Thinking about going to a foreclosure auction- what are your best tips?

Question

Howdy Bigger Pockets Nation!  I am looking for  your best tips for a foreclosure auction.  I am just wrapping up my 1st multi family rehab, and found a foreclosure going to auction in my target market.  What is your best tip for foreclosure auctions?

Marcello Di Gerlando · Answer

Hi William,

I purchased two properties this year at auction in Colorado, below is how I go through the process.

Caveat; Colorado is unique among all 50 states in that the Trustee of the county, holds in trust properties that are in default, when the time comes the trustee holds the auction where the bank sets the starting bid price. All properties are sold, as is, where is, cash only. Buyer is responsible for everything; evictions, liens etc

Consult with a real estate attorney to understand what you are getting into, there are traps that could bankrupt you.

Here is how I handle things:

• 1)List of properties going to auction comes out once a week. I have 22hrs to complete my due diligence and do a drive-by on properties that meet my criteria.
• 2)I do internet research on the properties – Building Dep, Zillow, County assessor, Alpha listing (known meth labs). My research takes about an hour and I often select about 5 or 6 properties out of about 20. If something looks promising after I do my beer math I then jump in the car to view the properties the best I can.
• 3)I do my drive by. If I can get in I will. If I like any of the properties I will call my local title company secretary and order an O and E report, Owner and Encumbrance report. I always call before 3pm this way I have the reports by 5pm. O and E’s give me lien and tax data and shows me if the sale is even the first mortgage. I will also call my realestate agent to have him double check ARV’s and pull any additional data on the property and the surroundings.
• 4)Go home and run my numbers tight, over and over again. I over estimate where I can to give me a cushion. I set my price the night before, I always know my ceiling. At this point I have narrowed down which property I will bid on. More often than not I am down to one property.
• 5)In the morning I draw a cashier’s check for my max bid. Attend the auction and join the fray. Lots of bidding strategies not sure how useful they are. However, I will often hang back if there are multiple bidders and bid when most people drop off. Hopefully at this point I win the bid.
• 6)After the purchase there is a redemption period of 9 days in Colorado, where as any junior lien holders can file an intent to redeem. Meaning a junior lien holder has the right to purchase the property from me at my cost plus interest and expenses.

Below are some of the most critical things I consider before I buy; you may want to do the same, this is not a be all/end all list. Know what you are getting into.

• 1)Check Alpha list or its equivalent in your area. Know if you are bidding on a meth lab. Impossible to resell. Don’t do it. CHECK IF IT WAS A METHLAB
• 2)RUN O& E REPORT or its equivalent in your area. It costs me $5, I hear in NJ they run $100. You have to check for liens to see if there are any financial encumbrances associated with the property. You could buy title insurance. I don’t. You could also purchase the property with the liens and pay the liens. There are strategies in paying off liens. You could offer the second/third lien holder pennies on the dollar. I haven’t done that, I simply stay away.
• 3)Don’t ever over bid. Run your numbers real tight. BP has several flip calculators in the file resources. I personally don’t care for BP’s online version. DON’T OVER PAY.
• 4)Understand the REDEMPTION process. States have different laws in this regard. I understand that in some states it could take up to a year or more for the title to vest in the buyer’s name. There could also be issues with you being able to resell within a certain time frame 30, 60, 90 days check with your attorney.

Bottom line is you have to do your due diligence and homework, speak to a good real estate attorney about the auction process in your state. It will pay off. Good luck!

Peter Sanchez · Answer

People get very competitive.  They've done studies where people overpay for stuff on eBay during an auction, for instance, paying way more than you can buy it elsewhere.

Don't get caught up in the competitive bidding.

Look at the property and the comps in the area and then decide (without knowing what other bidders think) what you think it's worth to you.  Write it down.  DON'T bid above what you wrote--no matter what!

Wayne Brooks · Answer

Title search, know what/if any liens, debts, property taxes you'll be liable for if you "win".

Ignore that @Ron S. guy, he just gets sarcastic/goofy on Fridays.  You know, one of those "banker's hours, 9-5'ers" who works Soooooo hard, and just gets gitty on Fridays, with the weekend ahead.  Unlike myself, of course:)  Plus, he's one of those "left coasters" too.

Bill S. · Answer

@Steve Babiak if there is equity I can almost certainly guarantee that there are folks pursuing the 2nd. If there is equity even with the 2nd they will buy out the 2nd and use their position to take out the 1st. It is very competitive. The only way to scratch out a deal is to get a 2nd to take a reduced position or to have thinner margins than the regular buyers do. This can work if you have good insider knowledge of the property that would not be available to the general public.

Know this, the regular folks will make you pay. They know who are the regulars and when they see a newbie they assume that the newbie either doesn't know what they are doing and will over pay or the newbie has insider knowledge. They have been known to bid up the price on newbies just to protect their territory at the foreclosure auction. Supply is extremely low. I know a number of wholesalers that are door knocking. The likelihood of a foreclosure deal making to the sale with equity is probably less than 1 in 100.

Steve Babiak · Answer

@Bill S. - no doubt that when redemption rights exist post-auction, it is possible for the junior lien holder to redeem (I.e. they can); but just because they can does not mean that they will, hence my question regarding how frequently that actually occurs.  I would expect that the junior lien holders would attend the auction so as to bid up if there is any bidding action so that they get paid something without being stuck with the REO.  But maybe I'm wrong in that thinking and the juniors pay the winning bidder and take REO on via redemption.

Bill S. · Answer

@Steve Babiak junior liens can redeem and some use this as a strategy to acquire the property.  It is good to at least feel them out or take them out so you actually get the property.

Steve Babiak · Answer

So there are some items that I left quoted in this post that are confusing and / or contradictory to a degree.

Assuming that the bidder was budging on first position lien, then the junior lien holders become extinguished (after the redemption period) - or at least that is what I would expect. So the only reasons to be negotiating with junior lien holders are for cases where the junior might be tempted to redeem and for when the junior will not be extinguished.

So Marcello, have you ever tried to examine how often the junior survived the foreclosure or redeems? Because I suspect that you would find that uncommon, and hence you exclude yourself from some potentially viable properties.

Steve Babiak · Answer

Lots of good tips are collected in the links found in this next thread:

https://www.biggerpockets.com/forums/41/topics/689...

Marcello Di Gerlando · Answer

@Bill S. You are correct sir.

Properties that have been professionally mitigated for Meth do not have to be disclosed and can be resold.

However, with the margins thin as they are at auction, I would personally, not incur that additional expense and risk.

Jay Hinrichs · Answer

@William Collins  the main take away is there will and always be the locals who have done this for ever.. so your always up against very stiff competition..

The due diligence the fellow from Colorado detailed we can get in a 3 minute call with our customer service at our title company for free.. including a title date down.

I understand on the east coast in markets that are attorney driven title searches have to be done physically.. we are blessed with everything on line and we basically get everything this person said in one quick call

In addition on the west coast you can subscripe to Property Radar and get all this info for 50 bucks a month at home and at your computer.

ONe reason west coast forclosrus are so competitive when your bidding against a stay at home mom that brought their 2 year old in their stroller you will understand

Thinking about going to a foreclosure auction- what are your best tips?

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