Sean - ? What are the risks when purchasing at Trustee Sale? ? I have heard that there are regulars at the auction that will bid up the price to push the price up to newcomers - How true is this? ? BOB
I have personally “bid up” newcomers so I absolutely
know it to be true. Even after having bought 150 properties, I second
guess my self everytime I “win” at foreclosure auction. Basically
wondering why I was willing to pay more than everyone else. But as long
as you stick to your numbers and don’t let anyone get under your skin
you’ll be fine.
Here are the primary risks:
- No title
insurance. Two primary issues here. a) that you missed something in
your title research that you have to pay for - if a title company
misses and you have title insurance they have to pay. b) someone makes
a claim (even a bogus claim) that you have to pay attorneys to defend -
again if you could get title insurance they would have to pay to defend.
- Typically no ability to do a thorough inspection of the property. I
had one house that the public records said was 2500sf. It used to be,
but after a fire they only rebuilt it to 1500sf, making it worth less
than I paid. Had we been inside (or frankly even paid more attention
from the outside) we would not have made that particular mistake (also
circling back - it happened to be in an area that was new for me and
the local pros bid me up in an effort to bury me and chase me off -
unfortunately for them I tend not to quit after I learn an expensive
Sean - ? Thanks - very helpful - I should go to a couple and see what they are like. ? Does the Bank send a representative? ie if 400k is owed on the 1st and the 2nd is wiped out - who sets the minimum bid? If the bank doesnt want the property they can set a lower minimum and let the market forces bid it up to its value. ? I have a shopping center investment that is rolling in the next 3 months and I am wondering if I can make more buying some houses at auction. Quite frankly, I could use the challenge - something more stimulating then grinding w/ Banks to help Sellers. I would still do that, but, feel there should be some other opportunities. ? So, if the banks sets the price at 300k, say as a minimum bid, then it gets bid up to say 320k, then the bank has no carry and further downside risk and it is off their books. Seems like win-win. ? The occupant now becomes a tenant and money should be budgeted for eviction, carry and repairs… ? Any suggestions on which auctions would be best to attend? ? Thanks again, ? BOB
Bob, I would suggest starting by doing some paper trading. Find a few “auction” properties that look interesting and do your due diligence. Attend the auction and see what happens on the bids. Also go back in time using our track feature, and find some that sold at auction long enough ago that they have now been relisted or ideally resold (say 4 to 6 months). Then do a proforma on those and see if you like the results. The foreclosing bank always places the first bid, and they can discount it below the amount owed. 2nds occaisionally show up to protect their loan but have to bid at the auction like anyone else. Yes, after the sale the owner becomes the occupant, though I would suggest trying to do cash-4-keys rather than eviction when possible. Also right now there are so many properties you may just want to focus on vacant properties and avoid dealing with occupants altogether. As for which auction, I’d start with the one closest to home. Once you get the hang of it, you can use out track feature again to compare areas and specifically how much the banks are discounting opening bids.
Sean - ? Sounds like with great information you can have great results. ? Does someone always show from the Bank that is foreclosing? if so, their first bid is clearly important. The more knowledge you have the more you know which Banks want to dump property. That would be a great first step. The next issue is dealing with the “pros” - its like going to a a poker parlor where you are a rookie and the experienced players know all the angles. ? How much cash would you guess I would need to buy and flip 1 home per month and make an average net profit of $40,000 +/-. I own a real estate, lending and an escrow company and am very comfortable with “reading” a market. ? For example, I just reviewed a condo development in Aliso Viejo - there is one active with 4 pending and 4 closed sales in the last 3 months - clearly a strong market dynamic. Conversely, in Lake Forest, I just reviewed a condo development with 12 active homes, 2 pending sales and 3 sold in the last 3 months - clearly a weak and deteriorating market. I presume the “pros” know all this and this data?would affect the spread needed to make these work. And this doesn’t take into account the forward pipeline that your site tracks. ? I presume it isnt too late to get into the game - There appears to be another 12-18 months of strong trading that will take place to fully resolve the credit issues. Even though there are signs and stability and even strength in certain areas, we can’d have growth until this current wave of problem loans are worked thru. ? BOB ? ?
I personally think you are fine on timing, this thing has some real legs and isn’t going away soon. I wouldn’t worry about the other bidders. Worry about getting your research right, and then just stick to your numbers and don’t get caught up with what anyone else is saying or doing. The bank that is foreclosing doesn’t need to show up, they place their bid, referred to as the “opening bid”, through the trustee and it is simply announced at the auction. As for cash it just depends on your hold time, which in turn depends a lot on the property and market. If you stick to vacant and your are quick to do your rehabs and market aggressively you can probably flip I’d suggest using 120 days as an estimate. Given one home a month you need enough cash for 4 homes, though I’d recommend 5-6x to give you some cushion. Nothing worse than to buy some home you only sort of wanted with the last of your cash to have the one you really wanted sell cheap while you are forced to the sidelines. I’d recommend using a credit line for pulling checks to take to the acution. This allows you to keep your actual cash invested somewhere liquid for at least some return in the mean time. If you pull and return a cashiers check on the same day, there is no interest charge (though you’ll want to build a relationship with the bank to avoid cashiers check fees).?SeanMon May 26th 2008 at 11:29pm
Sean - ? Great info again. Another great thing about investing like this is when the market starts going up again (4-6 years) there is real money to be made when prices are increasing. In the last up market I was completely focused on helping my clients buy, sell and finance homes that I didn’t invest. Seems like large opportunities in the up market. ? In the down market, it is all about buying the property right. Are their any quick and dirty guidelines that you use? I am not going to run Excel spreadsheets w/ IRR’s but will use simple math - If I purchase a home at auction for $400k and sell it?for $500k, that is 80k gross profit.?Subtracting about 15% for carry, getting property ready, selling costs, etc, then that is only 5k profit… What am I missing? That purchase price?would be a 20% discount from what the home would realistically?sell for in this market. So, something has to give — Is it realistic to be able to get a 30% discount at auction? That would put the net profit up to $55k and if things worked out perfectly another 15k in expenses not used and the perfect storm would be $70k on that deal. However, realistically, with cost overruns, market conditions, constrained financing, etc I would not be expecting windfalls, although it would be nice. ? I can see how a review of the past auction prices relative to what the homes sold for retail would be a good indicator on what the Banks are willing to sell for. What discount from a realistic sales price would you target. It seems like lots of risk, so the return would need to be pretty strong. Also, I can leave my money in a shopping center that has returned 50% in just less then 3 years on a preferred return and I didnt do any work. If I had not elected the preferred return, then I would have received closer to 100% return. ? In order to keep 5 homes going at one time, it appears I would need about $2 - $2.5 mil as peak funding. How much money do the “pros” have out there? Are they working with 100’s of millions? What do they do with the properties when they acquire them? I was under the impression that here in Orange County, there is a band of 8 or so “pros” and there is definately lots of professional courtesy and oligopoly going on there. ? Sean - I appreciate your sharing your experience and insights. Let’s get together if you are in Orange County. If you dont make it down here, then I’ll need to fly up upon closing my first profitable transaction. ? BOB
I’m the son of a logic professor and a software engineer, so I really don’t use quick and dirty assumptions, I pretty thoroughly research every deal I do. I’ve averaged around a 55% annualized return on capital before office expenses investing in foreclosures. Harder to do now than a few years ago.? I think $2-2.5M would put you right in there with many of the top pros. There are certainly a handful with more, but there are certainly some working with less (they tend to focus on building wholesale buyer networks they can very quickly flip to). The professional courtesy thing is fast disappearing due to more information being available. With sites like ours it is really easy to watch the profits around the state, so when profits get too big in an area, newcomers show up and competition tends to increase until profits return to reasonable levels.
Hi Sean. Is 55% annualized a very conservative number? My partnership has purchased 2 properties in California at auction. Paying 75k for the first and sold it for 130k, and just paid 75.5k for the 2nd and expect to sell it for 120k. After all expenese we expect a much higher return annualized. I would hope we don’t have unrealistic expectations. We expect our returns to be in excessive of 100% annualized since it is taking us less than 3 months to turn them over. Less than 60 days on the first one. What am I missing??mstarSat Oct 10th 2009 at 6:23pm
mstar, Other expenses to account for may be… cost of your funds (if you borrowed) past due property taxes from ex-owner utilities (power, water, trash service) un-paid utilities from ex-owner building permit fees pest inspection and whole house inspection fees septic inspection re-hab/repair costs landscaping phone and gas insurance real estate commissions title and escrow fees land survey costs (what have I missed?) You no doubt know most of these expenses but some folks fail to accurately account for all of them (and others). You may find your averages (after doing a number of transactions) may be lower than you hoped for. Let us know!?bukzinSun Jan 31st 2010 at 10:44am