How the foreclosure auctions work?
I hear this question often even from very successful and very busy people. I understand it. We are curious, and people who have money, are curious people, too. The idea of money growing on a tree is simply too tempting for any human being.
But I also know the reality. I know what it takes. I know how…
Folks, it is easy.
Here is what you need in Daytona:
• Have money, so that you can cover your losses.It is cash business only.
• Have time. It is not a part time activity.
• Have help. It is too much work for one person.
• Follow the pre-foreclosure market. Knowing property history from years back helps.
• Evaluate properties coming on the chopping block. How much you can buy them for on “regular” market. Check tax assessed value.
• Check for Liens, lis pendens… Some liens are wiped out, some not.
• If this is a condo (or a house in a HOA community), try to check what they owe to the association. Condo Associations in Florida do not have to lien the property in order to collect unpaid fees. Even if you see a lien, it may be for a fraction of what is really owed. Get used to that the Associations often times do not respond.
• Research the physical condition of the property. Look through the windows, talk to neighbors, anyone who might know about the condition of the property.
• Get the Title Search done. There are companies, that would do it for $50, but this IS NOT a complete report.
• When you get a report, which is dozens of pages, making no sense, you need Title examined. So, you either pay for a much better service, like Attorneys’ Title, that would cost you about $200 $250 a search, or pay a real estate attorney.
• Project the repair costs. Yes, you can’t see and inspect the property, but you need to be prepared to do work there. Don't expect that everything is fine. Be ready that everything is bad.
• Have people to do remodeling. You should be realistic. DIYs sound great, but you would need to sell it.
• Determine the resale value of the property you are bidding upon. Do not forget to include Commissions, Doc Stamps, Title Insurance, Settlement Fees, Title Search, Title Examination. In Daytona, it is all paid for by the Seller, which will be you.
• Expect that selling may be complicated, because some lenders would stay away from foreclosures, as reputable title companies would not issue Title insurance on a recently foreclosed property. There may be an issue with property insurance, too…
• Be good with numbers. Nearly everything can be done; it is simply a matter of cost and risk.
This list is for starters.
The advanced level would involve knowing the participants, people who bid. Know their habits, strategy, strength and weaknesses (keep in mind, auctions are on the Internet, so you do not see them face to face. All you have are codes. We know major players behind codes).
It would also include property tracing. Where to find information, how to trace properties. Only novices believe they just pop up on the auction, experts know of them well in advance.
Know how you would make profit. It is a very competitive business, so people bid up reducing the profit margin. Builders bet on their ability to handle any repairs, so if everything is darn wrong, they do not lose much.
We base our projections on doing high end remodeling and standing out from the crowd when it gets to selling. But there is a risk of spending too much and not being able to sell to make a profit. It is a tricky balance.
Hence, Exit strategy. Can you rent this property and wait till the market improves and then sell. Would you be covering the expenses?
Here is the fun part. I heard too often that people want guarantees. Here how it works as close to guarantees, as it can.
You may look at foreclosure schedule and see 25 properties there. You see the judgment amount, and usually it is so high that it makes no sense to bid at all. One-two days prior to auction instead of amount of judgement you would see "hidden". These are now game. Those properties, which did not change to hidden, that keep the high judgment amount, would go back to the Lender. Some of those, that say "Hidden" will also go to the Lender, because "Hidden" does not necessary mean, that they would sell for nothing.
The properties may be redeemed, or owners file Bankruptcy, or the Plaintiff and/or Defendant petitioned the court to reschedule or withdraw, and the judge agreed… All that usually happens in the last day or two, by which time you should already have the Title Search and Examination done… But if you get the Title work on each of 25 properties, you would have paid about $5,000 for one day in Title Search and Title Examination alone.
On normal week you may have about 100 properties auctioned. No guaranty of your win, but that would cost $20,000 to $25,000 just on Title fees alone for one week.
Do you have $100,000 to fool around month after month with no guarantee of winning? But this is the cost of guarantee in floreclosure auctions.
How many properties you would buy this month?
We are not the greatest example, of course, but when we were more active, we were winning 1 in about 1,500 auctioned properties. We buy fewer now. The reason is that we do not have the resources to handle everything and we only do condos and condo-hotels.We know them better than many others.
We do not venture into houses.
It is not that houses are riskier than condos. It is simply because we specialize in condos and we know them.
And yet, 1 out of 1,500. Is it at $200 per property for Title Work? That would be $300,000 for a peace of mind, but the one we buy cost less than $300,000 and the profit on it would be the fraction of it...
No, we do not have millions. We do not do it.
So, we take risks. And we hope that we would not seriously screw up. Because:
- We only do condos and condo-hotels here, which we already know.
- We do in-house Title Search, shy away from complicated cases, and we can get free help from our attorney when needed.
- We have been involved in remodeling for a few years, know how to estimate, and have crews to do the work, and do some work with our own hands.
- We are in Real Estate, so we can analyze the market and be very realistic with numbers.
And yet, it is a gamble… We risk…
Do we ever miss?
Yes, in 5 years doing it we made 2 mistakes.
And it's darn good.
Do we ever use exit strategy? Yes, we could not sell for what we wanted, and we rented.
Other than that, it is easy folks. If you decide to do it, go for it. You will get all the adrenaline in the world.
If, however, you are in this for money, let us work together. You do your job and do not deal with all these issues, and we do our job.
And we both win.
Image by Jo Jakeman , walknboston, Mike Licht, Alan Cleaver via Flickr.com
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