Auctions = Opportunities?

Question

Hi all, I recently spoke with someone who has been in real estate for years and he's told me that he's found a lot of opportunities in auctions and foreclosure properties. What are your experiences in these types of properties in the past 2 years and what do you expect for the upcoming 2 years? Thank you all for sharing!

Rick H. · Answer

I began investing in CA real estate (only) working foreclosures starting in 1978.

Lots to know and an incredible number of potential pitfalls. There are 58 counties in CA, some 3,043 total in U,S. Every state has very different laws for timelines, auctions, treatment of owners/tenants on residential vs commercial vs unimproved property.

Don’t expect to dance up to the courthouse steps with cashier’s checks and just buy the nice house with the brown trim. There are pro’s who show up everyday to buy what little inventory actually goes to sale and will pull some devilish tricks to throw you off course.

Frankly, I’m in favor of investing your time and money in the education part of the opportunities and stay away from trustee sales and tax auctions. Study pre-foreclosure laws and best practices. I believe publisher First Tuesday still has material on this topic.

There are multiple sources for timely foreclosure data. I’ve been at this so long that it was (20) years before internet-based data. I’m still a big fan of property radar. Think creating smaller lists with highly-targeted, multiple pain points and hone your skills connecting to distressed owners and more time LISTENING. That’s where the real money is. Oh, and beware the so-called “experts” who are really just promoters!

Gina Stern · Answer

Please remember to do your due diligence on any property you are thinking of buying at Foreclosure a Title Report is very important. You cant go into the property before the auction but you can for sure do a drive by. Good luck!

Randall Alan · Answer

@Yue Lehman

The thing to know about foreclosure auctions is that they come in a few flavors.  Where I'm at the county uses Realforeclose to run the auctions.  Usually there is a county prefix to the website... like www.polk.realforclose.com  They have you put 5% of your bid in cash / cashiers check, in advance, into your bidding account, and the balance of a winning bid is due the next day in cash / cashiers check at the County Court House.  So it is a 'big boy's / big girl's ' game. No financing possible.  If you don't show up with the balance the next day, you lose your 5% deposit. The auctions operate like eBay, except if there is a bid at the last second, the auction extends for a couple of minutes.  You can research the properties in advance, but there are no inspections of any kind allowed through the auction itself.  It's do your research, do a drive by, and if you are daring, put your nose to the windows and see what you see.  The buyer assumes all risk as to what they are buying.  This is the reason you are getting a good deal, because you are making allowances that the appliances are probably missing, the roof is probably leaking, the AC probably doesn't work (if it is still even there) etc, etc, etc, etc (and a more few etc.'s might be needed for good measure!).  It's buyer beware... so you assume the property has been neglected and hope for the best.

We have bought a few and have come out ahead sometimes, and sometimes not.  The last one we bought the owner still lived there, with is 5 cats, and 10 litter boxes he never changed in 10 years.  The house wreaked of cat urine... we literally had to use respirators to clear out the house... and even after stripping all the soft surfaces out after the owner left the house, it still smelled horrible...make that HORRIBLE!  We painted the house, replaced the roof, replaced the AC.  Ultimately sold the property to a handyman with no soft surfaces for a $35,000 profit, but it was one of our worst deals.  (maybe not bad for a worst deal?!)

Other auctions are done on site, or on the county court steps and usually require a deposit the day of the sale.  We have had better luck at in person auctions.  Sometimes you get a preview, sometimes not.  Just depends on the location and how they do it.

Not much will change with auctions other than maybe the throughput of properties.  Bad economic times = good throughput at the foreclosure auction.  With covid restrictions ending, I would expect to see more auctions because of it.   The way they are done is the same as the past... so that doesn't change.  You are getting a wholesale price... but also frequently bidding in the blind as to the condition of the property.  I usually get pretty bold and try to do a walk around the property if I can ascertain that unit is vacant.  If occupied it's pretty much just whatever you can tell from the street (ie. roof condition, is the ac compressor there?  look well kept?, etc.

All the best!

Randy

Randall Alan · Answer

@Yue Lehman

Every foreclosure I have bought had the original owner still in the property.  We go to them and say, "We just bought your property, and you can either choose to rent it back from us, or move out."  (We say it a little nicer... but that is the long and short of it.)  Here is what has worked for us each time.  As mentioned in my previous post, the owner of the property is entitled to the excess proceeds of the auction.  So my tenant owed in the $70,000 range, and we had to pay upwards of $125,000 for the property.  This meant that my tenant that couldn't / wouldn't / didn't pay their mortgage to the mortgage company when it was $700/month and lost their home to foreclosure, now has the opportunity to be able to afford the house again, because they are the recipient of the better part of $50,000 in cash from the sale of their property.  (The 'stupid / sad' part of the situation is now their rent is like double what it was from before).  We inform them about the excess funds, and actually help them (or at least point them in the right direction) to recover those funds.  We have them sign a new lease with us, and suddenly they have the money to afford rent and stay where they have been living.  The bonus there is that we don't have to do a thing to the property to start collecting rent... as they just stay in place.  We have done this multiple times.

The problem comes a year later when they have paid us $20,000 in rent or so, and otherwise use the balance of the money they got to live on... suddenly they are back to where they were before.  We end up having to evict them... which is not fun... but where I live, it's a 6 week process and the sheriff doesn't mess around.  They are given all their notices and if they aren't out on move-out day, they are physically removed.  Florida is a pretty landlord friendly state.  Whether they are squatting, or whatever, that is just an expected part of the process for a foreclosure.  It's no different than you paying your mortgage each month.  If X happens, you do Y.  If tenant won't leave, you evict them.  If you are anticipating it as a step, it's just not a big deal (business wise)... even though it sucks for the tenant.

Randy

Randy Rodenhouse · Answer

The last few years have been slow since many of the foreclosures were on hold due to the moratorium due to Covid. However that has changed and there are more properties going to the auction. In fact, I recently foreclosed on a property in Mississippi and got the property back due to no bids above my opening bid and it was priced about 75-80% of value.  So that would have been a good opportunity for some investor.  Tomorrow I have another one going to auction sale in Iowa and this market is hotter and should sale to a third party. These were notes that I purchased that were in default and homeowners were deceased.  Anyway, the point is many people think there is not much going on at auction since it has been so slow over past 2-3 years so worth checking out.  I am not sure what the Fresno CA market is like.

Yue Lehman · Answer

Definitely will do. Thank you!

Yue Lehman · Answer

This is very helpful, thank you! There can be a lot of emotions involved for sure, and including the cost of the eviction process upfront is a great tip. I need to learn more about eviction in CA.

Yue Lehman · Answer

Hi Randy, thank you for your insight! I feel like you're on the other side of the pedestal being a note investor and way ahead of my journey. Thank you for sharing what you're seeing and I'm looking forward to opportunities in my area as well.

Yue Lehman · Answer

Hi Randy, thank you so much for sharing your experience with auction properties! I've had my eyes on them for a while but am way too scared to get in. Plus I felt like there are so many big boys and big girls with minimum opportunities... Really does not sound bad that your worst deal turned a profit!! Here in CA my biggest fear is squatters and I'm not sure how I'd go about that. All I've heard is that it can take months to get squatters out and it has to be done perfectly right involving real estate attorneys etc. with potential additional damages to the property. Have you run into those types of issues in your past?

Eliott Elias · Answer

I have seen property in the last year at auctions sell for retail value. This is not going to be the case moving forward.

Auctions = Opportunities?

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