Buying foreclosed properties

[Michael Sheridan]

Hi All,

I am trying to take the time to read some books, read the forums and get myself started as a real estate investor!

Foreclosed properties have obviously peaked my interest as they are often a cheaper often. I would assume house flippers seek out those deals.

When it comes to buying a foreclosure, if it’s not an auction, in your experience will the bank take a lower offer? In other words it’s listed for $150k.. will the bank settle for that $150k and only accept that and nothing less? Do you HAVE to have 100% liquid cash when buying a foreclosed property? Is a pre-approval loan acceptable?

Thank you all for your time and answers in advance as they are much appreciated!

[Frank Chin]

Mike, I've bought foreclosures. And my wife was for a time a VP at a finance company where they had to dispose of properties they foreclosed on. 

I preferred to pick them up at auctions, where the banks gave up on it and let the market decide. Best to bid at absolute auctions where the lowest bidder wins. I wasted my time at auctions where the bank set a reserve price, don't tell you about it, and I get a letter in the mail saying "no go" because the bid is under the reserve price.

As to how banks look at it, the mortgage due is the determining factor. Some banks find it very difficult to sell below mortgage, for a number of reasons. I bought my home at an auction at $200K, whereas market at the time of $325K. They held on to it for three years because they will not sell it below $300K, the amount of the mortgage. The banker who handled the foreclosure did the paperwork with me after the sale told me the only way I got it is via an auction because his bank insists on selling for at least the mortgage.

The interesting thing is the builder built 4 houses, couldn't get his price at the time $399K, decided to get a $300K mortgage for each, all different banks. All 4 were foreclosed on. My neighbor to my immediate right bought his from the foreclosing bank at $235K but had to cover the back taxes which ran $20K. At the auction I attended, a buyer thought $200K was too high, when I bought mine at auction, went to the bank that foreclosed on the house 2 doors away, officered them $150K in cash, and it was accepted. A few months later sold it for $230K to another flipper who sold it to a buyer for $325K. All these transactions too place from 1993 to 1994. I recall this as this final buyer rang my doorbell, asked me if $325K was the right price. This was in 1994. He moved in then sold it in 2006 when he moved for $875K. Looks like every one did OK.

A comment on banks taking less than listed. So do and some don't. The main reason many don't as my wife worked as VP at a finance company is officers in charge take cash bribes to sell it for less. I don't recall all the details, but at her company, they were caught, and they would take $50K cash bribes and up to sell it for a discount. That works because it's the word of the flipper, the crooked banker, and a crooked appraiser to say what the worth of the property is. If the bank listed the property of $200K because there's a $200K mortgage, the crooked flipper could pay the crooked banker $50K cash, and get it for $100K, because the crooked appraiser agrees. See how easy it is. The only safe way for a bank is at a public auction where it's harder to pull off these shenanigans.

I bought a condo at a public auction at the bottom of the market, and a year later they still had 30 available selling for $25K more. I complained and offered $25K less, the price I paid at auction. The agent selling it says the bank would object. I said if you can't sell them all at auction, you're lucky I'm offering you any money for it. The bank thought about it, agreed, and sold it to me, at my price.

All in all, you have to know the markets to work it. The frustrating thing is banks all have different policies, so if one bank says no, you go to the next deal. The house I got at auction for $200K is now $1.2 million, so it's a good way to buy real estate if you have the patience. It's the easiest million I made. All I had to do is sleep at the place for 20 years, putting $20K down from a HELOC.