Bidding & Foreclosure strategies

First, you will need to know how a trustee’s sale works. The very best pros have advanced education from Universities, Real Estate Schools, and even Law Degrees. I strongly recommend as much schooling as possible, but think you will find some excitement and education simply by attending a trustee’s sale for the experience of watching how it all works.

A trustee’s sale occurs when a person falls far enough behind on their mortgage for the lender to initiate foreclosure proceedings (usually 3 months +). At that time a Notice of Sale is issued stating the time, place, and date of the sale, and the original principal balance on the loan. The notice of sale will include contact information for the trustee which is usually foreclosure service who will conduct the trustee’s sale.

The trustee or an agent of the trustee must conduct the sale at the time and place specified in the notice of sale (most sales in Pima county are conducted at the courthouse steps). The sale consists of verbal, open bids made by auction participants. Each bidder is required to present in cash or certified funds the sum of $1,000. just to bid. The bids are binding contracts that must be paid by the following day at 5:00pm (excluding Saturdays and holidays). If the high-bidder cannot pay his bid price by this time, the trustee will proceed to contact the 2nd and 3rd highest bidders.

On any given day, many investors may be eyeing the same property. With the stock market moving sideways and many people pulling out of bonds, investor monies for buying foreclosures have been plentiful. Also, the staging area in front of the courthouse is a noisy area due to both traffic and the commotion of yelling out bids back and forth. This is why it is good to have a strategy in mind before you attend the sale.

The opening bid amount is determined by each lender and based upon the amounts owed on the note and deed of trust. In today’s marketplace of fast appreciation rates, lenders are bidding out the full amounts owed. If a lender is concerned that nobody will bid then they have the option of lowering the opening bid to attract more bidders. This approach happens quite frequently on manufactured homes and also in a downward moving real estate market.

Over the years I used many different open bidding strategies, from early aggressive jump bidding to playing games of only raising my bid by one dollar. Unfortunately, after all the years and differing strategies, it still comes down to your pre-determined maximum bid that you are willing to spend. Many of the other investors also have a bid planned very close to yours, so sometimes it’s worth it to spend a fraction more than you planned if you hope to acquire a property. Having a maximum amount of concise data on each property is a big advantage when it comes down to the final few bids.

Typical bidding strategies center on your required return for monies invested. Many amateur investors attend a trustee’s sale with the idea that they will be able to make 30%-40% profit off each deal they find. This stems mostly from the false advertising from the “starter kits” on buying foreclosure properties. Unfortunately, this is simply not the case. In reality, competition is high and it will be a rare occasion that you are able to purchase a property well under market value, unless it is in need of serious rehab. The first step is to set a realistic goal as to the return you will require on your foreclosure property. In today’s marketplace if you’ve done your homework and research prior to bidding there’s a good chance you can expect at least a 12-15% return on each investment.

Ability to Finance – As stated above, your bid is a contract that requires you to fund the bid amount by 5:00 the next business day. Before going to sale you should have a complete pro forma on estimates to purchase, recon, hold and resell each investment. It should be noted that most investors are using a blend of private money loans (hard money), savings, equity in their house, or profit from their businesses to finance deals.

Some investors tap equity loans against other properties to finance the deal or use retirement funds. In some cases, your IRA may be allowed to own property, or you can loan against 401k savings. No matter which method you choose be sure that you understand the risks involved. Institutional financing is not recommended because lenders will usually be unwilling to finance an acquisition of foreclosure property. Even if you do find a lender willing to take on the risk of a foreclosure property, there will most likely be lots of time lost on documentation and funding. This method is often recommended by the above mentioned “starter kits” but it is very risky and very rarely successful.

Now that you know what your “magic number” is, you can go to the trustee’s sale. First the properties up for bid will be read aloud by the auctioneer. Then there will be information given on sales that are postponed, cancelled or otherwise changed. Finally the bidding begins.

When it is your property’s turn at auction there will most likely be one other, if not several, interested parties. As far as your actual bidding is concerned, I can’t tell you what to do. Bidding at auction is like playing poker: everyone has his own style and tolerance of risk, so only you know how best to play your hand. Just remember to remain calm and stick to your strategy. Don’t worry if you miss out on your first few properties, have patience, because there will always be foreclosures as long as there are mortgages. As these “golden years” of Tucson appreciation rates come to expire and long-term interest rates come out of historic lows, the number of foreclosures is once again expected to spike.

What’s Your Plan for Each Property? Early in our career, we didn’t have multiple work crews with all lines of skills and trades, tools, and work trucks to improve and remodel homes. I simply knew the main players in town and would “flip” my deals to them as fast as I could to build starting capital. With each property sold I then reinvested the profits into new deals and only later was I able to look at a longer-term strategy for holding and renting or even optioning the properties purchased. In an “UP” marketplace, holding a maximum number of homes (leverage) generates investors a maximum return on investment.

In the last 6 years we were able to offer the prior homeowner first chance to stay in the dwelling, provided they hadn’t already abandoned their house. We understood from the beginning that the rent we’d charge wouldn’t always cover the holding costs including: loan payments, taxes and insurance, and operating/holding costs. Almost all the families we offered this to were thrilled, even allowing us to work on the home’s inside/outside even if it was just 1 room at a time. We’ve learned that by simply being able to keep a family in their home even if they are renting is viewed by their neighbors, friends and even family members as still owning and maintaining neighborhood roots.

By offering the former owner the chance to stay in the home you’ve now minimized your holding time of it being empty as well as may have a built in buyer down the line if the relationship works out. If say after a year or two of renting to them you decide that they have been good tenants and you decide to offer them the chance to repurchase this home, then consider learning more about Options. In most Options there’s a clear start and end date; requirements for monthly rental payments; credits towards their down payment if rent is paid timely; and contract termination provisions (failing to pay rent or the term expires). Be sure that all your agreements are in writing and it’s best to have your attorney review your agreements prior to mutual execution.

Most of our competitors stuck with a more traditional shortsighted approach of simply filing a Superior Court eviction action against the former owners. This typically has them out of the property within 3-weeks after the auction. In my eyes the negatives outweighed the positives of this approach. They began their relationship adversial and in many cases couldn’t even see the condition of the house until after the eviction hearing. Once the house was empty, all the neighbors knew it thus wondering why and of course who would replace them. Vandalism once empty was typical, mostly from teenagers or even the homeless may move on it. In addition, getting your subcontractors and/or work crews to start promptly after taking possession can be challenging if they are already booked solid on other jobs.

NEXT ISSUE:

BUYING NEW HOMES AS AN INVESTMENT

Lets touch on some of the secrets of picking the right builder plus the best subdivisions for strong appreciation. Currently there is a serious opportunity for beginning investors with no or just one loan in their name. If you thought about buying new for either primary home or investment, you don't want to miss this next article. We'll talk about the profitability of doing each along with pros/cons of each investment.

Of course, if you find you are interested in investing in properties like this but feel you don't have the time or the skill, give some thought to a passive note and deed of trust investment with Deed & Note Traders, LLC. Your money will be secured by upcoming investment properties throughout Southern Arizona. Drop by www.RetirearlyinTucson.com to check out the programs we currently offer. To learn more about our services please come see us at: www.DeedTrader.com

To view prior articles visit: Buying Foreclosures

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Helpful Links:

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

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