Since I got into this business in 1999, my main focus has been on pre-foreclosures. As many investors that have worked in that field know that it is a highly competitive business. The TV infomercials paint a picture that is often times not accurate. TV wants new investors to believe that there are tons of these properties to be had and all you have to do is go to the auctions, bid on them and PRESTO! You have yourself a great investment property!
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Is it occupied or abandoned?
When a student of mine seeks my opinion of a prospective house, set to go to the auction, my first question is always the same…. “Is it occupied or abandoned?” What difference does it make? If it is occupied, all that you need to do is evict the previous owner and on you go…Right? Not always.
In the State of Texas, the average percentage of homeowners who are in pre-foreclosure, that have abandoned their homes is 15% (+ or – 2% monthly).
Do the math on this one. If a given County has 1,000 houses posted for foreclosure in a given month, then that means that about 150 of them are abandoned. So if you buy one of those at the auction, you can get started right away since you have full access to the house with the previous owners gone. You can wholesale it, if you like. Maybe you want to rehab it and then sell it? Some look to use it as a rental. The options are all there because there is no eviction needed.
Heed Caution When Considering Occupied Foreclosure Homes
This brings me to the story I would like to share. This is what happened to one of my students, after he bought an occupied house at the auction. The student, Bill, had told me a lot about the house he ended up buying. The problem was, Bill couldn’t give me any information about the interior condition of the house because the owner (before the sale) would not talk to him or let him see the inside. All of his numbers, etc., were nothing but projections to me.
I told Bill to offer the homeowners $1,000 cash if they can be out in a week. $750 if they can move in 2 weeks and $500 if they leave in 3 weeks. Guys, keep in mind, this is TEXAS! We can legally evict someone in about 21 days. If you are in Minnesota or California, it could take more than three months.
The homeowner refused all of his offers. I told Bill to go ahead and evict her.
Two and a half weeks later, he had won his eviction case and now only had to wait for the 5-day appeal period to expire & he expected to have her out in a week.
That is when all Hell broke loose.
Bill called me on the phone and he was frantic. He told me that the previous owner had appealed the case. That was a first for me. In all of my time in the foreclosure business, I had never heard of anyone appealing after the judge had ruled against them. It was pointless…Or so I thought. In Texas, after the judge rules in favor of the investor (or landlord), a tenant has 5 days to appeal it to the County Court…BUT…In order to do that, the tenant is required to post a cash bond. The amount is supposed to be equivalent to two months rent (or two mortgage payments), plus any court costs. In Bills case, the amount was about $3,300.
If any of you reading this don’t see the stupidity of the tenant, let me tell you why it is so unheard of for a tenant to appeal. They CAN’T WIN! No homeowner that has been lost their house to foreclosure, will win. All the appeal will do is delay when they have to move. The previous homeowner had to put up $3,300 for the right to stay in the house for a month or two longer. Once they lose at the County, the $3,300 is gone and they have to move.
The reason Bill was beside himself (in addition to the previous owner appealing) was because they DID NOT HAVE TO POST THE CASH BOND! Bill said that they had filed a “Pauper’s Affidavit” and asked me what it was. I had no idea. I asked around and no one could tell me what it was or why the owner didn’t have to post the cash bond. I finally called a Law Professor at the University of Texas and he said the following:
“Ah yes! The Pauper’s Affidavit! To put it simply, this person was supposed to post the cash bond but, the Pauper’s Affidavit allowed her to side-step it because she has the right to a fair trial. If she can’t afford the bond, then it would seem she wouldn’t get her fair trial.”
Here is the best definition I found for what a Pauper’s Affidavit is:
“A pauper’s affidavit is a sworn statement stating a person does not have sufficient funds to pay court costs for the filing of a new civil case. A judge must enter an order determining poverty.”
When the case reached the County, it was ugly but it was over fast. The County Judge was all over the previous owner. He wanted to know why she thought the outcome would be any different with the County Court? He told her that she lost her case in the JP Court and unless she could tell him one good reason for her appealing her loss, other than just to stall moving out, her quest ended right there!
And so it was over for Bill. Sort of.
Even after going through all that hassle, she refused to move and it took a Writ of Possession to finally put her out of the house. THEN…When Bill went to the house the following day, he discovered the A/C condenser had been stolen. The police found the unit…Two blocks away…In the woman’s PICKUP! Her legal problems continued from that point but, Bill finally had his house!
From the date he bought the house at the auction, until the day he gained legal possession of the property…Just under FOUR months had passed! Let me remind you that he paid cash for the house and having $100,000 sit dormant like it did for that long, really hurt his bottom line. Just to gain entry, was four months! After all that headache and financial burden, Bill came to me and asked, “Hey Jim, what could I have done differently?”
My answer was painfully simple… “Buy an abandoned house, Bill!”