Creative Real Estate Club

“Foreclosure Profit Machine” Chapter 7

When pre-foreclosure properties meet their fate and go to the auction sale, it is too late for the homeowner who wishes to stop the foreclosure. The property has been foreclosed on, and is either owned by a new purchaser at the auction, or by the foreclosing bank itself, which buys back the property at that time.

In most cases, if the property has substantial equity and goes to the auction sale, it may be purchased at an extremely low price by a wise investor who is aware of the opportunity and prepared for action. The key is to have an understanding of the property’s final value, after repairs. Once again, you need to make a careful determination as to the actual cost-to-value (“CTV”) that the property may cost you to buy, hold, fix-up, and resell.  Cash is King

Having this in mind, you can back down from the CTV, into what should be your maximum cash price paid for the property at the auction sale. Cash is King at the auction. In fact, it is the only welcome guest at an auction. If you’re going to buy property at auctions, you must have a strategy as to how you’re going to pay for it. Most auctioneers require that you bring a large sum of cash, a series of cashier’s checks, or at least a cashier’s check with the minimum amount of the bid. Be sure to contact the trustee holding the auction to determine their bidding and payment rules.

In any case, you need to be ready to move quickly – with cash. So where can you come up with this money? Certainly, you could go with private party monies, credit lines, cash, or private mortgage investors who issue what we call hard money. There is literally a ton of cash awaiting a good rate of return out there. Watch out for our “Raising Cash Fast Training,” elsewhere in this course or online.

Be sure you have your cash all lined up prior to getting to the auction. If the particular auction property you are seeking is vacant, this could be an additional opportunity to get the property cheaply. It could be an opportunity for two reasons. First of all, other pre-foreclosure investors may not have been able to reach these homeowners to negotiate a deal prior to the auction (likely because they did not know how, as we teach you). Another reason is that many investors may have gotten a hold of the sellers, but never got to see the inside, thus they did not act. What may be a risk for others may become your opportunity.

Be sure that any auction property that you might be bidding on is, in fact, the first mortgage that is foreclosing. First trust deeds and first mortgages are the ones in first lien position against the property (excluding property taxes). If a second trust deeds or mortgage is foreclosing, you could be fooled into purchasing a property for essentially the value of the second trust deed, not realizing there might be underlying IRS liens, property taxes owed, or even a first mortgage, in addition to what you thought you were paying for the property. This is a common mistake people make at auctions, so be sure you work closely with someone on your first auction who understands this process. The simple answer is, get a preliminary title report as part of your final step in making bids.

The insider’s strategy to protecting yourself at an auction

This one is very simple. Go with someone who’s bought property at an auction before. They’re going to be the ones to give you some great insights about what’s going on at this auction, at this particular location, and about auction investing in general. A mentor is really the key.

When an action is to be held, a public notice is usually required. Certainly the Public Notices of Trustee Sale, or whatever they’re called in your given area, will list this information. Online resources are other good sources of properties that are in pre-foreclosure and soon heading to the auction. Usually, you will find that the local newspaper is also a good resource for auction notices. You can also go to the courthouse for updates and notices. The courthouse should have dates and times of auctions coming up.

Another good resource might be foreclosure trustee or attorneys. These are the people working with the lender to take back the property through the foreclosure process. They put together extensive lists of properties that they’re about to foreclose on. Some have web sites full of this information. You may wish to contact them prior to the auction, just to be sure of the terms and conditions that may be offered at the auction. While you’re doing that, you can establish a relationship where you get on their notification list for properties that are going to auction.

The post-closing steps required are similar to buying any property. That is, you need to get insurance, title insurance, new locks, and begin repairs on the property. Consult with our extensive checklists in our advanced courses.

Frankly, auction purchasing is the simplest way to buy a property. It’s an all-cash deal; you get a clear title if you do it correctly. You now own the property outright, with a lien granted to your money-lender (if applicable), ready to sell it at a significant profit. Once you clean up the property, you could then refinance it and hold it long term as a rental, sell on a lease option, or perhaps sell it with an installment land contract (see our Creative Financing Course).

Obviously, if you sell it for all cash, you’ll receive your cash sooner, but you should also consider the tax implications of selling in less than one year of ownership, vs. holding over one year. The final profit outcome could be significant. Consult you tax advisor on that one.

Now, it is up to you to act. If you need to study more, do so. If you need a mentor or coach, let us know. See our Resources directory in the back of the book. Whatever you do, don’t make the critical mistake of confusing “study” with productive activity. There is a difference. Too much study can even backfire on you, by creating too many ideas and too great an obstacle to overcome.

Letting fear of the unknown stop you. I think of mistakes I might make by taking an action as far less costly than failing to act. How will your future ever change, if you don’t change first? You have to be willing to take on a few uncomfortable risks, in order to obtain the wealth and success you what you want? Staying comfortable will ultimately keep you uncomfortable in the future.

See you in the “Success Circle” soon…please join us. All you have to do is choose to be there.