Posted by randyOH on November 17, 2002 at 21:28:36:
JM,
Tuscarawas County. Ever been there? I have some relatives in Columbus and have spent some time there. One of my favorite places.
Regards,
Randy
Am I Ready To Buy Houses At Auction?? - Posted by Mike
Posted by Mike on November 17, 2002 at 03:41:30:
I think I am, just wanted to get some further input from the pros here. I started out going to auctions and getting input from the regulars there. There are about a dozen of them who do this for a living in my area. Next I partnered up with an acquiantance of mine who is a professional homebuilder to help me assess houses that are going to auction and manage whatever repairs need to be done once we buy one. Next we met with a real estate attorney who is going to look at the houses we plan to bid on before we bid. We then found a realtor who specializes in foreclosures, she also moonlights for a trustee company and knows about this business inside and out. She is helping us with comps and focusing in on houses that will provide the most profit. Finally I have a title company providing us with free title searches.
What’s left? There are a few houses coming up for auction this week that have been blessed by the experst I have surrounded myself with. If they actually make it to auction I would like to pick at least one up.
Any further advice on what needs to be done to further limit getting burned here would be greatly appreciated.
Thanks.
Re: Am I Ready To Buy Houses At Auction?? - Posted by JT-IN
Posted by JT-IN on November 17, 2002 at 17:22:12:
Mike:
You didn’t mention what your exit strategy is going to be with these acqusitions; buy and hold, wholesale/retail flips, L/O’s, etc. The answer to which will determine which legal form of business structure you should utilize. e.g. LLC, S-Corp, C-Corp. Of course this is not specific to foreclosures, but to any property acquired by an investor.
Specific to foreclosures, it seems that you are fairly well prepared, however there will undoubtedly be some learning curve involved. While you may have an excellent support group to begin with, you will find that this will get expensive having such a contingent staff involved each purchase. You will want to learn each area from the specific pro, and quickly be able to replicate their tasks, in order to cut costs. Of course, I am not advocating that you cut corners at the expense of quality.
What you will find is competition is driving prices very high, which cuts into potential profits… so lean and mean is required in order to stay i this business… IMHO.
What I recommend to folks who want to get into foreclosures is to attempt to understand “why” each step and phase occurs in the foreclosure process. Analyse and disect each step until you do understand exactly what is happening. Too many people who have investing for years, never really know why certain steps are taken, and it is just a matter of time to these folks making a “big mistake” in the process.
Become a student of the game, or you shall become a statistic of the game…
Just the way that I view things…
JT-IN
What % could you reasonably expect to get? - Posted by randyOH
Posted by randyOH on November 17, 2002 at 16:57:03:
Mike,
You could have a problem if you plan to spend time and money on EVERY house you bid on. In my area, at least 80% of the sales go to the lender. And for the remaining 20%, I am competing with other investors and even some owner occupant buyers. I do drive by the houses and look in the windows when I can, but that is all I can justify prior to the sale. You mention you can get free title searches and I have to wonder how long that will last. You also mention that a lawyer is going to “look” at all the houses you plan to bid on. That all sounds a little expensive if your sales are like mine. But, maybe it is different where you are. Anyway, just thought I would pass this on for what it is worth. Good luck.
Randy
Re: Am I Ready To Buy Houses At Auction?? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on November 17, 2002 at 15:19:49:
Mike------------------
If you have not already done so, I suggest that you read my article in the “Money-Making Ideas” section of this CREONLINE.COM website. Since you are planning to do foreclosure investing, I suggest that use it as a guideline for some of the bases you will want get covered. And please understand that that is not an exhausive list of things to watch out for. There may be some local issues that I have never even heard of.
And, read and understand your state laws on foreclosure and collection of debts. Get into the courthouse and read the “annotated statutes,” not just the “black letter law” which is the statutes themselves. See if you can find a book for attorneys on something like mortgage practice in … state. You need to know the law related to foreclosures, in my opinion, better than an attorney. I have been to many sales where the auctioneer was going to do something which the attendees said “no way–that is not what the law says.” You need to be prepared to do that.
While foreclosures can extremely profitable to those who and work them well, few beginners can do that, in my opinion. If you have spent about 6 months going to sales and studying the law and studying up on what to do with the properties after you buy them, then you may be ready to start risking your money. This is a serious business and some of the other players may do some very nasty things to you. You need to see how things work so you can recognize when you are getting set up to lose. The “40 thieves” can include some very hard-ball players. This is not a picnic in the park.
Good InvestingRon Starr*
Re: Am I Ready To Buy Houses At Auction?? - Posted by KN
Posted by KN on November 17, 2002 at 06:59:41:
ummm… you almost have everything coverd but you forgot the most important part…$$$$ money. Maybe you have it, but if you don’t then your going to need to start back at square 1. Also I don’t know what state your in but in florida you have to have the money by 3pm that same day, and the auction is over at around 12 noon so that leaves you 3 hours to get the money.
Re: Am I Ready To Buy Houses At Auction?? - Posted by Mike
Posted by Mike on November 17, 2002 at 18:02:54:
JT-IN thanks for the response. I have enjoyed reading your posts about this whole business of foreclosures. We are planning on flipping our houses, at least at first. The housing market here is pretty hot but from what I understand many rentals are going vacant due to low interest rates. We were planning on going with an LLC, let me know if you disagree with this approach. One partner I failed to mention was my CPA, and I was planning on talking with him tomorrow. He’s another one that won’t be charging me anything for his advice, not at this stage at least. Do you work with an attorney on your purchases? I don’t plan on including him on all our deals, just the first few. The one consistent vendor expense is going to be the realtor though. We intend to negotiate with her on price once we actually do a few of these and see if we can make it work or not. I am definitely curious to hear from you on what is a fair arrangement to have with a realtor who will largely be responsible for listing rather than bringing buyers to the table for us. I don’t want to offend her though because she is well connected on the trustee side of things and is a major asset to us. She even serves docs to alot of the foreclosed owners and has seen the inside of some of the houses we are considering buying.
Your comments about understanding the steps is a great one. In a nutshell what are the major steps I should focus on?
Thanks again for the input, it’s greatly appreciated.
Re: What % could you reasonably expect to get? - Posted by Mike
Posted by Mike on November 17, 2002 at 17:50:50:
Randy our intent is to buy houses that require minimal repairs so we can flip them quickly. My biggest concern is the one you touched on, namely we won’t be able to look in all the houses we buy. I want to build in enough padding in our repair estimates so we don’t take too big of a hit on any house that looked like it needed less work than it did. The title searches will definitely be free for as long as we need them, especially if/when we start floating business their way. I agree about the legal expenses, we will probably need to reassess the need for the lawyer after we do a few deals. It sounds like you don’t use a lawyer?
As an fyi, people who do this for a living in my area shoot for 40k profit per house. Not sure if that’s the norm where you are or not. We will be happy if we can make 30k for our first few houses. I would also be interested to see if our willingness to bid higher thins out competition from the regulars or not. My partner and I both have money to put into this so we should be able to buy twice the # of houses, so long as the inventory is there. We want to start with cheaper houses first but if we get a good feel for this we can also leverage our combined money to buy more expensive homes that might weed out some of the competition at the auctions.
So far from what I’ve seen, about 80% of the houses in preforeclosure get reinstanted one way or another. Out of the remaining 20% I would say about 80% of those don’t have any equity. My rough estimate is that there are about 15 decent houses worth bidding on per month. I am already thinking about looking into other counties outside my general area to see if there is less competition for houses. First I want to get one or two houses and go through the process though, one step at a time.
Re: Am I Ready To Buy Houses At Auction?? - Posted by Mike
Posted by Mike on November 17, 2002 at 16:20:56:
Ronald, thanks for the response. I have indeed read your article, it’s the only one I could find that actually discusses the pitfalls rather than all the “easy” money one can make. Thanks for writing it! I thought having a good real estate attorney would limit my liability on the legal front. I would be interested in getting your opinion on buying houses in the preforeclosure stage. I am under the impression this is actually much more risky than going in at the auction.
From what I can tell so far, the bidding here is competitive but not cutthroat. The regulars are all buddy buddy with one another and regularly buy one another out as an auction is actually going on to prevent one another from bidding up a house to high. It’s a pretty interesting sight to watch.
Re: Am I Ready To Buy Houses At Auction?? - Posted by Mike
Posted by Mike on November 17, 2002 at 11:49:24:
KN, I got the money part covered. It’s the not losing it part that worries me the most. Lol.
LLC vs S-Corp… - Posted by JT-IN
Posted by JT-IN on November 17, 2002 at 20:36:17:
Mike:
You may want to search the archinves on both the Main Board and the Legal Forum under LLC or S-Corp, as John Hyre has posted some very good articles and posts about forming your business. I personally think you wuld be money ahead to form a Corp, then file for the Subchapter S election, and all properties that you intend on flipping, or holding a year of less, then put in the S-Corp. There may be some tax savings on the FICA taxes that the corp would pay for you… Of course, check this with your CPA before doing so.
Commissions are negotiable, and I try not to pay over 5% total, with 3% going to the selling agent… on some of the more expensive props, I even go down to 4 1/2%. Volume will make up for any reduction in the comm rate, and a long-term team player will recognize this and be happy with the repeat business. You should tell the agent that NO hand-holding is required, so you are lots less trouble than a typical homeowner… provided this is true.
Wish you all the best on the new approach.
JT-IN
$40,000 profit? - Posted by randyOH
Posted by randyOH on November 17, 2002 at 18:13:24:
Mike,
That $40,000 profit figure sounds awfully high to me. I shoot for about $10,000 and I think some of my competitors are happy with $2,000 or $3,000. But I am working in a low priced market. My typical house would be bought for $30,000 and need around $5,000 - $10,000 in repairs, then be worth around $50,000. So, I am netting around 20% of the after-repairs-value. Of course, if you are dealing in $200,000 houses, then $40,000 would be in the ballpark of what I am doing. It just seems to me that $40,000 deals would attract a lot of competition. Maybe you have found the utopia for REI. Dare I ask where you are?
Randy
Re: Am I Ready To Buy Houses At Auction?? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on November 17, 2002 at 17:20:11:
Mike----------------
As I wrote in the article, I think that the pre-foreclosure buying is less risky than buying at the acution because you can go through an escrow company, get title insurance, have inspections, etc.
You should not talk in public about the “deals” that cut at the sales. Those are strictly illegal and against the law and not ethical. Here in CA there are actually two different laws on the subject: no “chilling” the bidding at any auction, and a specific law forbidding “chilling the biddng” at trustee’s sales. Big penalties. The economics favors the practice, the law forebids it. Sometimes the guys just all go around the corner, leaving one bidder at the sale so that it does not look strange that there was no competitive bidding.
Of course, as an advisor, I suggest that you never break the law. I have never taken a fee nor paid one for not bidding at a foreclosure sale. I suggest that you adoppt the same policy. Now, I have seen a different practice. That is for a couple or three guys to all become partners in the purchase of a property. As long as they all have money at risk and all stay in as partners until the property is resold and they are cashed out, I would consider that legal. While I do not think it is illegal, I am not the judge, so it might be deemed illegal by a judge, should it ever go to court. Usually one of the partners will take title and the others are “silent partners.” And the titled owner manages the whole property. Different properties get managed by different partners, so the work is divided around in a satisfactory way.
Good InvestingRon Starr***
Re: LLC vs S-Corp… - Posted by Mike
Posted by Mike on November 17, 2002 at 21:39:03:
JT-IN thanks for the advice. I can’t wait to actually pick up something at auction.
Re: $40,000 profit? - Posted by Mike
Posted by Mike on November 17, 2002 at 18:22:29:
I’m in Portland, Oregon. Depending on what you read we have one of the more overinflated property markets in the country, I of course disagree.
40k is right, and I know this figure is legit. I have watched properties go up for sale that might need 5-10 worth of work but without a doubt sold for a good 40-50k below market. Where do you live?
Here is what is happening in my market - Posted by randyOH
Posted by randyOH on November 17, 2002 at 18:27:52:
Ron,
The two biggest foreclosure investors in my market have recently started partnering on sheriff sale properties. I can see where this would increase their profit, but I have to wonder if they will be able to make it work in the long run. I would think things would get kind of complicated in between the buy and the sell. Anyway, they sure make it difficult for anyone else to get a deal.
Take care,
Randy
Re: Am I Ready To Buy Houses At Auction?? - Posted by Mike
Posted by Mike on November 17, 2002 at 18:16:39:
Ronald, my apologies I forgot that you had written in your article about preforeclosures. My experiences so far have led me to believe that the odds of doing a deal at the preforeclosure stage are very low which is probably why I have soured on it as an option. I have been sending out postcards weekly, leaving cards, phone calls, knocking and it all seems like a waste of time. The reason I think it’s more risky is that the seller has all sorts of legal protections that I’m afraid could come back to haunt me years after whatever deal I have struck with them. My attorney has also said, regardless of any deal we strike with the owner we have to buy their loan out in it’s entirety before the sale in addition to straightening out an junior morgtages, judgements, liens, etc. I have yet to see a straight forward pre foreclosure that at the very least doesn’t have a 2nd mortgage attached to it. I would be interested in hearing about your experiences with pre foreclosure.
I would like to look into REOs as well but from both what I’ve been told and what I’ve read in the archives here it’s very difficult to get around working with the bank’s realtor and paying a premium for the property once a property goes unsold at auction.
Your info about “chilling the bidding” at auctions is pretty interesting. From what I understand it’s legal in my state. I will definitely double check on this one. Thanks.
Sounds good - Posted by randyOH
Posted by randyOH on November 17, 2002 at 18:57:04:
Actually, I live in Orange County, CA, but I have a second home in a rural area in Ohio and I have been doing most of my investing in OH. I just don’t see any opportunities here in OC. The only question in my mind about OC is when I should sell my three condos that I bought about five years ago. I am planning to sell next spring. I hope that is not too late. Best of luck to you in Portland. Keep us posted.
Re: Here is what is happening in my market - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on November 18, 2002 at 13:13:58:
Randy–(OH)-------------
I don’t see any reason to think that they will have any problem with doing the partnerships. As long as they are reasonable people and good businessfolk. I have seen professional foreclosure investors here do this for years.
Good Investing*Ron Starr
Re: Sounds good - Posted by Mike
Posted by Mike on November 17, 2002 at 21:40:44:
Randy, good luck with the condos. I’m sure you will make some nice coin on those investments.