Foreclosure Auction Investing at the court house steps

[Greg Moran]

Question : is it possible to use a self directed IRA to purchase properties at a foreclosure auction? Is that custodian dependent?

Background : I'm trying to invest with a well-established rehabber in Roanoke VA. His business model is to purchase properties at the courthouse steps, for cash. If I'm trying to use the self-directed IRA, would the custodian allow me to loan him private or hard money for the purchase?

[Greg Dickerson]

@Greg Moran yes you can lend the money for the purchase. It doesn’t matter where the investor gets his money he just has to pay cash by a certain date.

The terms and structure of the loan are up to you not your custodian. If your IRA is Self-Directed then you are the one that makes all the decisions. You just need to make sure you know how long it takes to get the money out to fund the deal.

Also make sure you talk to an attorney to make sure you use the proper legal structure to secure your investment.

[Mark Brogan]

I would not bother with the court steps in this area unless you go in the outter areas around Roanoke, lots of collusion going on in this area with other investors corrupting the system

You will be much better served working with an investor that will do driving for dollars, direct mail or probate leads at the court house

In our experience most all investors are always looking for the low hanging fruit 

Good luck 

[Eric M.]

Yes you can. Ask your custodian for the procedure, not us.

BTW, all custodians are not the same. Depends on the exact type of account you sign up for. Some custodians, you need to request funds and explain the purpose well in advance and then they release the money. But once you learn the legalities you can use a custodian that just gives you the checkbook and you are responsible for following the laws, but you have immediate access and control.

[Greg Moran]

Originally posted by @Greg Dickerson:

@Greg Moran yes you can lend the money for the purchase. It doesn’t matter where the investor gets his money he just has to pay cash by a certain date.

The terms and structure of the loan are up to you not your custodian. If your IRA is Self-Directed then you are the one that makes all the decisions. You just need to make sure you know how long it takes to get the money out to fund the deal.

Also make sure you talk to an attorney to make sure you use the proper legal structure to secure your investment.

 Thanks @Greg! Good advice! I'll check with the custodian on their timeliness for getting the money out for closing. And I'm down selecting between a couple different attorneys now (would you have any recommendations?). 

[Greg Moran]

Originally posted by @Mark Brogan:

I would not bother with the court steps in this area unless you go in the outter areas around Roanoke, lots of collusion going on in this area with other investors corrupting the system

You will be much better served working with an investor that will do driving for dollars, direct mail or probate leads at the court house

In our experience most all investors are always looking for the low hanging fruit 

Good luck 

 Howdy Mark, I'm interested to know more about your cautionary warning. What do you mean by collusion and how does that corrupt the system? My rehabber did mention that other investors are getting into the market, and driving up the auction prices. Is that what you're referring to? 

[Mark Brogan]

Hello @Greg Moran, 3-4 of them are going to the court house steps and actually bidding against each other making it look like they driving up the price to buy the house, they are actually working together after they buy the house to rehab and sell it.

Most people in our area stay away from court house auctions because of this, it use to be a good source to buy properties but not anymore

I would go with driving 4 dollars or direct mail since all of this takes work which most investors do not want to do to find the deals 

[Greg Moran]

Originally posted by @Mark Brogan:

Hello @Greg Moran, 3-4 of them are going to the court house steps and actually bidding against each other making it look like they driving up the price to buy the house, they are actually working together after they buy the house to rehab and sell it.

Most people in our area stay away from court house auctions because of this, it use to be a good source to buy properties but not anymore

I would go with driving 4 dollars or direct mail since all of this takes work which most investors do not want to do to find the deals 

 That makes no sense to me... Why would anyone who is working together intentionally bid up the price of the house at auction? That directly cuts into their profit at the end of the project. Right? Or, I must be missing something. 

[Mark Brogan]

That made no sense to me either, that’s exactly what I thought when I heard about it, as you know there are many different exit strategies in real estate, some are not always about buying at the cheapest price, when you are working with or bidding with many different peoples money you can run the price up in order to insure you get the properties you want no matter the cost, like the big companies that buy up real estate all over the country they will pay higher prices for it if they can get more homes hoping there are some really good deals in the mix 

[Greg Moran]

Originally posted by @Mark Brogan:

That made no sense to me either, that’s exactly what I thought when I heard about it, as you know there are many different exit strategies in real estate, some are not always about buying at the cheapest price, when you are working with or bidding with many different peoples money you can run the price up in order to insure you get the properties you want no matter the cost, like the big companies that buy up real estate all over the country they will pay higher prices for it if they can get more homes hoping there are some really good deals in the mix 

 Now I guess it kind of makes sense... They would be OK with smaller margins, or maybe breaking even, as long as they got the quantity of deals to keep a pipeline of business going. 

[Eric M.]

@Mark Brogan 's story doesn't make a lot of sense, in my experience. First, any type of collusion is a felony. FC auction bidders have been arrested many times for doing this. If it is as obvious as he says, it would be easy to catch. Report them. Clean up your auction and reap the profits yourself. I bet it is not exactly what he thinks it is....people tell stories and exaggerate and those stories get passed around as fact. Most auctions are actually IN the sheriff's office or building. The Sheriff will generally pay attention if you tell him fraud is taking place in his building.

Second, there are times when you do purposely drive the price up to unprofitable levels. But you don't do it regularly as a strategy. Sometimes, you bid it up just to drop out and drop a loser on a newbie to drive him out of the auctions. Newbies are easy to manipulate. Often they have not done their research. They purposely follow other bidders assuming if 3 other guys want it, then it must be good. I have seen regulars bid on auctions for second mortgages only to drop it on the newbie who followed them into the bidding. All it takes is a glance and everyone says out...and the newb is left with it. It is quite an effective way to make someone not come back.

Sometimes you take unprofitable property for yourself to discourage and drive away your competition and make them think they will never get a deal...but again only here and there.  And other times, you make unprofitable bids occasionally to keep your crew working....but you don't collude with others for that purpose.

The regulars at the auction absolutely get to know each other and each other's style and there is some winking and nodding and joking. But newbie paranoia misinterprets that chumminess as collusion a lot more often than it really is. When the regulars see a newbie, they don't want them there. They take advantage of the newbie paranoia. So they are hostile his first few visits in hopes of driving him away. This is actually very effective. Most newbies go and think it is too competitive or there are no deals. That is what they want them to think. If an auction gets a reputation as an unfair auction that you can never win, all the better. Doesn't really mean the guys are really working together. They just all happen to be working on the same thing.....keeping you out of their territory. So it looks like they are working together.

When the rubber hits the road, these guys are competing hard with each other. Not working together.

[Frank LaViola]

@Greg Dickerson

Hi Greg, with a self directed IRA doesn't the money, profits, have to stay in the account until age 62? My thought based on the question was the rehabbed is looking to make money now not for retirement.

[Greg Dickerson]

Originally posted by @Greg Moran:

Originally posted by @Greg Dickerson:

@Greg Moran yes you can lend the money for the purchase. It doesn’t matter where the investor gets his money he just has to pay cash by a certain date.

The terms and structure of the loan are up to you not your custodian. If your IRA is Self-Directed then you are the one that makes all the decisions. You just need to make sure you know how long it takes to get the money out to fund the deal.

Also make sure you talk to an attorney to make sure you use the proper legal structure to secure your investment.

 Thanks @Greg! Good advice! I'll check with the custodian on their timeliness for getting the money out for closing. And I'm down selecting between a couple different attorneys now (would you have any recommendations?).