Who is buying at the courthouse steps?

Question

Would those of you who are buying (or bidding) at the actual Courthouse auction, please share your (or someone else's) success story.

Dan Menan · Answer

FYI: In February, Countrywide conducted 201 Trustee's Sales in Sacramento County (ugh...).  Of those, 199 went REO, 2 were picked up at the Courthouse steps.

NOBODY is buying at the steps.

Example:  $400,000 purchase in '06.  1st at $320,000, and a 2nd at $80,000.  Now, the first in going to sale at $335,000 (includes past due stuff), but the asset has depreciated 25% (or more) to $300,000.  Often times, the lender is reducing the opening bid, but in this example (and I've seen this a lot) to around $280,000.  Where is the deal here?

Hmmm......hard to make a buck at the steps. Oh yeah, and in order to find the one diamond in the rough (out of hundreds) you have to spend countless hours researching the properties.

Dan in Sacramento
(916) 856-0026

Calixto Urdiales · Answer

James I say me and you take a road trip up to Kansas City and start investing, the two of us together can do some real damage  8)

Craig Williams · Answer

I have bought 10 properties on the courthouse steps over the years.  Now I focus on word of mouth and whatever my realtor can find me.  I have made a lot of money on each property when I got one.  Our area, Akron Ohio, has a sale every week and the lists are getting very big usually pages of homes.  The lists are four weeks ahead of time so you  have a good amount of time to drive by the properties.  By the time you drive by ten of them a week it takes a lot of your time and most of them will be cancelled or over bid on.  But there is always that one or two that you can seriously bid on.  You can usually get a good property if you spend the time.

Mitch Freed · Answer

Agreed.  I am starting to shift some focus to REO as well, but more in the bulk portfolio direction.  If you can get enough capital to buy a bulk portfolio, customize it to your area and the type of homes you want to buy (little to no renovation, 50% of the value, etc...) then you can do much better than grinding out short sales or trying your luck at the trustee sales.  With enough capital and a decent potential buyer network you could hit it out of the park in bulk REO.

Bruce M. · Answer

I have been to one court house steps auction.  Every property up for auction was postponed for one reason or another.  
However, I have found a few websites of trustee companies which publish the amount owed, the opening bid and the winning bid.  Generally what is owed is more than the property is worth.  And the opening bid is sometimes a good deal, sometimes its not.  When the home does have a winning bid, it is has always been the opening bid, at least on the 20 or so I have looked at.
One thing I have noticed, even those that are a "good deal" are not a fantastic deal.   I'm seeing REOs that are as good.  REOs have a lot of advantages over Trustee sales, such as paid taxes, no liens, and no tenants.  Also, REOs can be easily viewed prior to buying.  So I have been really questioning why I would incur the risk of a trustee sale when there are so many REO opportunities currently.

Chris Montgomery · Answer

Sorry for the delay.  There was a question above about how to finance the deals at auction.  Someone above mentioned the idea of using a line of credit.  That certainly works, though for most of us the lines of credit available are proabably limited to an amount that would only allow purchasing one house on occasion.

In our case we occasionally use a relatively small line of credit, but primarily use private money.   The line of credit is generally quite a bit cheaper than the private money.  We have a company setup as a limited partnership in which a few us us have invested some funds.  The company has discretionary control of how to invests the funds.  That's really the key to the auction, because at the auction, cash is king.  Hard money works well for pre foreclosures or in the case where you are pursuing one particular deal and can provide the details of that specific property to the lender.  However at the auction, most properties don't even show up.  Almost impossible to then pursue borrowing money against a specific property in advance because you don't even know if it will be fore sale.  As I mentioned before we do the research on a large number of properties, set a price that we'd be happy with on each of them, do our best to mitigate the risk, then wait to see what shows up.

At the March 08 auction we only purchased 2 properties.  Everything else that showed up either went back to the lender or was bid up by other investors.  The previous month we picked up 4 and probably could have purchased others.   That's one of the biggest auction challenges.  If you raise the money and then don't use it, you have to then return the money.  It can be a challenge to keep the money working smoothly.  Some months there are several good deals and some months it's pretty sparse.

Exit strategy is one of the key drivers of how much you can afford to bid at the auction.  We primarily fix and flip retail.   In that case we have to leave room for rehab, closing costs, taxes, holding costs, etc.   If we're bidding against someone who is looking for a buy and hold, we'll almost always be outbid.  A 15% to 20% discount to them may be a nice discount off retail.  If I'm trying to flip it we can't compete.

In other cases we've been able to buy houses and then immediately flip the property on to other investors.   This is an infrequent strategy that only applies to certain properties in certain areas.   When we do this we're generally willing to make far less as an absolute percentage.   We may make 10% rather than the expected 20%, but if we can do it in one month instead of 4 or 5 that equates a better annulied return.  The math works but it assumes we can then put the money right back to work, which isn't always possible.

We're a fairly high volume buyer so it gives us the flexibility to pursue a variety of exit strategies, but most of the times it's fix and flip.

We've seen the number of investors competing and the amounts they are willing to bid increase significantly over the last two years.  The stories of the huge profits of yesteryear, or even the recent stories I've read nationally of sales taking place with no one even there to watch don't apply in our central texas market, but then again we haven't seen the dropoff that people have experienced in other areas.

Account Closed · Answer

Speaking of cashier's checks and Portland auctions...

There is a local investor who has a great deal with the local branch of a large bank. He has a decent sized LOC set up so that he can borrow the money when he needs to do so.

When he wants to go to an auction at 10:00 he picks up cash in the form of cashier's checks. $200K to $300K depending on what he is after.

If it works out that he can not buy at a price he likes the bank takes the cashier's checks back without charging him for the use of the money. He just needs to get the checks back to him on the same day.

It pays to have a good relationship with your banker.

Mitch Freed · Answer

Hi Eric,

You are correct, there aren't that many people that go to the courthouse to bid..and the pre-foreclosure short sales may play a factor, but there are other factors in play.

I go to the courthouse maybe once or twice a week if there is a really good deal, which is rare..I'm talking at least 80k up to 150k in equity in the home.  It's rare, but they actually do happen more than you would think.

The investor that picks up 1 or 2 houses a year at auction doesn't have a chance to get a good deal that has equity like I talk about above...and that is because he/she will get squeezed out by a sort of "auction mafia."  Portland's investor street gang.

I refrain from really going into detail because i'm afraid they will reach into my bank account and seize my assets...just kidding.  But just for the sake of field research..I would recommend going to a couple auctions and watching what happens when there is a really good deal.  (and bring cashiers checks...you may walk away with more money than you came with...)

Veloz Zypher · Answer

Thank you austininvestor (Chris),

I have been on about 10 different forums looking for some feedback from someone doing basically the same thing we are.

Your post was very helpful.  While we don't have the volume you do (we only research about 100 foreclosures a month), the method we use in Alabama is almost identical.

We do the title research on approximately 100 foreclosures per month.  Around 60 of them are canceled; another 30 will have no equity and go-back to the lender.

Leaving 10 deals with actual bidders showing up at the courthouse steps.
Nine (9) of those will be bid up too high for any serious investor to make any money, usually by someone we never see at the courthouse again.

We did manage to purchase about 10 good deals at the courthouse last year.

Thanks again for your reply.

It is a little bit of a relief that someone doing more deals than us is describing basically the exact same method we are using for our courthouse deals.

Kinda reassures we are the right track, but it looks like we should be finding about twice as many deals.

Eric Foster · Answer

Very impressive! I don’ know that I have heard of many people buying 40 a year at the steps! You clearly have some good systems in place to be able to do that!

How are you able to have the cash to do your deals? Do you fix and flip? Refi cash back out?

Walk me through a typical deal start to finish…