always recommend that first-time foreclosure investors sit in on at least five auctions before bidding. When you begin sitting in on auctions, you’re likely to notice the same people showing up week after week, a majority of whom never bid on properties. Some people attend for the entertainment value, and that’s fine, but others consider themselves to be the resident foreclosure experts. A new face in the crowd draws their attention, and they offer what they’re convinced is solid investment advice.
Steer clear of these foreclosure-investor phonies. The people you want to seek advice from are the people who show up every week, bid on properties, buy them, and turn them over for a profit. Unfortunately, these knowledgeable people aren’t likely to share their wisdom with a novice investor who’s looking to compete with them. But if you can earn their trust and offer something of value in exchange, they may be willing to pass along some advice.
Weighing the pros and cons of buying at auctions
The foreclosure auction provides you an opportunity to purchase a controlling interest in a property without having to deal directly with the homeowners in often-uncomfortable situations. In a way, the auction simplifies the process of acquiring properties. You show up, submit the winning bid, and walk away with the sheriff’s deed.
Buying at auction, however, presents several additional challenges, including the following:
You may not have the opportunity to inspect the property thoroughly, although you should at least inspect the property from the outside, as I advise in Chapter 8.
Properties are often sold as is, so you’re more likely to take possession of a property that requires costly repairs.
Cash payment is usually required at the time of purchase, so you need to show up with a cashier’s check. In some cases, you have a few hours or days to come up with the cash, but you still need ready access to cash to close on the deal.
Depending on the number of investors at the auction who actually bid on properties, you may face some stiff competition.
When you buy a property at an auction in an area that has a mandatory redemption period, you may need sufficient funds to hold the property for several months to a year until you see your profit. (If you’re using your own money, you need just enough cash to insure the house and pay the property taxes. If you borrowed the money, you may need additional cash to cover the monthly payments. For more about financing your purchase, see Chapter 5.)
Setting a maximum bid well in advance
One big mistake to avoid at an auction is getting caught up in the excitement of the bidding experience. I know the risks of overbidding firsthand, because I have trouble restraining myself at auctions. I hate to lose, so if someone’s bidding against me, I always win — the bid, that is. Only later do I realize that my obsession with winning made me the big loser for having spent too much for a property.
Putting on your poker face
Bidding on a property at foreclosure is a bit like sitting around a poker table and trying to figure out why a particular investor is bidding on a specific property for a certain amount of money. In some cases, the other investor may know more about the property than you do. In other cases, the investor knows less. The person may be bidding on instinct to drive up bidding or simply to toy with other investors.
The comparison of bidding on foreclosure properties with playing poker ends there, however. Bidding on properties is a high-stakes game in which you stand to lose as much as you stand to gain — or more. You may never know why a particular investor bids a specific amount on the property, but you always need to know why you’re bidding a specific amount, what you’re bidding on, and how high you’re willing to bid.
With a fully fleshed-out property dossier, which I show you how to assemble in Chapter 8, you hold all the cards in the deck. This dossier enables you to put on the dispassionate poker face required to win the bidding game. You know exactly how much you can afford to bid to earn the desired profit. Not everyone who’s bidding against you will have the same advantage.
Acquiring Properties after the Auction
The auction close doesn’t signal the end of your opportunity to acquire foreclosure properties. For investors who choose to focus on post-auction properties, an auction's close signals the beginning. These investors don’t want to deal directly with homeowners, and they prefer to avoid the sometimes-messy auction process. They’d rather buy properties from the new owners.
In the following sections, I list various opportunities and resources for tracking down post-auction properties, from bank-owned and government-owned repos to properties that have been seized because they were paid for with ill-gotten gains. You can make a good profit by focusing on any one of the categories I describe.
Scoping out REO properties
Auctions typically start with a minimum bid. If nobody in the room bids high enough, a representative for the bank that’s foreclosing offers a bid and takes possession of the deed. The bank transfers the property to its REO or Other Real Estate Owned (OREO) department, which prepares the property for sale.
Because preparing properties for sale and selling them costs banks additional money, they’re often willing to negotiate sales with investors rather than place the properties on the market.
Admittedly, the process sounds pretty easy, but it can be very challenging for any or all of the following reasons:
Banks don’t like to sell properties at bargain-basement prices just to unload them.
REO
