foreclosure acquisition questions - please help :D

[Mark Updegraff]

I'm getting ready to jump into the foreclosure market. I've got a couple questions before taking the plunge. I've gone to a few to see how they work, so I'm comfortable there, and I've spoken with my attorney regarding the costs associated with doing this.

So, let us say that Mr. Homeowner is underwater on his home, and for whatever reason it makes it to foreclosure. Mr. Homeowner paid 43K for his home in 1995. The judgment is for 92K. I've driven by it and here is how it stacks up:

Good:
GREAT location
Double lot
up-and-coming area
hot area for MLS listings
Large Home 2050 sq ft.
Off Street parking

Bad:
There is plywood in a couple windows
Have not seen inside

Comps: a 800 sq ft home sold on the same street, a few houses away for 80K, just last week.

I would say, that in good shape this would sell on the MLS for 130 - 140k

As it is, I'm not sure this is the BEST deal NOW (foreclosure wise anyway). That said, I'm wondering if this is still a good deal for buy / hold / rent because
1. Possibility of adding a second structure to the lot.
2. Long term appreciation (very up and coming area, lots of new development etc).
3. Same neighborhood as my other rentals, creating a coherent property portfolio.

Would you say this property is over priced?
What will happen if it goes to foreclosure and there isn't enough meat (ie no bidders). Is it then REO and the bank will list on the MLS? Will they start it higher than the judgment? I'm basically trying to decide if I should get it at auction, or wait and see if I can get it cheaper as REO (if that is what happens) - my concern is with the RE area being hot right now, I may run into more opposition as a REO than as a foreclosure...

Any suggestions would be MOST appreciated!
Thanks much!!
Mark

[Jon Holdman]

You don't say where you're located and the procedures for these auctions vary widely. Here the bank submits an opening bid two days before the auction and that's the end of their input. I see the banks most commonly set the opening bid at what they're owed. But in some case, maybe a quarter, they set it much lower and file a deficiency. Those are usually the ones that get purchased. You say you've been to the auction there, and so you should have a feel for how it goes.

Even for a buy and hold I want plenty of equity. I apply two formulas for buy and hold. One is the 70% of ARV, less repairs. So, if you think its worth $130K, 70% is $91K. So, if the bidding starts at $92K, its not a deal. I assume there are some repairs, so it would need to be that much under $91K to be a deal.

I also figure out the rent and back into a max P&I payment. (Rent*0.6) is my absolute max permanent P&I payment. A more conservative calculation would be (Rent * 0.5) - desired cash flow. I then turn that into a loan amount, back off my rehab, hard money and acquisition costs and come up with a max price I can pay.

One property is a start, but you need to find a few dozen more to add to your funnel. The odds of buying this one are small. If you have 20 or 50 candidates in your funnel, odds are good you'll get one of them.