The ins and outs of bidding on a foreclosure at auction.

[Justin Richardson]

Hello All,

I'm new to BP and wanted to introduce myself as well as hopefully get some advice since I am just in the beginning stages of pursuing REI.

I work as an engineer and am currently enrolled in a MBA program at the local University. I realize that is not particularly important to the topic at hand, but just wanted to make it known that I have a propensity for being very analytical.

The market I live in as well as want to invest in is extremely depressed. The city consistently makes top ten lists for "cheapest places to live". The schools are also well known for being some of the worst in the state. Unfortunate, but it's the reality of the city I choose to call home. With that being said, I truly believe there is money to be made in real estate in this market. 

Anyway, to get to the point, since I am extremely new to the concept of REI I am curious about the process of bidding on foreclosures at auction through the County Public Trustee Office. It is my understanding that after placing a bid, if it is accepted, I would be required to provide a check for the total amount within a very short period of time. My wife and I are fortunate enough to earn enough from our 9-5's to make well above the local median household income, but are not in a position to start purchasing property for cash. Is it even possible to finance a foreclosed home that is purchased at auction? Are there better options I should be pursuing? I am interested in buying foreclosures at a greatly reduced price for flipping as well as buy and hold. Does anyone have experience with this particular technique? Preferably in a market that is extremely low-end compared to the rest of the state.

Thanks in advance for your feedback. 

[David Midgett]

Justin-

I've bought hundreds of foreclosures "at the courthouse steps" (its actually all online now... not nearly as much fun) over the past 15 years. 

And we are in one of the most affordable areas in Florida.  

I agree they are great deals.

But PLEASE don't start your investing career with courthouse foreclosures. There are so many pitfalls and I don't know of any area of investing that is more "caveat emptor". 

-- You have to pay all cash.  You don't get title until after you pay the Clerk or Trustee, banks are funny about needing title before they give you the cash, and Clerks and Trustees don't close in escrow.  Hard money is always available... but hard money is, well... hard. And a hard money lender won't lend to someone without a track record.

-- You don't get clear title. You get bare legal title at a foreclosure sale... you do NOT get "clear marketable title free of all liens and encumbrances" like you would at most real estate closings. Just last week I watched a real estate agent bid on an HOA lien being foreclosed, who mistakenly thought the HOA lien wiped out the first mortgage. Nope.... you just paid $8k and will lose your new house next month when the first mortgage, already in foreclosure, schedules its foreclosure sale. That's a really painful lesson in title examination.

-- You don't get absolute occupancy rights. Federal law protects bona fide tenants in a foreclosure house.  You might buy the house thinking you are going to flip.... and you find out you have a tenant whose rent is not enough to cover your interest payment to your hard money lender.

-- You usually buy a pig in a poke. Nobody offers showings of foreclosures prior to the sale.  You can look through the windows, but breaking and entering is still a felony in most states. So you may have a gutted bathroom, missing electrical panel, rotten floors, water damaged cabinets, and on and on and on.  There is absolutely no reliable way to estimate repairs on a property you can't even walk through.

-- You have lots of competition. Every other investor in town got the same list you just picked up.  They like the prices as much as you do. But some of them do this full time.  Some of them (like me) have entire staffs of people to research each property, do a site inspection, take pictures, pull title reports, run comps.  You are working AND going to school... and you think you will find a deal at the foreclosure sale that your full time, experienced competitors are passing on? Hmmm.

Now, after all these warnings?

My very first real estate investment was a foreclosure house.

And it made money.

But I got so lucky... and had no idea.  I thought it was skill.

Since then I've learned 100 ways I could have lost money on that first deal.  And many of those lessons were only learned the hard way... by losing money.

But most of my lessons were learned watching people come to the foreclosure sale and buy their first property.

Caveat Emptor....

David