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Question

I'm a somewhat recent grad making a fairly decent income.  Was planning to save up over the next 6 mos to a year to purchase a home (that will eventually be a rental property).  I know some people that I am very close with that have access to a good amount of money. Here's my question:  Can I locate a home that is being auctioned (ideally it would be a really good deal, of course), these people are willing to buy the home at auction then turn around and sell it to me.  I then would refinance and give them their money back plus 10%.  Is this a good idea?  Have you ever heard of someone doing this?  Is this even legal or just completely not a good idea?  Any input you have on something like this would help a lot.  Thanks!

William Hochstedler · Answer

@DB Brooks

Yes.

This is a great method investors use to acquire real estate.

Instead of having your people buy the house and sell it to you, have them act as a lender.  Search BP for (private money, BRRR, and hard money).  They loan you the money to purchase the property secured by a trust deed and note (provided Florida is a lien theory state).

You force equity thereby increasing the value.  Then refinance with institutional financing (a bank) to repay the private lender.

This method is also used in flipping.

Before buying a property, make sure you talk to an institutional lender to make sure you qualify for the take out loan and that it's structured properly for an eventual refi.

Welcome to BP!

Jill Patton · Answer

Since 2012, I've purchased more than 200 houses in Florida for a publicly traded REIT, here's what I've learned....

The best deals are on the local county site.  Once the auction is over, you know if you've won or lost.  And, there's no buyer's premium and no contract to sign.  You receive a CET (certificate of title) which is the same as a deed but issued from a courthouse sale.

The third party auction sites (i.e., Hubzu) have detailed (and often confusing contracts) that are different per lender.  So, you'd need to read and understand the contract BEFORE the auction which means reading several of them.  And, they protect the lender NOT you.

However, the benefit of buying from a third party is that you can usually view the houses beforehand.   And, you usually can't do that with properties sold at county auctions.

And, if you're buying at auction..... make sure you run title work BEFORE the auction.  Or, you might get caught.

The other big risk is estimating the repair value correctly.  I've had friends who bought a property at auction without viewing the inside, and when they finally got in - the house was fully gutted - only four walls.  And, you can also have an inspection before the auction but still have the expense of repairing a broken pipe under a slab foundation.  Auction properties are notorious for hidden repairs (more so than traditional sales).

If someone is willing to purchase the property at auction for you at a specified price, and guarantee clean title, and only charge 10% of the auction price, it may be worth it.

Scott England · Answer

DB

I am going to go against the grain here and say...no, I wouldn't do it.

You are a recent grad with a decent income and you want to buy a house to live in for a while and eventually rent it out?  Awesome.  go find a house (or if you can manage it, a duplex) that you like.  Go online and find 2-3 lenders to start working with (preferably one regional bank, one local bank and one online lender).  Interest rates are stupid low right now and you can lock in a 30 yr fixed.

What you are proposing is way too complicated for a first transaction (IMO) and has too many unknown variables.  My suggestion?  Take advantage of the interest rates and terms of the loan you can get, find a nice house that you like and move into it.  Then, in a couple of years, find a complicated deal to get involved in and rent that one out.

Aida Sevilla · Answer

Hello,

Here are two good websites you can use to buy property at a auction

www.hubzu.com

www.homesearch.com

That is a great way to start buying real estate. I lot of investors use the method. Good luck :)

Account Closed · Answer

DB Brooks

if you are coming into some money as you say, there are lots better ways to do deals. I am an auctioneer and full time investors of houses and commercial properties and in the process of developing  11,000 s.f. bar/restaurant in Baltimore.

I'd be glad to give you some ideas.  You may want to consider an advertising campaign to smoke out the truly motivated sellers. Understand and apply alternative creative financing and control and roll by public auctions.

Wishing you good luck,

Charles

Marcello Di Gerlando · Answer

@DB Brooks I am going to side with @Scott England on this one. The auction process can be tricky to navigate and has dangerous pitfalls that could potentially cost you >100% of what you might pay for a property.

@Aida Sevilla pointed you toward HUBZU and Auction.com. @Jill Patton pointed you toward the county Auctions. Understand that the process for both commercial type, judicial, non-judicial type auctions are very very different.

Auctions are a spectator sport. Spend some time at your local county auction, ask the local pros, and don't be afraid to consult with a Real Estate attorney in your area familiar with the county auction process.

Figure out the nuances between the different types of auctions. Personally I have not had luck with commercial type Auctions like HUBZU. Properties in my neck of the woods tend to get bid up to retail prices on these internet auctions. However, I have had luck winning bids at my live county Trustee Auction. Tread lightly.

Good luck to you.

Ron S. · Answer

Just based on the very very limited information you provided, if the numbers pencil out, yes. There are so many variables to consider (And it sounds as if you are doing that) that could change the appeal of the deal but if you go in eyes wide open, managed expectations and have contingency plans as a back up in case of any unforeseen issues, you may come out of this ahead of the game.

DB Brooks · Answer

Thanks Ron.  I'm curious, do you think this is a good idea?  Am I being too optimistic in thinking that I'll find such a good deal?

Ron S. · Answer

The only way you can do an inspection is if there is contact with the owner and, they allow you entry to do so.

Good luck and let us know how it turns out.

DB Brooks · Answer

Ron those are very good questions and I have considered them before making this post.  I would do my due diligence and not bid on a home (or too high) unless it will remain profitable.  I have been pre approved w/ a good credit score and income and will get everything in writing before a bid is ever placed.  I do plan on living in the house, unless it is more profitable not to.  I would like to live in it for a couple of years and then turn it into a rental (of course only if the numbers work out).  I do not claim to know all there is about buying foreclosures at auction but I plan to take my time and do what I can to be positive this is a good deal.  The only thing that worries me is buying a home w/ unforeseen issues, are you able to get a home inspection before the auction?  I don't think you can but maybe in some cases?  I do have family and friends in real estate and plan to call on them for assistance.

I should have been upfront about my "friends," they are family that I have a very good relationship with.  They are of retirement age and have expressed interest at buying foreclosures before.  My idea is for them to have a short term investment while I have a long term one and repeat if the deal is successful.  I would like to buy the home from them asap after the auction, I will be pre approved and hopefully we can get it done in a matter of weeks.  I plan to split the instant equity with the sellers 50-50.  example: They buy a home for 50k and the current value of the home (before repair) is 80k, so they sell me the home for 65k.  Is this a fair deal for both of us?  I realize it would be better if they loaned me the money but that is not an option for this deal.  Also, I am looking for a home that does not need major repair.

Thanks for your responses.

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