With foreclosures still going strong in this country, most people recognize that there is a very serious opportunity to make money by purchasing them on the cheap, but few actually know how to buy a foreclosure the best way possible.
People think that buying foreclosures is all about purchasing them from the bank once the bank has already taken the property back. This is incorrect!
Those that know how to buy a foreclosure the right way know that it is all about picking them up at the trustee sale, before the bank has a chance to take it back. this is where you can legitimately purchase property well below market value and make a considerable amount of money as opposed to buying bank owned homes once they come back on the open market. Those properties are usually bid back up to fair market value because they are just as easily purchased as any other home. In fact, buy property at trustee sale is probably the best way to make money in real estate today.
What makes trustee sales so lucrative is that so few people understand them. This creates opportunity. However, it is a lot easier said than done. If you are seriously considering purchasing property at a trustee sale you will want to read on and study the following points. Once you do, you will know how to buy a foreclosure the right way.
What is a trustee sale?
A trustee sale is an auction of property that has fallen behind on payments and is about to be foreclosed on. The auction usually takes place on the courthouse steps and is normally a strikingly casual event, considering that millions of dollars in real estate are changing hands.
At the trustee sale, property that is about to be taken back by the bank is put up for auction, the bank automatically puts in their opening bid. If anybody puts in a big over the bank’s opening bid, that person becomes the new owner of the home. If nobody bids, the property is taken back by the bank and becomes what is widely known as a bank owned home or an REO.
It is not uncommon to purchase property for as much as 40% below fair market value at the trustee sale. Why then does not everybody learn how to buy a foreclosure at trustee sales? Aside from the fact that shockingly few people are aware of these sales despite their very public nature, you have to purchase the home cash and on the spot usually sight unseen.
Those two elements obviously create some major barriers to entry. For one, not everyone can come up with a cashier’s check for a few hundred thousand dollars on demand. Furthermore, not everyone has the stomach to purchase a home cash that they have never stepped foot in before.
However, for those that do want to know how to buy a foreclosure in the best and most lucrative manner, read on.
See, the thing is that there is actually no risk in the numbers when you purchase a home at trustee sale. You know what the fair market value is and you also know what you are paying. The risk is totally and completely in the unknown, which you try and mitigate through very thorough investigative due diligence.
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Trustee Sale Due Diligence
There is nothing more important in knowing how to buy a foreclosure at a trustee sale auction than investigating the property inside and out. In fact, you will want to create a strong relationship with a title company that will support you on a number of issues. This is what will determine if you make a load of cash or you lose your pants. Here are the items that you need to become aware of:
Loan Position: The very first thing you will need to do is call your title company and verify that the loan that is being foreclosed on is in first position. Otherwise, you will be making a huge mistake. If you were to purchase a loan in second position you will find that the money you just spent most likely went down the tubes. Verify that the loan is in first position or walk away.
Status of occupancy: When buying foreclosures at the trustee sale it is crucial that you verify if the property is vacant, owner occupied, or tenant occupied. That is also the order of preference you should have. The reason this is so important is that if the property is owner occupied it is very easy to evict the person living in the home. However, with tenant occupied property there are a series of very large headaches that come into play. In California, for example, you must honor an existing lease for up to a year. This means that you have a lot of cash tied up for a very long time. If you can find a vacant property to purchase that is the most ideal situation.
So how do you verify who lives there? You literally become a detective. You do simple things like ask the neighbors who lives there and more involved things such as getting the name of the owner from the public tax records, knocking on the door, and then calling the person who answers the door by the name you found in the tax record to see if they react. Just make sure you figure it out.
Verify fair market value: This is a fairly simple step but still a very important one. You need to figure out the true market value of the property that you are considering for purchase. In my opinion you should aim to be conservative and allow yourself to be surprised on the upside rather than down. This will be a key number in your decision on whether or not to purchase the property.
Condition of property to whatever extent it is possible to determine: In order to be able to decide if you will purchase a property at the trustee sale you need to have a good idea for the general condition of the property. Does it look like it is in good shape? Has it been taken care of or does it seem neglected? These are important questions that will directly affect the desirability of the investment. Look for clues such as landscaping and visually compare the home to its neighbors. What I like to do is observe everything possible about the home including looking over the fence and peaking in windows before I knock. This is because once somebody comes to the door they may ask you to leave and then you will not have a chance to continue looking. Knock as a last step. Once you do knock make sure to look inside at the walls, floors, and walls as much as possible and to take a big whiff to try and pick up on any smells. You may only have a few moments before they close the door on you so work quickly. These will be important clues. Depending on the condition of the property you will want to build in more or less reserves for fixing it up into your financial analysis.
Liens and encumbrances of any kind that may exist against the property: A key component to your investigation will be to figure out anything that is affecting title on the property. Contact your trusted title officer and have them research any liens or encumbrances against the property that you are considering. They will not be able to give it to you with any guarantee as they do in a normal title policy but this is the next best thing. Most liens actually go away in the foreclosure process but you will still want to investigate this information. Avoid anything with federal judgments. Also, mechanics liens on new construction should be avoided to due to their tricky nature depending on when they were recorded. Until you are more familiar with how to buy a foreclosure through this method just avoid them. Please consult a title company or attorney in your area for more detail on this issue. This is a state by state matter and cannot be fully covered in this guide.
Bankruptcies recorded against property: The main reason to be aware of bankruptcies is because they will often cause you to waste a lot of time on a property that will continue to be postponed at auction month after month until the bankruptcy is settled. If you have a large database of properties you may want to track them, but otherwise you may be wasting time and energy.
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Owner occupancy rate and litigation if purchasing a condo: Condos come with more risk than single family homes because you also have to worry about how the neighbors affect your ability to sell. If the owner occupancy rate is low or if there is litigation in the building where you are buying the condo you may have a hard time closing a deal with any buyer that is getting a loan. Banks are very careful about not lending on property with litigation or low occupancy rate so please look into this as a key issue if you are considering a condo. Try and keep the ower occupancy rate above %65 and make sure there is no pending litigation in the development’s HOA.
Set a limit: Once you have analyzed all of the above elements and you have decided to move forward to purchase the property, be sure to set a limit. If your analysis tells you that you should not purchase it for anymore than $300,000 than stick to it. If the auction gets bid up to $300,001 just walk away. It isn’t worth it. This is how people get hurt. They get caught up in the game of bidding and they over pay for property. Be cold and calculated about it. Discipline will pay off.
That is how to buy a foreclosure. It is no joke. It takes time and expertise. That is why not everyone does it even though it seems so simple before you have the facts. It is also why there is so much reward to be had by those that execute the plan correctly. Take your time. Study. Learn. Go through a few test runs. The time and effort will be worth it. Short cuts will get you killed. Good luck!
Written by Daniel Beer of Prudential CA Realty – San Diego Houses For Sale