Question for experienced courthouse buyers... Is it worth the risk/effort?

Question

I've been renovating and reselling houses for many years but lately I've been researching courthouse sales and attending some auctions to get more familiar with the process.  I've done some external research and read almost all the posts provided by @Steve Babiak, @Rich Weese (& others) and I see a LOT of opportunities for things to go very wrong (eg. @Eric Michaels $500k deal, etc).

My question is this..... Have you received a large enough reward from all your years of navigating the courthouse auction pitfalls to say that it was worth the effort and risk you took?

My current business runs smoothly and is very predictable because of the years I've spent refining it.  I'm glad that I spent the time to make it work.  I want to be careful with what I jump into and I want some level of confidence that a careful plan WILL result in a good return.

What's your "hindsight" with your auction buying?  Would you do it again? Do the rewards far exceed the risk?  .......was it worth it?

I appreciate your feedback!

Brian Burke · Answer

I've been buying on the courthouse steps for over 20 years...about 500 properties so far (and counting).  If it wasn't worth it to me I wouldn't still be doing it.

That said, this is a professional's game. The casual buyer is more likely to fail.  I've seen hundreds of would-be auction buyers over the years who have bought zero properties or one deal, never to return again.  The rewards may be high, but the risks are higher.  Doing volume mitigates the risks by covering the occasional failure with successful deals.

In my experience one in a hundred is a major problem with either physical issues or you wind up stuck in the middle of a lawsuit between the foreclosed former owner and their lender (I spent over $170K defending one of these).  If your hundredth deal is the one with the issue, no big deal.  If it's your first, or even your tenth, it could sink you.

During the peak of the foreclosure crises I was buying way over 100 homes per year and I was spending as much time with lawyers as I was with contractors. Call me crazy, but I wish it was still 2010.

Jay Hinrichs · Answer

@Michael Woodward

I have not done C H since 06 or so.. but I did volume like Brian did here in PDX.. its uber competitive in certain markets IE as @David W. states there will be a very few who dominate and buy the majority of the sales.. they will even bid up property to make no money if they know it will knock out a newbie.

NOw this is major markets. but the risk are real... for me I did not quite have as much lawyer interaction as Brian and that could be because my main years were 2000 to 2006 were the sales were pretty cut and dry.. But I did have one that cost me about 25k in legal fee's to untangle.. and for sure I lost money on some.. ( can't get in them and you find them destroyed) . However like Brian I was doing Volume here in 4 counties in Portlandia.. we did 75 to 100  a year... average profit was right at 15k a door net.  It was after all this work and effort and the intense competiion that I decided to take the 10 million we had ear marked for foreclosure and become a HML  made as much if not more and let others do all the work   LOL....

However if your in a smaller market you can mitigate much of this.. this is a very capital intensive business... it takes millions in the major markets to make any kind of money ... The person who thinks they are going to track a property or two and be able to buy them they are fooling them selves.. when you are in this business you must TRACK every property that is on the list in your county... Reason is you never know which ones will go.. If you get laser in on one property it has a high probability of not being sold then the others you were not keen on or did not track end up selling and your caught flat footed and not prepared to bid.

Brian Burke · Answer

Well, sometimes yes and sometimes no.  @Steve Babiak was right when he said that complex titles add to the layer of risk.  When I first started, if a title was more than just a deed, deed of trust, notice of default, and notice of trustee's sale I wouldn't bid.  This locked me out of anyone that owned multiple properties or refinanced multiple times.  Once I gained confidence in my title research skills and title laws I got more comfortable with the more complex titles.  Another red flag that I see once in a while is a borrower will record a bogus affidavit that says that they belong to a sovereign nation and are exempt from property seizure etc...these were being passed around by the foreclosure avoidance scammers and they are totally meaningless but give you an insight into the owner's frame of mind.

I've been involved in three lawsuits from former owners suing their lenders and wrapping me up into the suit in an effort to regain title to their homes after the sale.  The law in CA is very clear that the sanctity of the bonafide purchaser's title is protected as a matter of law but unfortunately there is no law that prohibits the owner from suing anyway and when they do you have to defend yourself.  Each of these suits has cost a lot but the biggest one was over $170K in legal fees (and still counting) and I've been stuck with the house for almost five years now.  There was absolutely no indication prior to the sale on any of the three that there would be problems after the sale.  It's like I said, 1 in 100 is a major problem and you just have to hope that your first deal isn't that 1.

Steve Babiak · Answer

There are several kinds of risk, so I'll try to give some input on risk. When you do the title search, some properties will have lots of recordings - things like deed transfers back and forth, multiple mortgages in place at the same time, subordinations, mortgage modifications - all of these sorts of things add complexity. Nice and simple ones (like only one mortgage at a time so you know it's the senior mortgage, and maybe some mortgage assignments) will have less perceived risk.

Newer construction can eliminate concerns about lead paint and asbestos. Public sewer eliminates concerns about septic failure. In general, these are not much different than when you buy through MLS or other non-auction purchases.

The condition inside is the big unknown of course ...

Of course, there is more to it, but in trying to keep the post short something has to be left out ;)

David Wurzel · Answer

@Michael Woodward

Since we can download all the information from both tax and foreclosure auctions in my county I did so for the past 3 years.

I then threw that into a spreadsheet and did a pivot table that told me that 90% of third party sales are successfully bid on by only 10 bidders.  This is over the course of thousands of properties.

I then dug deeper on the top three and saw what they were refinancing their portfolios for and knew I would never match a property they wanted.  I would be left with crumbs if lucky.

One thing good did come out of it.  Can you guess what that was?

Account Closed · Answer

In NC the process is very easy to research on line and in the smaller markets you can often find incredible deals. We have successfully been buying at the courthouse for years and the biggest key is research, research, research and use an attorney to do a quickly title search.

We helped a client buy a commercial structure that had been listed for $480,000+ and got it at the courthouse for $214,000 now it's been fully rented for years and makes a tidy profit.

Check out the trust attorney websites in NC for all the properties that are coming up for foreclosure that haven't hit the market yet.

Sarah

Joel Owens · Answer

Here in GA it's the first Tuesday of every month for foreclosure unless falls on a holiday or weekend etc.. Cash sale to the highest bidder from the outcry of the lenders attorney.

You have to find out if it worthless swampland, a storm drain, a first lien, second, or  a nice house with clear bidding on the first.

I have went to a few in the past but have not bought anything. The banks usually set very high starting bids to try and show they got full value. Nobody bids and it forecloses. Months later the banks sells REO for cheap. Another situation that happens often is the lenders withdraw the foreclosure at the last hour ( owner does a workout ) or the lender was seeing if an idiot buys a second at full value thinking they were bidding on the first. BK filing to stop the foreclosure is also common up to the last hour before bidding. I have even seen a person run to the attorney to tell them to stop the process on that property because of BK filing.

Even if they didn't stop the foreclosure sale would be deemed null and void because the BK filing happened before the actual foreclosure the attorney or the lender just didn't get the notice in time.

I might go again as it's ten minutes from the house in my county.

Steve Babiak · Answer

Before contacting the homeowner, talk to the neighbors. The stressed out homeowner is potentially a ticking time bomb ...

Michael Woodward · Answer

@Brian Burke. Excellent advice! Thanks!  I think I'll wade in slowly by targeting the simple ones first and I might also try to further hedge myself by trying to contact the current owner to see if they plan to walk away quietly or fight the sale.  It sounds like one of the key ingredients to problems is a disgruntled homeowner so if I can eliminate that side of the equation, the only people left to deal with are business people that don't have an emotional attachment.  If the homeowner wants to try to prevent the foreclosure, there might be an opportunity for me to get what I need and at the same time give them what they need.  In the end, I want it to be clean, smooth, and a win-win for both me and the homeowner.  That might be a pipe dream but it's worth a try.

Michael Woodward · Answer

@Jay Hinrichs    Thanks for your input!  You answered another important question I had about expected profits.  I know that profit will fluctuate a lot with specific deals but I wondered what the average was.  I'm happy with my current business model and I'm not looking to replace it but I'm looking for alternate methods to use when I've got my contractor covered up with renovation projects.  I'm in one of the smaller markets so hopefully I won't have to deal with the competition you had.  Good point about tracking multiple properties.

Question for experienced courthouse buyers... Is it worth the risk/effort?

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