Purchasing Property BEFORE Sheriff Auction Tips?

Question

A property that I've been following in pre-foreclosure for a year now has a set date for a sheriff auction in about 2 weeks. I've located the lender (out of state if that matters) and contacted them but I'm waiting to hear back. I'd like to purchase this house BEFORE it goes it auction. What are some good negotiating strategies to acquire without giving up too much?

ARV: $380,000

Est. Repairs: $75-100K

I'd like to get it for ~$200K

Wisconsin

ARV: $380,000

Est. Repairs: $75-100K

I'd like to get it for ~$200K

Wisconsin

Jay Hinrichs · Answer

@Elizabeth Wilson is correct without a sign permission slip from the owner trustor/mortgagor you wont get any love from the bank.

this will go to sale and you need to be prepared to bid.. is there a right of redemption in WI?

you can try to buy the note but same thing one of note buyers with no contacts at the servicer or bank will be wasting their time.

also remember many times once it comes back on the market as an OREo you get a better deal

two years vacant this thing could be totally under water money wise..

lastly your spread is too close.. you will not do well paying 300k all in for a 380k flip  lucky to make 20 to 25k on that deal.. sure you want to take on that big of project for that kind of money

Jay Hinrichs · Answer

@Fred N.  Ok blew that off the top of my head but lets pencil it out and see how close I was

300k all in..  30k of equity  your cash let say.

270k HML  ( very few can borrow from banks for rehabs unless they are doing a 203k then that changes things dramatically) but assuming a flip for profit.. as he did not mention until later in the thread the rest of the story.. ( Paul Harvey)

I am going to round off here

Now 270k  3 points  =   8k   maybe you get it done for 2 but maybe your new and its 4 points especially in your NJ market which tends to be very expensive for HMLs

12% interest could be 10 could be 14..  270 X 12 = 32,400 for the year  pretty hard to do a 100k rehab start to finish plus sell and all any less than a year but could be but lets use a year.

sell at 380k  6% sales costs = 22,800  but maybe your  your own agent and its only 3% but for most its 6

escrow fee's to buy  2k  escrow fees to sell 2k  = 4k.

Utls  say 200 a month that's a wag  for  2,400

tax's I think WI is pretty high and I know NJ is  so say 10k for the year.

so what do we have

300k all in

23k to sell

4k  fees

10k taxs

2k  utls

1k  insurance

32k   interest

8k  points

grand total 379k..  so lets say I am off by 20 to 25k too high and that is your profit.. or you break even or you lose.. Unless of course you pay cash and have no interest carry then you make the money you would pay a lender  40k.

Jay Hinrichs · Answer

Ryan... if there is Mortgage insurance on the loan it will go out at full credit bid..

your asking if they will drop bid.. it happens but not as much as 10 years ago when it was quite common

a vacant home in WI for 2 years could be in pretty rough shape.. I would never bid on this if I could not get in it.. and I would break into it if I had to.. I know not legal but I am not going to risk 200k or more and not know.. I would take the chance on trespassing..

John Franczyk · Answer

Assuming that the loan is FHA-insured (as that vast majority of mortgage loans at that number are), the lender will simply make a bid at the outstanding loan balance and take the house into its REO portfolio. The lender will then shift it to HUD and collect whatever insurance proceeds it can collect. The lender won't lose any money here and it's highly unlikely that the lender will respond to another bidder that is coming in with a lowball bid 2 weeks before the auction.

I hate to be cynical here, but the mortgage lending industry is set up so that losses are fobbed off on taxpayers through FHA insurance and HUD programs. I just went through a big analysis that touched on this on a house I wanted in Milwaukee. The house had not been updated in more than 50 years and the owner recently passed away, but the house is subject to a reverse mortgage. FHA reverse mortgage rules and regulations throw a monkey wrench into the whole process of trying to get the home for a price that reflects its true current value (and not its ARV).

When the lender made the reverse mortgage deal, it got an appraisal on the house that was easily 80% higher than the real market value of the house.  That allowed the lender to give more money to the owner at that time, but the principal balance of the loan has since ballooned to at least $25,000 above the real current ARV of the house. The reverse mortgage rules are such that the lender will now just take title to the house, dump it into a HUD program, and collect its losses from FHA insurance. The saddest part of this is that the house will sit vacant for 12-24 months while the process plays out.

Move onto the next deal and don't try to fight the process here.

Jacci Konkle · Answer

My pleasure!  I also saw you were hesitant to get in contact with the homeowners.  I understand that fear, and it's easy to say "just get over it and make the call", but not everyone has the confidence to do it when they aren't 100% sure of what they are asking for or offering.  The next time you run into something like this, let me know (or anyone else who is comfortable with short sales or working with underwater sellers), and I'm sure you can get the help you need!  I do 3-way calls to help people with the first ones all the time so they can see how easy it is.  It's really just a bunch of questions and letting them talk and then sharing a few solutions for them...some of which will also benefit you.  They're just people and they're scared too :-)  The BEST day you will ever have in this business is the day you close a deal where you really really helped a person who was sinking!  I usually get huge hugs and lots of tears at those closings and I'm high for the rest of the day.

Elizabeth Wilson · Answer

@Ryan Biankowski - Honestly, just call them.   We've gotten the full range of responses.  The worst thing that can happen is they won't want to talk with you.  There will be your answer.  and you will have to bid on the house like everyone else at the auction.   From my experience folks in pre-foreclosure tend to either be in denial or don't care about being foreclosed on.  We actually quit marketing to this group because we got zero responses -even with door knocking.

The only way you will get to the lender is through the owners.  Go for it!

Look forward to hearing the results!  Good luck!

Elizabeth Wilson · Answer

@Ryan Biankowski - Have you talked with the home owner?  Unless you have permission from them, you probably won't hear anything from the lender.  That has been my experience and I'm pretty sure they are legally bound to that.

Jimmy Dudley · Answer

You waited a long time. I admire the persistence. You can always use tax records to find owners. Then reach out as soon as you are interested. The worst that can happen is they don't respond. At best you have a lot of leverage and the home doesn't sit empty and decay.

Ryan Biankowski · Answer

Thank you Jacci!

Jacci Konkle · Answer

Ryan, I agree with everything that has already been said about the property.  At this point, just continue to watch it and wait for it to come onto the MLS for sale from the bank.  I highly doubt anyone will bid on it at all...unless they are crazy.  Once it comes out, you will be able to purchase before investors because you plan to live in the home.  If there's a first look period, you win!  That gives you a proper opportunity to inspect the property and bring any contractors in that you might need to bid on mold, foundation repair or other special items.

Now, that being said, next time you are trolling a property for over a YEAR, take steps early to contact the homeowner and try to work out a short sale helping them AND you in the situation and keeping it from the court house steps.  That $360k the bank is asking includes all the years of penalties, extra interest, taxes, property preservation, attorney fees, etc....  likely you could've worked a nice deal a year ago and done it with permission to inspect the home first. When homeowners truly understand how you can help them, they generally jump on board to work together with you.

My 2 cents....

Purchasing Property BEFORE Sheriff Auction Tips?

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