a special relationship with their portfolio borrowers, and those big investors get access that way. I have HEARD that some banks will respond favorably to an investor who picks out a house that is part of their shadow inventory and offers to buy it at a reasonable price.

This is all investor rumor mill grindings, sadly. I don't know a guy who did it. I don't even know a guy who knows a guy (and can give me his name and the address of the property).

@Mary Jay

When the market crashes, a lot of rental owners, especially low-cost C-class and midprice B-class property owners, start dancing. Landlords with a diversified portfolio don't typically end up with 50% vacancy because of a market crash. People who own their homes are often forced to sell and live in rentals. So demand for cheap rentals often goes up, while supply does not. Rents either stay the same or go up. Luxury rentals are often affected and are forced to lower their asking price, but the hit a solid B-class property will take is typically minimal or nonexistent. If your tenant loses their job, they'll move out and someone downscaling from an A-class luxury rental, a former homeowner who wants to hold on to the tatters of their middle-class lifestyle, or an aspiring social-climber from the working poor looking for something better will move in.

If your rentals are not generating cash and there aren't good tax reasons to hold on to them, I suggest you get rid of all of them immediately and invest the money in mutual funds with historically good yields.

@Account Closed

Exactly, the REOs kept on the books are called "shadow inventory." This is different from a bank that keeps a vacated property in the foreclosure process as long as it can -- those properties are "zombie foreclosures."

You're describing a short sale.

The homes you're looking at are going to be auctioned. Foreclosure is extremely state-specific as well as county-specific and sometimes city-specific, and you need to study the process carefully before you wade in and bid. This is NOT an attempt to dissuade you from doing so -- bidding at the local sheriff sale on foreclosures is a major part of our business model. But you have to learn about the process in your state and county. This can take a long time.

With that in mind, this is what we do here in Allegheny County, PA with a mortgage foreclosure we're interested in. We track the foreclosure in the county's online court records system. We read the case thoroughly. We look at the property's deed and any outstanding mortgages through the online property records system of the county. We do research on the current owner, and we research the title. Learning how to do all of these things took a great deal of time and effort.

On the day of the sale, we go to the lawyer representing the mortgage foreclosure entity and we learn what they're willing to sell it for, what their bid instructions are from the people foreclosing on the home. If their maximum bid instruction is acceptable to us, we tell the lawyer, as a courtesy, if we plan to bid higher than their bid instructions, and we immediately bid a dollar higher than their minimal bid limit when the sale comes up and the lawyer representing the foreclosure entity bids the minimum amount to start the sale.

As another courtesy, I also talk to other regular investors at the sale whom I have done business with or whom I have another business relationship. I inform them that I want the property. The wholesalers who are willing to bid on the property know that I am not a wholesaler and can therefore afford to outbid them on the property and still make money on the deal. For most of them, the maximum bid instruction is too much anyway. They know me and I know them, and we both know that this is not the last sale we'll be attending together. Sometimes we horse trade -- I won't bid against you for that property, you won't bid against me for this one. Sometimes we just trade information: "That title isn't clear, I saw bad cracking on the back wall of the foundation of that place, FYI, that one was just postponed." That sort of thing.

If all goes well, I bid the minimum bid plus one, and the officiating sergeant ends the sale. If not, I will bid against whoever bids until I hit the maximum amount I am willing to pay for the property. In most cases, I will have had at least a month to come to that number. If I am bidding against obvious amateurs with their hearts on their sleeves at the auction and I sense that they are willing to go significantly higher, I have no qualms about bidding them up a bit as a bar to entry into the group of experienced  auction buyers of the county who get things done in a civilized way and don't waste each other's time and energy when acquiring properties. The 100+ seats of the Gold Room at the Allegheny County auction are overfilled each first Monday of the month with rubberneckers who will never successfully acquire a worthwhile property at a decent price in that room. They just don't know it yet.

There are at least six regular wholesalers and ten more people like me at every monthly sheriff's sale in this county. I can't imagine St. Louis is much different from Pittsburgh. I do not know the foreclosure laws in Missouri and St. Louis. I do not know if you are looking at mortgage foreclosures or tax foreclosures. I hope I have convinced you to investigate the laws in St. Louis thoroughly and not think of the auction as a one-off place to buy properties. You can get a great deal, you can get lucky, but the people who repeatedly succeed at the auction are not quite normal. Most of them have formal research and investigative backgrounds, in addition to being bright, organized, knowledgeable, hardworking, highly competent, good at taking calculated risks, and, of course, quite wealthy.

@Mike Abramov

My take on this is pretty straightforward and why we self-manage our local properties: property managers work in an almost completely unregulated business. They are trying, as all businesses do, to maximize their income by leveraging their strengths. If they do no do this, they are not competitive and go out of business. They sell convenience in a service-based industry. It is very easy for those who sell convenience to develop a deep sense of contempt for those who buy convenience. It is the rare individual in the convenience-selling segment of the service industry who can recognize this tendency and stoutly resist acquiring it over time or allowing it to fester in the people who work for them. If you find this person or business entity, you can expect to pay a premium for their efforts.

@John Krasner You write: "Are there any risks involved with purchasing on foreclosures sales that I am not aware of?"

Well, what are the risks that you are aware of?

I went to a guru real estate seminar five years ago and the speaker somewhat disparagingly mentioned BiggerPockets as a source of free information and a way to network with real estate investors. I got on the site and started reading the forums. Considering that at the time of the guru seminar I had no rentals and I currently own two duplexes and three SFRs, I've increased my net worth four times over, and my wife and I look forward to the future with great anticipation instead of dread, yeah, I can't complain. BiggerPockets has been a priceless source on what to do as well as what not to do in this business.

@Markus C.

All you would need would be the tenant going to the media with that story and even the hint of a shred of proof, and your name would be mud as a landlord where you live. If your cancer-patient tenant can set up a website and host it on a free server...small businesses do not survive long by abusing their customers.

@Sherman M.

I do not know the one best way. I am sure that there are multiple good ways. But what I'd do if I were you is to buy a small, cheap investment property, or better yet, an inexpensive, run-down house for you and your family to live in that has an additional apartment to rent. Even two extra bedrooms or even one would fine nowadays in the age of Airbnb. I would buy that investment property/house hack and move into it and/or rent it. Then I would aggressively focus on paying down whatever financing it took to get the house, fixing up the house in my free time, and learning how to be a decent landlord or Airbnb host.

I would learn how foreclosures work in my county and state, doing the research and spending the time to figure it out. I would choose a target neighborhood in my area to invest in, and I would learn the area frontways and backways, walking the streets, taking notes, printing up a big map and making notes on it, visiting the shops and stores, eating at the restaurants, learning my way around the municipal building of the place. Of course, you should already have been doing quite a bit of this in your attempt to become a wholesaler. I would get to know agents in my target neighborhood. I would take them out for lunch to pick their brains about the neighborhood. Above all, I would use public records to find out who the tradesmen that most frequently service the area are, starting with the master plumbers and locally licensed electricians, and I would get to know them and ask them about the agents they most frequently work with.

All properties that you consider will need to be renovated, in some way. Either they need to be renovated as durable, hardened rentals or they need to be renovated as high-value for-sale properties. I would spend a great deal of time and energy learning the nuts and bolts of how this is done and what it typically costs. The more effort and energy you spend here, the better flipper you'll be and the fewer times you'll be taken advantage of as a novice in the field.

If you have any questions, don't be afraid to reach out, OK?

@Sherman M.

Here's my take on wholesaling as the first step into REI:

You're not going to become a good wholesaler with two years of experience. Wholesaling of course involves finding deals that other investors can't and passing them on to investors who pay you for them.  By definition, these deals have to be better than the deals that the investors might find themselves. They have to be spectacular deals, special deals, awesome deals, super-duper deals.

An awful lot of guru training seminars tell you that the way to get into real estate investing is wholesaling. They call it all kinds of things, but really, it's finding deals for well-established real estate flippers and passing them on. The well-established flippers are supposedly too busy flipping to find their own deals. This is wholly untrue, of course. It also only works reasonably well in an up market, where there's plenty of money to be made in flipping.

The reality is that everyone is exposed to unexpected real estate deals in various ways, through our jobs, through our network of family and friends, through living in the neighborhoods that we live in, through our various professional contacts. A great deal of real estate exchanges hands under the radar. The guru training seminars that tell you that the way into REI is through wholesaling really just expect you to be able to mine a deal or two from your little slice of the under-the-radar real estate market and pass it on to flippers who would otherwise never be able to find it. It's the same sort of reason why Kirby keeps training vacuum salesmen for the opportunity of a lifetime. The Kirby people don't really expect you to be able to sell dozens vacuums door to door. They expect you to be able to sell one or two of their vacuums to your own friends of your family, whom they could not otherwise hope to reach as customers.

So the gurus are feeding you a lot of hype about how to find deals when all they really expect is for you to tell an established flipper that your Aunt Martha's friend Juanita's neighbor Billy Ray just died and Billy Ray's sister told Juanita's hairdresser Marq that she just wants to get rid of Billy Ray's old house because he had a huge stash of transvestite porn in his basement that she really, REALLY doesn't want to go through and throw away to get the house ready for retail sale.

What do you want to do in real estate? Let's start from there.