This is Part 2 of a three-part series. (See Part 1: Buying defaulted real estate no easy task and Part 3: Lenders, bidders unleash foreclosure deals.)
Earning big profits from properties that are in the foreclosure process is a “numbers game.” One way or another, about 95 percent of homes with defaulted loans are never sold at a foreclosure auction. The reason is the owner either reinstates the mortgage (usually by refinancing or adding a junior mortgage) or sells the property.
That’s where you enter the picture! If you are a mortgage broker, you can build a very lucrative business helping owners who are in default by offering to refinance or create a new junior mortgage. Of course, you will need to have sub-prime loan sources to provide the new financing. Or, you can become a buyer of properties that are in the default process.
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OPPORTUNITY #2 – PURCHASE AT THE FORECLOSURE AUCTION. If you weren’t successful buying direct from the defaulting borrower during the pre-foreclosure reinstatement period, your second great opportunity to purchase at a wholesale discount price is to buy at the foreclosure sale auction.
I know many foreclosure investors who will only buy at this opportunity. Their reasons are (a) they don’t want to buy direct from the distressed, often emotional, property owner, (b) they understand the benefits of having the junior liens wiped out at the foreclosure auction, and (c) the auction sale is strictly a business transaction without any emotional involvement with the defaulting borrower.
However, as explained earlier, the big disadvantage is cash is required either at the sale or shortly thereafter. Many prospective foreclosure property buyers just don’t have the large amounts of cash required – although I’ve attended foreclosure auctions where the opening bid required was only $5,000.
Personally, I’ve only bought one property at a foreclosure auction. Frankly, I don’t like hanging around with a bunch of “vultures” (although some very nice bidders also show up at these sales).
Don’t believe anything you hear at the auction from the other bidders – some of these professional “40 thieves” will intentionally mislead other bidders. Once I was even offered $500 cash by another bidder to leave – that’s illegal, but nobody’s enforcing the laws against “bid chilling.” Another time, one of the professional bidders said, “We are bidding on a third mortgage, aren’t we?” The rest of us thought we were bidding on a second mortgage foreclosure. And we were! He said that to bring uncertainty to the situation. But he was outbid and didn’t get the property.
In addition to the cash requirement, another major drawback of buying at the foreclosure auction is no title insurance is available. It’s up to each bidder to research the title status and hope you didn’t overlook a senior mortgage. That’s because bidding at a foreclosure auction is “subject to” any senior mortgages and liens on the property.
To illustrate, if you are the successful high bidder at the foreclosure sale on a third mortgage, you will be purchasing “subject to” the first mortgage balance, the second mortgage balance, and probably unpaid property taxes too. Incidentally, it is most likely any senior liens are in default, so consider that fact when bidding.
Although some bidders at foreclosure auctions do their own title searches, or rely on a professional list or title service, that’s very risky. The best method I’ve discovered (at least in California) is to phone the customer service department at two local title insurance companies with which I do business. I tell them I am considering bidding at a foreclosure sale and would appreciate a “complete property profile,” including all liens for the property.
By law in California, title insurance companies must provide this free service to members of the public (because they provide it free to realty agents who need property profiles before taking property listings for sale). But there is no accuracy guarantee for property profiles. Of course, don’t wear out your welcome and, when you buy or sell properties, be sure to use the title insurers who were the most helpful.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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