New construction forclosure auction

[Matt Frazier]

I'm in the Minneapolis area and I'm trying to find a creative way to try and buy a stellar property at auction. I have no experience with foreclosures. There is a house just down the street from my development. It was part of a smaller development with about 20 lots. The small time builder got into the area just as rates started to hike up. They sold one house, built a model home and now are in foreclosure on the model, with 18 or so empty lots. The house is brand new, no one ever lived in it, and I've been inside it everything is intact. This was listed in the local paper being sold at auction to recoup the $170,000 original mortgage. The house is pretty high end, and was for sale for $850,000, brought down to $750,000 recently. Does anyone know how a sheriffs sale operates, and when trying to bid with cash (I don't have) are there any lenders that might put up cash, knowing we could get a pretty good deal if the bid was won for less than $400,000 or so. Just open to thoughts, critiques and ideas! Thank you!

[Randall Alan]

@Matt Frazier

There are a lot of ins and outs to what you are thinking about trying to do.  First, and foremost, my guess is that it is highly unlikely that the only lien on the house is for $170,000.  (It's always possible I suppose)... but in foreclosures, there are frequently second lenders who may or may not be listed in the auction paperwork.  It really starts off with figuring out who is filing the foreclosure.  For instance, if there were two lenders between the lot, and the house, and the foreclosure is just one of those trying to recoup their costs,  you might not see the other lender listed at all in the foreclosure paperwork.  But if you got the property for the $170,000, a more senior (earlier) mortgage would remain attached to the property.  So if there was a $600,000 house loan still floating around out there, you would own the house for the $170,000 (if it sold for that), but the property would still have a lien by the other lender wanting payment for their $600,000 loan; and if you didn't pay, they would then turn around and foreclose on YOU!  So be careful... there are a lot of intricacies with all of that.  

The safest thing to do there is to have a title company do a title search on the property and it will show you all the encumbrances on the property.  It will cost you probably $75 - $150 to do it - but then you could be certain who had claim to all the parts.

As for financing... auctions, like you suggest, are frequently "all cash" affairs.  Where I live you have to show up the next day with certified funds.  No regular bank is going to do that... it just doesn't fit their process of 30 days of reviewing it, dotting I's and crossing T's. 

You might have luck with a hard money lender... or partnering with an angel investor that you can do some sort of split on the profits.  

Keep in mind though that if the $170,000 is the only encumbrance, it is HIGHLY unlikely that the house will only sell for $170,000.  That is the STARTING bid.  More experienced investors are almost always on the prowl for winners like you (think you) have found. Trust me, the person who is in foreclosure has told all his buddies about it... and get this, even the person losing the house has the ability to bid on the auction as well.  It might be some sort of strategic default where he is trying to shed other debt... you never know!  Just know it's entirely possible it could sell for triple the base amount if someone thinks they can make money on it.  We have been outbid by a 2nd mortgage company where they would have seen their 2nd mortgage wiped out by the foreclosure of the primary lender.  The only move they had to not get wiped out was to by the house themselves, so they could resell it on the open market and recoup their investment. They were willing to outbid us, pretty much regardless of our reasonable bidding price to avoid that happening, because they could subtract their investment off the cost of the property in their calculations.

I would encourage you to look up who owns the property on the property appraisers website in that town.  Then take that name and pull up the foreclosure documentation on the county clerk's website for that town.  You will often get a lot more details that help you make an informed decision on how to proceed.  Between the 18 lots, and the model home, I would have to wonder if you don't run into something just like I said, where a developer will come in and pay a hefty price for the model, and take over the development.  You just never know how auctions are going to go, or who the players are going to be.  Being inexperienced, I advise A LOT of caution in your pursuit.  Definitely do your research to find out who all the players are on the property.  If you get really serious, do the title / lien search to make sure there isn't other encumbrances on the property that won't get wiped away.

All the best!

Randy