What are good Terms for a pre-auction property?

Question

Here's the situation:

A nice house in a great neighborhood is being foreclosed on. Auction starts in 2 weeks, starting at $220k. Since it is a hot RE market, I suspect it would fetch much higher -- comparable auctions have! I estimate the amount in default is somewhere between $280k-300k. Home would likely fetch $450k on MLS ($500k after renovation) -- I'm more interested in buy-and-hold. The owner has declared bankruptcy, is supposedly trying to save his home via a HAMP modification but that's hasn't moved fast enough to stave off foreclosure. It's obvious this family has fallen into hard times. They're going to lose their house, but from my perspective I'd much rather see them keep the 5%+closing costs (and apply that towards 3 months rent from me) than have an online auction house pocket it.

After the tenant left, the house would easily fetch $2500/mo -- and significantly more from AirBnb due to location. Property taxes are low, so that's around a 7% cap rate. The house needs some cosmetic work but appears to be a reasonable shape (obviously I would insist on inspection).

This is significantly more complicated than my last deal.

What would a typical terms for such a sale look like? Would it be between myself and the owner, or myself in the bank? Is there any deal I can make that can stop the auction? If I offer terms, should I hire a lawyer? What are some common pitfalls?

Thanks for advice.

Ron S. · Answer

You have some flawed assumptions in your analysis.

First - You wrote, "I assume they're either not yet under BK protection -- or filed long ago, didn't make their BK payment schedule, and got foreclosed on anyway". If that's the case, this is a moot point as they already got foreclosed on and the bank owns it or a third party owns it so, I'm thinking they didn't get foreclosed on if the auction is two weeks away. If perhaps they did get foreclosed on and the bank is using an Auction.com type of site to sell the home, you are dealing with the wrong parties and wasting your time. If they have a BK attorney, and they filed BK, the lender cannot schedule a sale unless many months of no payment to the BK trustee has occurred so, something isn't matching up here.

Second - You cannot be in consideration for HAMP and have a foreclosure going on at the same time. It's Federal Law and the penalties for dual tracking are significant and swift. So, my guess is they already got denied any HAMP modification if there is an auction date in two weeks.

Third - You said the owner declared bankruptcy. Well, Like HAMP modifications, Federal law prohibits the lender from taking any action if the borrower is subject to bankruptcy protection so, if they did file bankruptcy and it was not dismissed, my guess is the lender moved for relief and was granted relief to proceed with foreclosure. If that's the case, the only way you are going to get this is at the courthouse steps on the day of auction as there is nothing the seller can do to negotiate with you due to the short time of the sale date (I suppose you could get into a five day escrow and pay their loan off before the sale date, but is that probable?)

As to what you can do...nothing short of paying the entire loan off, and quickly. You can hire an attorney but you might as well grab a bum off the street and hand them the money you were going to give an attorney as they aren't going to be able to do anything for you to stop the foreclosure.

Final two cents...forget assuming the loan. No one is going to let you assume the loan. You'll find many posters on this board that say they do it all the time but, they are either lying or haven't been caught by the lender for the illegal transfer...yet.

Nicholas Bregenzer · Answer

I had a question on this topic too. I'm looking at properties that are going up to auction being sold on the courthouse steps in the next couple weeks. Pretty much all of the properties are being foreclosed on by the banks. I would like to buy them before the auction because they get bid up so much. All the properties I'm looking have equity in it already and I would be able to make a nice profit if I just paid the amount owned +CC. I would like to go around door knocking asking the resident if they would sell it to me and I would pay cash for the balance due plus some extra to help them move on. Is this possible? how would I pay the bank the balance due and secure the property in my name? Someone above said that might be illegal is that true?

Wayne Brooks · Answer

@Aaron Knoll  All the misinformation/wishes/desires from the homeowner aside, you need a couple of pieces of basic information.

Is this upcoming auction the foreclosure/trustee auction (which means the borrower still owns it) OR is it a REO auction (which means the bank already owns it).  I would think it's the foreclosure auction, if the owners are still trying to save it-even though I've seen some delusional owners who thought they could reverse an auction.

What is the actual judgment amount, if this is the foreclosure auction?  I'm not familiar with your state's nonjudicial foreclosure procedures, but that "opening bid" may not be the total owed, or even what would be accepted to let the property sell to a third party at the auction.

In most places you can find this information online from your county web sites, or at least in person looking at the files.  Often times the owners are the least dependable sources of accurate information.

IF this is the foreclosure auction, you need to be able to pay off the entire balance/judgment due, plus whatever the seller agrees to, prior to the auction.

Aaron Knoll · Answer

Hi Ron,

Thanks for this.

I think you're right. If the auction has been scheduled, it de facto belongs to the bank and there's nothing I can do other than win the auction. I'm not sure what the occupant's situation is, and did not pry (mostly out of respect). He mentioned HAMP, and only said he would call me back if things did not work out with his attorney. But by then it would probably be too late anyway.

It would be great if I could have the owner sell the home to me for X which would be the outstanding balance of the mortgage plus 5% (assuming those numbers work), do the title work and pay off the bank myself. But obviously that won't work if the bank owns the property. Does that approach only work for pre-foreclosure properties?

I'm learning this as I go, trying to figure out what sort of deals can be made with underwater owners.

It sounds like I need a lawyer and a friend at a title company.

William Hochstedler · Answer

@Aaron Knoll

I have seen opening bids posted very early down there and haven't spent much time on it.  Could this be from an earlier sale date and left up on the site?

If you do contact them, get a loan authorization form from them so you can find out what's really going on with the mortgage.  Try to use the lender's form.

Assumption is probably not the term you are looking for.  Usually we refer to an assumption as a formal process with the bank where the current borrowers are taken off the loan and you are added.  I've never seen this happen when the loan is in default.

I think you are talking about purchasing the property subject to existing financing or sub2.  This means that you would bring the loan current and make payments on the loan.  This is why the reinstatement fee is so important.  You would have to come up with that.  There are other risks to this as well including secondary liens and due on sale.

As you intend to purchase (even subject to) you would be on title and assume the equity depending on the purchase price.

What title work have you done?

Aaron Knoll · Answer

Thanks William,

I just spoke to the borrower this evening. They said they're meeting with their BK attorney to prevent foreclosure but will be in touch with me if they can't work it out. I had to read between the lines but I suspect this is a strong possibility. I assume they're either not yet under BK protection -- or filed long ago, didn't make their BK payment schedule, and got foreclosed on anyway. If they do get in touch, I'd find out the payoff, reinstatement fee, etc. $220k is from the auction site.  My estimate of $280-300k is based on starting bids in the past for homes on that site, and my informal, non-committal conversation with the borrower.

How does assumption of a mortgage work? After I purchase it, who will be on the deed? What happens to their equity / interest in the house?

William Hochstedler · Answer

Hi @Aaron Knoll

Are you talking to the borrower?  How do you know the opening bid two weeks out?  Do you know what the payoff is?  How about the reinstatement fee?  What's the status of the BK?

What are good Terms for a pre-auction property?

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