Foreclosure Auctions

Foreclosure auctions are a treasure trove of lucrative deals to real estate investors for they are rich sources of handyman specials. However, before embarking on this treasure hunt of bargains, doing one’s homework is essential to come prepared, ensure that you make a killing and avoid walking into a trap of losses.

1. The first thing you have to do is secure a “bidder’s package” which contains useful information including the particulars on the auctioned properties such as property description, a report on the title, survey and financial data.
2. Decide on which property or properties you are going to bid on in advance and get to know it. Drive by the selected property to give you a picture of its condition so that you can estimate the needed repairs. Hiring professionals for assessing the property and estimating repair costs will be wise especially for newbie rehabbers. Although this will also entail costs. This visit will also acquaint you with the neighborhood. Keep in mind to go for an ugly property in a nice neighborhood rather than a pretty house in an ugly neighborhood.
3. Study the foreclosure laws of the state where the property is and note how much premium the winning bidder is expected to pay which usually comes as a percentage added to the acquisition cost.
4. You also have to find out if there are any liens against the property which may become your responsibility once you have acquired the property, and how much is owed on the property. Typically, this last figure will also be the initial bid price. You can stop by the tax assessor’s office of the county for these.
5. Another crucial homework you have to do is compute for the maximum offer you can bid. This cap will remind you to get a grip of yourself from overbidding lest you get carried away when the foreclosure auction becomes too exhilarating. Making an offer that exceeds this pre-calculated amount translates to a reduced profit, or worse, a bottom line in jeopardy. So remember to put your paddle down when it comes to a point where another bidder gave an offer greater than your ceiling. This amount is contingent to such factors as the market value of the property, your target profit and the cost of repair and other expenses.
6. Having determined these figures, the next set of figures you have to work out are your own. Set aside the amount for the downpayment in cash or check. Some foreclosure auctions require a cashier’s check made out to the buyer for the amount of $5,000 which will become part of the 5% downpayment on the property for which you have won the bid. There are also several ways in which you can buy properties from foreclosure auctions with no downpayment. You can approach lenders who can provide you with no-down financing options, such as VA and FHA loans. For a smoother transaction, work out a pre-approval for a zero-downpayment loan.

All these seem to exact loads of work, but remember the aphorism, “Success always comes when preparation meets opportunity.” Skipping due diligence in this field is exposing yourself to the many pitfalls and perils of treasure hunting in real estate investing. So better do your homework!

Related articles

• How to Avoid a Common Mistake All Newbie Real Estate Investors Make
• 4 Things You Must Prepare Before Diving Into Bulk REO Packages

Flippers and Rehabbers Caught in the Crash

Many real estate investors, flippers, and rehabbers were caught with their pants down when the real estate market crashed in mid 2007.  Rehabbing and flipping foreclosures was the craze at the time, as depicted on the many popular TV shows such as Flip This House and Property Ladder.  As long as the money was flowing loosely from the banks to the investors and homeowners, flipping a rehabbed home was relatively easy.  Almost anyone could arrange 100% financing for their end-buyers back then.

Bankruptcy & Real Estate Investors

But when the money dried up and banks stopped lending almost over night, many investors were left holding fully rehabbed homes with no buyers to be found.  Many of the flippers at that time had no intention of ever being a landlord and therefore were determined to sell their property rather than rent it out.  The problem is that the real estate markets only got worse.  For several different reasons, the REO’s being flipped for quick cash were not good rental property candidates.  They were either too expensive or in too rough of a neighborhood to find quality tenants to occupy them.

Bankruptcy – What Does it Accomplish for the Real Estate Investor?

Many investors spent their entire savings and even their retirement savings (ouch) in an effort to keep their under performing rentals afloat when selling them didn’t work.  Stuck with maxed out credit cards and uncooperative lenders, many investor have filed for bankruptcy to get out of this mess.

Bankruptcy Accomplishes the Following for a Real Estate Investor:

1. It eliminates the right of the lender to collect a deficiency judgment from the investor when the property sells for less than its loan amount.
2. It relieves the investor from the obligation to repay the note on the property.
3. It eliminates the need to pay the real estate taxes, since the bank cannot come after the investor anymore.  The bank will be stuck paying the taxes for you, in order to avoid the property being sold at a tax sale.

Bankruptcy Does Not Accomplish the Following for a Real estate Investor.

1. Bankruptcy itself does not relinquish ownership of the property. The real estate investor still legally owns the investment property after a bankruptcy is filed.  The bank has to legally foreclosure on the investor in order to take back the property.  This means the investor could keep collecting any rents received until the property is sold at auction assuming the bank does not assume the rents as they are entitled to.
2. Bankruptcy does not eliminate the landlord’s liability for what happens at the property.  Since ownership still belongs to the investor, the investor can still be sued by a tenant, the city, or issued violations that will have to be dealt with.
3. Bankruptcy does not eliminate the landlord’s responsibility to the tenant as dictated by a lease or local tenant-landlord laws.

Your Real Estate Investing Career is Not Over

Remember, bankruptcy stays on your credit report for 7 – 10 years so make sure its your only way out.  But if that’s your last resort, don’t be pressured into doing anything that’s not required of you.  Being eligible to file for bankruptcy usually means you’re in pretty bad shape financially, so understand the law and do what’s necessary to get yourself back on your feet as fast as possible and investing once again.

Bankruptcy does not mean your real estate investing career is over.  There are still many options out there for the creative investors.  Private lenders, hard money, transactional funding, and owner financing can all be used to continue investing in real estate even with bad credit.

Typical Foreclosure Viewing Instructions: Remove the Front Door Yourself!

Most experienced real estate investors and rehabbers have figured out a way to bypass having to be accompanied by a real estate agent every time they view a vacant home or bank owned property.  Some investors decide to get a real estate license for themselves while others have friends as real estate agents that get the lockbox combos for them. Others just sweet talk or persuade the listing brokers into offering up the combos – it’s possible.  These practices aren’t being recommended, so be careful not to get in trouble if viewing a vacant home without permission.  Many agents will actually instruct investors to bring a power drill with them to remove the front door to gain access to the house as long as the door is screwed shut upon leaving.  REO listing agents don’t make a lot of money per deal, so they have to concentrate on volume.  It’s all about relationships. Befriend an agent at a local REI club meeting and you may get access to all the foreclosures you ever wanted.

Viewing several (6-8) foreclosures in a morning is very tiring and always an adventure in of itself.  This is especially true for those investors choosing to invest in the rougher neighborhoods due to the above average cash flow opportunities these hard hit areas present.  One day, I managed to walk through and estimate the rehab costs on 11 REO’s while in pursuit of my next rehab project.  I was mentally and physically drained at he end the day, but it was this process that helped me develop the knowledge I needed to eventually stop viewing every property prior to placing an offer.  Based on certain neighborhood generalities and housing types, I created a worst case scenario formula for placing offers.  If the numbers made sense, I submitted an offer without ever viewing the property until it was actually under contract.  This is what really kick started my real estate investing career while simultaneously reducing my time away from home.

Property Rehab Tool Bag

Foreclosure Search Tool Bag

After viewing over 500 properties over the years, I have learned that the following tools are essential to maximizing one’s time in the field.

• Pre-planned list of foreclosures to see and in what order to see them
  • When you leave your house in the morning, there should be no doubt as to where your going first, second, and third that day.  Bring printed maps or directions if needed.  Don’t forget the lockbox combos.
• 1 million candle power flashlight with spare battery and car charger
  • Most REO’s and foreclosures are boarded up and the electric company has turned the power off to the house.  For efficiency and safety reasons do not try viewing a dark beaten up house with only a small utility flashlight.
• Back-up flashlight
  • Just in case your spot light goes out and the second battery is drained always carry a back-up flash light in your car so you can at least finish looking at the property your at.
• Cordless power drill with various bits
  • As I mentioned earlier, in some cases the front door will actually be screwed shut and you’ll need to remove the door to enter.
• Screws for re-securing windows or doors
  • Always have spare screws for re-securing doors, windows, and boards on your way out.
• Digital camera or camcorder
  • Even if you took meticulous notes, it is nearly impossible to remember what the first house you saw looked like after viewing 5 others that day.
• Clipboard/pen and paper
  • Some investors use a checklist when they are estimating the rehab costs of house, especially when starting out and that’s a good idea.  Do this long enough, and you will be able to estimate the rehab cost to within $2,500 off the top of your head after your walk through.
• Heavy duty boots
  • Sandals won’t cut it when walking through mold, water, and broken boards.
• Wear pants not shorts
  • Vacant foreclosed homes have sometimes been trashed by their previous occupants; don’t take any chances.
• A snack and drink
  • This may sound like your in third grade, but when your really in the groove or sometimes not in an area where you wan to stop, the candy bar and drink can prevent a serious headache from coming on.
• Navigation
  • Never get lost again.  The one negative side to always using GPS, is that it tends to dumb down my natural sense of direction which makes it twice as hard to find something when I don’t have my GPS.
• Laptop with wireless card or an iPad
  • This is not necessary but definitely very useful.  Have all your info at your fingertips; it’s like never leaving the office.
• Cell phone
  • One phone call to your real estate agent is all you should need to submit an offer on a hot property.  Also, for safety reasons, never view vacant properties without a cell phone.  It can be pretty nerve racking when you come across a squatter.
• Pocket knife
  • Necessary for cutting and lifting up the carpet to check for old hardwood floors underneath.  Always look to see what’s under the carpet.  Finding old natural hardwood floors in decent condition always put a smile on my face.
• Baseball bat (Louisville slugger is my preference) in the car
  • Again, you can never be too cautious.

I would love to hear what other items, tools, or technology other investor’s have utilized to ease their foreclosure house hunting trips.

FHA Admits They are Hindering the Real Estate Recovery

The FHA has finally come to the realization that many investors buying and fixing foreclosures are taking much less than 90-days to rehab their homes.  Good rehabbers can actually have an ugly house ready for occupancy less than 30 days after its purchase.  So beginning February 1, 2010, the FHA is suspending the 90-day resale restriction imposed on sellers selling to buyers using FHA insured financing.

In order to re-sell a home to a FHA buyer in under 90 days, the following conditions must be met.

This chart was created using the information listed in the Waiver of Requirements of 24CFR 203.37a(b)(2) which is located on the HUD website at http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf.

Here are two more points not listed in the chart.

1. The 90-days flip restriction waiver will expire one year from February 1, 2010.  If the program is successful with minimal fraud, it can be extended by the FHA.

2. If the FHA discovers a significant increase in mortgage defaults and insurance claims attributable to insured mortgages obtained through this waiver, then this waiver may be canceled immediately.

Now let’s analyze the following four key points

.

1. Title must be held be the seller

I know many investors including myself were thinking that simultaneous closings would now be possible.  A to B and B to C all in the same day, where C is the FHA insured buyer.  Unfortunately that’s not the case since the seller must hold title.  In many area across the country it takes about 30 days for title to be recorded assuming your county is not backed up in red tape bureaucracy.  I guess it’s still less painful to pay for 30 days of transactional funding  instead of 90 days, so there’s an improvement.

2. No pattern of previous flipping activity

There has been a lot of fraud and properties changing hands multiple times in the past several years.  So we can’t just assume that the property we are going to sell has not been flipped in the past 12 months.  I see zero tolerance on this policy.

3. If the sales price is greater than 20% above the sellers purchase price

A second appraisal will be needed to justify the increase in value through the repairs performed.  Anytime you have to deal with appraisers now a days it can be hit or miss.  Make sure to cross your T’s and dot your I’s and keep everything in a nice folder to prove your rehab work later.  But now, what if your purchase price was $300,000 and you are trying to sell for $350,000?  No second appraisal required per the guidelines since that’s less than a 20% increase in value.

4.  Repairs not needed to justify a sale price increase

Good news for wholesalers.  Repairs are not required to justify selling at a greater than 20% increase in value above the original purchase price even a day after your purchase.  All that’s required is that the appraiser justifies the sale price and hands the home buyer a home inspection report performed by a third party.

The true investor impact of the 90-day flip waiver

This isn’t the holy grail that will jump start economy and turn small investors into millionaires, but it’s a step forward. This change will help investors save some money on holdings costs and minimize their risk of vandalism since FHA buyers can now buy immediately once a project is complete and not at the end of a 3-month waiting period.

Follow these steps to start submitting multiple offers on foreclosures, REO’s, and HUD properties without ever seeing the property.  Learn to submit offers based on price points and spend that quality time with family and friends instead.

1.  Learn the neighborhood

The first thing an investor must do is learn the neighborhood inside and out that is going to be targeted for flipping homes.   The best way to do this is to view at least 25 foreclosed properties, mostly REO’s, which meet your predefined property selection criteria.  I actually looked at about 50 foreclosures before submitting my first offer – I was pretty gun shy.  Investors that know their neighborhoods well, will know if a house is on a good block or bad a block and what it’s after repaired value is just by its address.  With this kind of knowledge, real estate investors are able to react quickly to new deals and beat out the competition on the really good ones.

2.  Learn How to Estimate Rehab Costs

Go to your local Home Depot or Menards and study the cost of common items that will need to be replaced.  After a while you will learn the general cost of a hot water heater, furnace, kitchen sink, wood floors, tile, etc.  Then find a contractor (read the article on How to Find a Contractor) and schedule a day where the two of you can look at 4-5 distressed properties in detail together (this will require buying him dinner).  Have the contractor explain step by step what he would do in each room and how much it would cost.  By the fourth or fifth home you should be getting an idea of the range of the repair costs you will be experiencing.  Use rules of thumb, such as a full bathroom rehab is approx $3,500, a full kitchen rehab is $6,000, a re-shingle on a roof is $1,500, etc.

TIP:  It’s wise to apply a 10%, “Oh Shit Contingency” onto the rehab estimate for a little extra breathing room.

After estimating enough properties, you will be able to come up with the standard repair cost for a typical foreclosure in your target neighborhood.  Depending on which neighborhood I was targeting, I knew that my average rehab cost was $20-$25K for one neighborhood and $40K for the other.  The first neighborhood ($20K average repair cost) was mostly brick homes, with little exterior work needed and not as many deferred maintenance issues.  The second neighborhood ($40K average repair costs) generally had much older homes in much worse condition that were not treated with any respect as they went into foreclosure. Those were the numbers I used when working backwards to develop my price points for placing offers on a potential rehab homes.

3.  Add-in typical Financing, Closing, and Holding Costs

These costs will not vary much from project to project.  Factor in the cost of your hard money lender or which ever way you plan to finance your rehab purchase and construction costs.  Make sure to include the cost of rehab insurance (builder’s risk), utilities, title company closing costs, and the refi costs if needed.  The rehab should take no more than 30 days to complete (if properly managed) which means minimal holding costs should be incurred.  All together, these soft costs will be anywhere from $5K to $10K depending on the financing.

4.  Determine how much Profit or Cash Flow you desire

Are you shooting for $10K, $20K, or $30K in quick flip profits? Aim for a $25K profit but don’t be afraid to accept less if your presented with a solid offer to purchase your rehab.  A quick and solid purchase offer that will generate a $10K – $15K profit is better than a creative offer with a 30K profit, trust me.  Remember, the profit isn’t real until its in your checking account.  This business can be rough sometimes, so don’t be too proud to accept a $10K profit when the offer is from a reputable investor that you know will close on the deal and not back out at the last second.  If the property will be held for cash flow, then determine what end loan amount is needed to provide the desired cash flow using the Quick Cash Flow Calculator.

Here’s an example of how to calculate the purchase price point for a quick flip:

Purchase price point = $95K (ARV sale price) – $25K (standard rehab cost) – $5K (soft costs) – $25K profit

Using these numbers, the price point for this neighborhood would be $40K.  Any property that can be obtained for $40K or less is a deal worth doing.

Here’s an example of how to calculate the purchase price point for a rental targeting a monthly cash flow of $250 per month:

Purchase price point = $67K (end loan needed for a $250/month cash flow*) – $25K (rehab costs) – $7K (soft costs)

*See below for the assumptions used to calculate the end loan amount that will provide $250 per month cash flow using the Cash Flow Calculator.

The purchase price in this example comes out to $35K.  So any property that meets your predefined criteria that can be obtained for $35K or less is a deal worth pursuing.  Comment below if you want me to explain this further.

What if the assumptions are wrong?

What happens when your offer is accepted and when you see the inside of the property for the first time you find out that the rehab costs are much higher than anticipated?  This shouldn’t happen very often if you evaluated your target neighborhood correctly; otherwise, you need to reevaluate your assumptions.  When the numbers on a deal will definitely not work, you have to walk away from the deal even if this means losing your earnest money. I’ve only had to do this twice on over 60 rehab foreclosure projects.

If you love flipping real estate, whether it is for quick cash or long term cash flow, you will eventually have desires to quit your job and do this full time.   Plan carefully and submit offers frequently.  Your not making any money until your submitting offers.  Don’t look for the home run on every deal.  Focus on developing a system to put your rehab business on auto pilot so you can actually enjoy some of the money you make.  As Tim Ferris says, author of the 4-hr Work Week, “the new rich define their wealth by how much free time they have in life to do whatever they want whenever they want”.

Define your “House Flipping” Strategy and Stick To It

When referring to flipping properties, we are referring to the “art” of buying a broken down house, rehabbing it quickly, and turning it into profitable asset in the least amount of time at a controlled cost. The exit strategy can be either to sell for quick profit or rent out the house for cash flow.  The decision typically depends on the state of the current economic market cycle. When property values are skyrocketing it’s easy to fix and flip for quick profit. When it’s a buyer’s market, usually during economic downturns, it’s easy to create positive cash flowing rental properties. Regardless of which profit strategy is chosen, stick to it without wavering.  In the long run this will save you money by not wasting time bouncing back and forth between strategies just because it’s taking longer than you originally planned for to sell or rent out that house. Hence the importance of reserve funds. Unless you completely misread the market, don’t change strategies mid stream.  Nothing more than that is needed to be successful in this business. Expensive guru courses and creative techniques are not all bad, but they are certainly not required to get started in making money with real estate.

Why Buy REO’s?

Because REO properties or bank owned foreclosures will be the easiest properties to acquire and locate and therefore the best properties to start your real estate investing career with.  REO homes have already been through the foreclosure process, they have been returned to the bank, and are being offered with clear titles with no negotiating necessary other than the price.  Real estate investors interested in starting a “fix and flip” or “fix and hold” business should focus their initial efforts on construction cost control and marketing of their affordable housing rather than creative techniques to acquire super cheap properties.  Everything an investor needs is on the MLS right now.  Wholesalers can be a good source of cheap properties also, but make sure they are not just regurgitating what’s already on the MLS.  A new investor should direct their attention on not blowing the construction budget and quickly finding a buyer or tenant instead of trying to perfect creative ways to acquire cheap property.

Flipping Houses

What kind of Property and Neighborhood Should I Invest In?

• In the “flip this house” business, single family homes are the bread and butter of quick profits and/or long term cash flow.
• Look for 3-5 bedroom homes with decent size bedrooms as your target properties. Small bedrooms are big turn offs to potential tenants and buyers, even when dealing with affordable housing. (Requirement)
• Choose brick over frame homes if possible. (Not a requirement)
• The neighborhood needs to have access to public transportation and a major metro nearby with plenty of jobs. (Requirement)
• Avoid war zones and neighborhoods that are constantly on the nightly news due to their crime rate. (Requirement)
• Don’t fall into the trap of targeting neighborhoods with the absolute cheapest homes on the market, you’ll never maintain a decent tenant. (Requirement)
• Decent sized, freshly rehabbed homes in good blue collar neighborhoods have the largest pool of potential buyers and good renters in the market place. (Requirement)
• Just an observation: A “good” neighborhood typically has well maintained lawns; it shows that people care about their homes.
• Avoid buying a home with a boarded up home next to it or across the street from it and preferably with no other boarded up homes on the block if possible. (Requirement unless you can buy all the boarded homes on the block)
• Check to see if the county’s section 8 voucher program has a waiting list. Many areas across the country do and this can be a great way to acquire steady and reliable cash flow. (Not a requirement)
• Target a neighborhood that meets this criteria and farm it. (Requirement)

Also, it greatly helps if your target neighborhood is less than an hour from your house. This may not be possible, but at least stick to one neighborhood and don’t start buying homes on opposite ends of town. This will kill your efficiency in very aspect. Buying foreclosures, fixing, flipping, or renting for cash flow is not that complicated when you stick to the basics.

How Much Damage Should the Property Have?

Many gurus recommend only purchasing cosmetic fixer uppers for ease of rehab and minimum risk; probably because they don’t know how to fix “real” problems. That’s OK though. If you can find cosmetic fixer uppers that will cash flow and have a no more than a 65% LTV after repairs, then I suggest you start with these. There are many failed landlords out there who have lost good properties as a result of this historic real estate market crash and these properties are now for sale at dirt cheap prices as REO’s.

In order to get some even better deals, consider going after homes that are in need of major repairs requiring a gut rehab.  Many investors shy away from these because of their lack of knowledge in how to repair them and what the cost will be.  Gut rehabs, where all of the drywall, most electric, and most of the plumbing needs to replaced is the sweet spot for getting a great deal.  Banks will usually give these away depending on the investor competition in your area.

Unless you really know what your doing, stay away from whole house mold damage, fire damage, sagging foundations, major additions, and changing floor plan layouts.  All of this can be managed but be very careful that your numbers make sense.  Also take into account the extra time that these repairs may take and would you be more profitable performing another “standard” rehab instead of focusing on one big one. A gut rehab on a single family home of approx 900 – 1200 sq. ft. should take no longer than 21 days to complete if properly planned.

Why Buy Single Family Homes Instead of Multi-unit Homes?

Single family homes are the easiest properties to rehab, rent out, and profit from with more exit strategies than any other type of property.  Enough said.  Yes, it’s true that when a tenant moves out of a house it is a 100% vacant unlike a multi-unit property with several units producing rent.  But many times tenants leasing well rehabbed homes will stay longer and be less of a hassle than the tenants in apartments.  Single family homes also have the largest pool of potential buyers when it comes time to sell.  Potential buyers include the tenants themselves who may be eligible to purchase the house, another real estate investor looking for steady cash flow, or a homeowner looking for an affordable home in good condition.