Buying Foreclosures

In 1989, I started buying single-family homes for a primary residence in the beginning then mostly for investing. In the last 12-years my company has purchased or built over 700 homes throughout Southern Arizona. There are many ways to find your own home and one aspect is buying foreclosures.

Before you decide to enter this market, you have an ENTER and EXIT strategy. To enter this market you’ll need to decide how to free up your schedule to work the deals. In addition, I recommend you pre-qualify for your financing with your banker or local broker before you enter this market. Since these auctions require payment IN FULL by 5:00 p.m. the day following the bidding, it’s going to be extremely rare to find an institutional lender to finance you so quickly. Since there are many large, well-organized and operated businesses doing this in a full time capacity, you need to be prepared for rejections and fierce competition from the very first day. When I started there were only a handful of full time competitors doing this so we all dedicated less resources but still obtained enough homes to gradually build our businesses.

Your EXIT strategy needs to center around you financial ability to hold the property either until it is fixed up and sold, OR rented out. When I started (with minimal capital) I basically had to do all the fix-up myself and hire out the subcontractors for those areas out of my expertise. The market back then was much slower than it is today so sitting on a house could easily run 6-9 months including recon. There are firms such as ours who will quickly close a flipped property, which someone has just acquired, however you can expect a smaller profit margin in those instances.

There are basically two types of foreclosures: pre-auction purchases- buying from owners prior to an upcoming trustees foreclosure date and secondly, from bidding at trustee’s sale typically is conducted at the courthouse steps.

Today let’s review some of the basics on how to buy at a trustee’s sale. Typically the auction is held on the courthouse steps or at an attorney’s office. You are required to have cash or certified funds in the amount of $1,000.00 for the bidding. All bidding is verbal and the auctioneer moves through the daily list at a ferocious pace so it is extremely critical you listen closely to the legal description and the debtor’s name so you don’t bid on the wrong property.

RESEARCH:

This is possibly the most important step because so many things can go wrong if you don’t know anything about the property. You must determine what position the delinquent loan is in, meaning, if the loan is in second position, then buying it at trustee’s sale will most likely require you to pay off the first position as well, which can turn a great deal into a very bad one. Information on lien structure can be obtained from a title company, or other property databases.

Another important item to check is taxes owed on the property. If a person has not been making mortgage payments, it is also likely that he has not been paying property taxes either. It is important to visit the county assessor’s website to verify whether the taxes are current, because any back taxes will need to be cured by the new owner.

Often times a visit to the subject property can reveal more than any database or website. There all kinds of considerations here: Have the owners vacated or are they still inside? Are there non-working vehicles, boats, debris that will need to be hauled-away? Has the home been vandalized? Can my insurance company even cover this home, given its current condition? These are examples of important questions you need to know before bidding at the auction.

DETERMINE Fair Market Value (FMV):

There are numerous methods investors use to determine the market value of a property, including income valuation, replacement value and comparables sales. The most common (and quickest) method is the comparable sales method. Appraisers do this by finding recent sales of comparable properties in the area and then adding or subtracting from their sales price to reflect differences between the subject property and the comparables (e.g. adding x amount of dollars for a comparable having 1 less bedroom than the subject).

Realtors and investors use a somewhat simplified method, finding the average price per square foot in the area and multiplying that figure by the square footage of the subject. This method provides fast results, but you must make sure that you are using properties with similar traits. There’s no use comparing the sales price of a home with built-in pool & hot tub on 2 acres, to a town-home on a 10,000 sq. ft lot, even though the buildings might the same age and size.

These types of comparables can be obtained from Internet sites, title companies, realtors, and some county websites. Most of us investors are using their MLS access to study not only the SOLDS, but what properties are ACTIVE or PENDING as well. There are also some valuation websites out there, but their methods are unclear, and they ask for quite a lot of information to get started.

COMPUTING EQUITY:

Equity is defined as the difference between the market value of a property and the claims held against it. To investors equity represents our profit. Once equity level is determined, investors analyze the potential investment to determine whether or not this investment meets their equity criteria. Each investors investment criteria is different, typically this is determined by each investors cost of doing business. If you determine based on your time and energy expended per investment you want a profit of $10,000 per investment then you look for deals yielding with at least $15,000. of equity. Other investors may value their time more and require $25,000 dollars potential profit per deal. This way you’ll have some room for the unexpected expenses like roofing, plumbing, electrical, legal, and many other areas, which have a habit of surprising an owner.

PREPARING TO BID:

Purchasing real estate at trustee sale auction is a good way to find a property at a slight market discount. Typically these sales occur daily at 11:30a.m. on the steps of the Pima County Court House. When purchasing property at trustee sales auction there are some things to keep in mind. First in order to bid you are required to bring $1,000 dollars cash/cashiers check as a deposit. If you are the high bidder you will be required to give the non-refundable deposit. Second, you are required, when purchasing property from trustee sales, to provide the trustee entire purchase amount by 5:00 p.m. the following day. For example if you were the high bidder on a Thursday with $80,000 dollars, you would be required to send the Trustee $79,000 in certified funds by 5:00 p.m. on Friday. Before you purchase a foreclosure as an investment you may want to consult with an attorney and/or your financial advisors.

ALTERNATIVE SOLUTIONS:

If my description of the business may have scared you a bit, give thought to more creative solutions using our firm. You could simply agree to lend your available investment money secured on local property. Going rates for private money range from 8-12% for firms with a proven track record/history. Another solution may be to partner-up with a professional buyer and bring your ability to finance a property to the table. Many lenders will allow up to 10-loans on a persons credit report before they will shut out additional rental purchases. These solutions shouldn’t take up much of your time and can provide much better returns than traditional investing methods.

If you have more specific questions regarding this article, investing or our joint venture programs feel free to contact us at questions@deedtrader.com.

NEXT ISSUE:

Bidding strategies used by the pros. Building your Exit Strategy. Do you plan to do a quick flip, fix & flip, fix and rent, fix and sell on terms? We’ll talk about the profitability of doing each along with pros/cons.

www.DeedTrader.com

Helpful Links:

A-Z Real Estate Terminology-
Pima County Recorders website Pima Express website AZ Daily Star website

To view our current home inventory, search MLS, or learn about our other services, please visit us at: www.RetireEarlyinTucson.com