Tutorial for buying at foreclosure auctions

[Frank Dai]

I invest in foreclosures in the Monterey Bay region. I have been doing this for 2 years and have had 7 profitable deals.
This is a short tutorial of the process. By the end of this post you'll have a rough idea of how foreclosure investing works and
how to go about it.

I write a blog about investing in foreclosures, at [REMOVED]. I analyze 3 deals a day in the San Francisco Bay region, where I work
(And away from where I buy). In the interest of marketing my blog, here is a tutorial in buying foreclosures, gleaned from real experience.
Feel free to ask me questions!

How do Foreclosures Work?
-If you take out a mortgage on a home and falls behind on the payments, the bank can start the foreclosure process on the home. This is
when the owner can try to short sell the home: sell it for less than he owes the bank. At the end of the process, before taking back the house,
the house must be auctioned off at the courthouse steps. This is the foreclosure auction. If the bank sets the price too high and no one buys,
then the bank takes it back, and it becomes a REO, a real estate owned. The sequence is short sale, foreclosure auction, REO.

Why Foreclosures?
-Because you can make 50-60% returns per year, at 2 deals per year and 25% returns on each deal.
At the auction, homes routinely go for 75% of market price or below. This is because of all the obstacles between the buyer and the house:
The entire amount is due in cash. This eliminates 99% of buyers right away. You cannot get a mortgage because it's a foreclosure.
The auction is held on weekdays during working hours.
The property is sold as is, where is. The loan being sold may be a worthless second loan. There may be back taxes.

-The climate is right. There is a wave of foreclosures from the housing crisis. Efforts by the government to prevent foreclosures have failed.
see http://www.nytimes.com/2010/01/02/business/economy/02modify.html

Prerequisites:
-Cash. Foreclosure auctions require a cashier's check for the full price of the property. This is the single biggest obstacle you face. As long as you can find the cash, everything else is doable. How much you need depends on the location and whether you partner with others. Have 30K at the very least.

-Time. You need to attend the trustee sales, which are held weekday mornings at the courthouse. You need to research properties, visit properties, read books, manage agents, contractors, potential buyers, and a hundred other things. To a certain extend, this work can be delegated.

-Local Knowledge. This is incredibly important. When bidding on a property, you must know exactly how much it can sell or rent for on the market. Do not rely on zillow estimates. Do not rely on comparables you found on the internet. Again, this can be delegated. Find a good agent.

How to get started:
-Step 1: Visit your local foreclosure auction. It's at your local county courthouse. In California it's held weekdays between 10-12. Google "XYZ county foreclosure auction", or visit the website of your county. At the auction, ASK THE BIDDERS WHERE THEY GOT THEIR FORECLOSURE INFO.

-Step 2: Finding foreclosures. You need to know which houses are selling before hand. Looking through public notices is NOT effective. You need a foreclosure info gatherer. Your options are:
www.lpsasap.com is free and has information on 17 states, including CA. It covers only about half of all foreclosures, however.
If you are in CA, AZ, NV, OR, or WA, you are in luck. www.foreclosureradar.com is a one stop shop with all the relevant data. $50/month, 3 day free trial.
Many sellers of foreclosure info exist, some of them are local. Bidders in Santa Clara County uses info from www.thebluesheet.com, while bidders in Monterey County use www.foreclosureradar.com.

-Step 3: Verify loan position. MAKE SURE YOU ARE BIDDING ON A FIRST LOAN! The auction is not for the property itself, but the loan. The person who holds the first loan owns the property. Information sellers like foreclosureradar and bluesheet provides this information. You can also teach yourself how to do property searches at your local county recorder office. Pay close attention to the loan amount and the loan date. The first loan should be around 80% of the property's value on the date it was created. For example, if you are bidding on a $250K property and the loan amount says $550K, this is okay. The house was probably made in 2006-2008, when prices were high. If the loan amount says $50K on the same $250K house, watch out. In my experience there's a second loan for every 30 or 40 first loans at auction.

-Step 4: Estimate the market price. Go to www.zillow.com and see their estimate. On the map, see how much comparable properties sold for (yellow icons) and are selling for(red icons). Go to www.realtor.com and see what comparables are listed for sale. Go to wwww.maps.google.com, type in the address, and use Streetview to see street level pictures of the house and neighborhood. Bring all of this together and estimate what the market price is.

-Step 5: Go to the auction and bid for 75% of the market price. Make out cashier's checks to yourself in the amounts of $2500, $5k, $10K, $20K, etc. For an added layer of safety, identify savvy investors who are there day after day, and only bid on what they bid on.