And the Long March Continues……
Hi again Houseketeers. Welcome back as we complete our review of the methods of finding inventory to flip, wholesale or hold.
Last time we spoke about three methods, Foreclosure, Driving for Dollars (should be driving for lack of dollars) and bandit signs. You can I am sure, tell that I am not too wild about those methods, but there are investors for whom these do work. Remember, make them part of a more comprehensive program.
So let’s get back into it.
Auctions: This is a big subject and we will need to break it down into two different types, Steps and On-line. Auctions are the 600 pound gorilla when it comes to finding great deals. It can also be a total waste of a day. Auctions are the one type of sale where the negotiation is open to all participants to see. Whether it is an on-line auction or a steps auction, it will move fast, and it is final. This is where, as an investor you really need to know your financial limits. You have to have the self control to walk away when the auction rises above your maximum Offer (MO). No matter how you’re buying; auction, foreclosure, distressed sale, whatever, know your limits …cuz….repeat after me “you make (or lose) your money at he purchase.” Have that statement written on your hand when you’re at the auction. It is very easy, especially for a newbie to go over their limits thinking it’s only another $5,000 or $10,000 or $15,000, or ….see what I mean? Its a competitive situation and before you know it, you can the proud owner of a house that quite frankly will break you.
Types of auctions
Steps Auctions:
No this isn’t an auction for used stair cases. Homes recently foreclosed upon are brought to auction by the lender at the county courthouse or offices. In the days of old when men were men and women were women, bidders would assemble at the steps leading to the front door of the building and the auction would be held there, hence a “steps” auction is one that is held by a municipality. These days they actually let us into the courthouse (I guess it closer to the holding cells). The Steps Auction is the first stop if you will, for a house after the foreclosure process is completed, the lender has won, and the courts have ordered the sale of their home. It doesn’t necessarily mean the auction will be successful. I’ll get into that in a bit. Because this type of auction is the result of foreclosure, it becomes important for the well educated investor to understand the foreclosure process. For that, rather than listen to me drawl on, I have included a flow chart of “The Foreclosure Process in New York State”. I stole it off the the NYCourts.gov website.
Back to the Auction.
Your first task is to find what homes are actually being auctioned. Be aware that many houses involved in this type auction are still occupied by the owner. Its against the law to bother them. You can’t knock on their door. You shouldn’t be staring through their windows or waiting for them to leave and breaking in. In other words you have to leave them alone. You are pretty much buying sight unseen. But if you’re conservative in your costing, this can work out well. If you’re not careful, I’ll buy the property from you right before you have to go bankrupt (what a guy!). Also, If you win the auction it’s up to you to evict the poor previous homeowner, and throw him out of the house that he probably raised his kids in. Damn you’re heartless. In all seriousness, you will have to hire an attorney bounce them out.
That being said, if you want to participate in a Steps Auction the best sites to find out what is being auctioned off is LIProfiles.com and PropertyShark.com. Both offer all the information you need to find a property and bid on it.
There are a few things to aware of with Steps. To begin with, half the scheduled individual auctions will not happen. Why you ask? I’ll tell ya! The owner may have filed bankruptcy which immediately stops all sales. Or, the owner found a White Knight Investor who bought the house for equal to or more than what was owed, or the court issued a stay, or any number of reasons. The point being, you can show up at the court steps bright and early with a hand full of $5,000 certified checks (we will cover why you’re walking around with all those checks shortly) ready to make the purchase of the decade, and as you’re checking the days schedule you see your auction is crossed out. So the night before the auction, call the Plaintiff’s attorney to check on the status of the house you plan to bid on. They may even answer the phone. Now, let’s say you are successful in bidding on your ocean front mega mansion in the Hamptons for $200,000. What a deal! The rules say you must have certified funds of ten percent to put down post (that means after) auction. How do you know what you will really need in funds if you don’t know what your mansion will sell for? The answer is you don’t. So bring multiple $5,000 certified checks equalling ten percent of your highest expected offer or in this case $20,000. If you cant do the math, that would be four $5,000 checks. If it happens to go off for $150,000 you only need to leave three checks. Get it!?
Does this all sound a little confusing? It is. But its also why I believe if auctions are your thing, the Steps Auctions are the safest. Safest you ask? Safe for whom? Safe for you not to over spend on an auction house. Why is it safe you ask (obviously you have purchased all the toilet paper you need and have time to ask these inane questions)? Because there are mostly professional real estate type persons attending steps who will not over bid a house. It’s takes an effort to attend, so the attendees are serious. And unlike an on-line auction, you will have only so much money with you to put down so you will not over bid, like the inexperienced wonk you are.
The On-Line Auction:
I’ll be honest, I hate on-line auctions. Don’t get me wrong, they serve a function and given the new COVID-19 reality, I believe they will replace Steps Auctions altogether. Like Steps Auctions, many houses may be occupied and the same rules apply about not being a pain in the ass to the owner/tenant/squatter. Some auctions are run by public agencies like HUD while others are private auction firms. Some are distressed homes and others are just an alternative way to market as opposed to a brick and mortar brokerage.
No matter what type of auction it is, if you have no control, you will get caught up in what I call “bidders head”. You can increase your bid by just clicking. Click$. Click$. Click$. Click$. You can click yourself right into bankruptcy or foreclosure or insolvency. And the way the auctions are run are ripe for just pulling you in like a fly to a Venus Fly Trap. Imagine if you will that your hot to get a deal done, and you are in the last minute of an on-line auction, and your highest number is in first place, and just as it times out, and you’re thinking “holy shit I’m gonna WIN!” the clock resets to 15 minutes as a higher offer came in. That’s the real sneaky thing about these auctions; you cannot count on the clock to win. If a higher offer comes in within the last 15 minutes, it restarts the timer to 15 minutes. And you just know someone is going to up the bid almost every time. Its devious, and I wish I had though of it.
On top of this, many on-line auctions have a “Technology Fee” (ka-ching, Baby!). Sometimes it’s the higher of $2,500 or five percent of the sales price. STOP!!!!!! Look back at that last sentence.Your eyes were drawn to the $2,500 right? Real quick, what’s the tech fee on a $300,000 deal? $2500? No $15,000. But many people will miss that and think $2,500. And even worse, if you missed that 5%, you’re caught, as in order to bid you need to drop your visa or MC with them so they can charge all fees, right up front. Feeling like a bug? Dasterdly! So much for on-line auctions.
Agents / Brokers
You’re an investor. You’re looking to flip. You want to find a house where you can add value and make some money. So you’re not looking to buy that perfect little cottage near the water in RVC. You want that quasi-burn out zombie house, but in a good neighborhood(location, location, location). These types of great deals are all over the MLS. But only real estate agents have access and in many cases control of who of gets them.
Quite frankly, if you are going to be a full time investor, then as I have said, make the investment in yourself and become an agent. Why pay a commission to someone else? In our business, in the moderately priced house arena we play in, our average commission is 2% of the selling price which averages between $8,000 and $10,000 per house. And that’s in addition to the profit on the flip. Before the pandemic, we were scheduled to close 15 to 20 houses. Do the math.
If becoming an agent is not for you, I really cannot stress how important it is for you to establish relationships with investor centric agents and brokers. There are agents who specialize in the destressed markets such as short sales and REOs. If you do a deal with an agent, you should be prepared to give that same agent the listing when you sell. That way they know you’re serious about long term relationships. And let’s face it, relationships are everything here. Many of our deals come from our relationships with agents. They know we are professionals, move fast, and they seek us out to buy what they feel would be a good deal.
I mentioned moving fast, and I’m about to go off on a tangent concerning funding and moving fast. Although I’ll cover funding in a future episode, we need to chat about having funding at the ready BEFORE you find a house. The experienced real estate investor, regardless of how they find a property will be ready with cash in hand to close in 30 days at the most. If you make an offer contingent on getting a mortgage or any type of funding, fugeddaboutit! You aren’t going to be successful. Why, cuz I’ll be bidding also and my offer will be cash, and no conignecies other then clear title. I move fast. I have lenders in waiting and the agents and brokers know if I go after one of their listings, I’ll close fast and most likely give them the listing. But fast does not mean careless.
Bank Real Estate Owned (REO)
When we were talking earlier about Steps Auctions, I said this was the first stop for houses that were lost to foreclosure. If the house sold at the Steps, great. But if it didn’t, then it goes into the banks non-performing inventory. While it’s in the banks possession, they evict if not vacated, address any liens, physically clean it out and winterize the pipes (sadly most banks winterize after at least one freezing cycle), and remedy any title issues. At the end of these tasks, the bank hires a real estate broker who specializes in REO sales to market the house. The bank determines what they want for the house, and believe me that price usually has little to do with reality. Here is another reason it pays to be nice to your local real estate agent, who will bring this house to her two or three usual investors as well as list it on MLS. These can be very good deals. Some of the houses can be in great shape and need little repairs, while others are night walkers.
Short Sales
Here is another way to find a great property with the possibility of a lot of equity for you to pick up. What is a short sale? Its a way for a home owner in trouble, with the assistance of the their lender, to sell their house for less than is owed to the bank. The bank will be selling short of what is owed, so hence the name Short Sale. With this method, if an owner is in arrears on their payments, all is not lost, and it doesn’t always end in foreclosure and eviction.
I’m not going to spend too much time on the mechanics of a short sale as it isn’t germane to this discussion. Essentially, an owner who cant make mortgage payments and has few assets can approach the bank to reduce the amount owed. The bank will do sort of a reverse financial study of the borrower to prove they can’t make payments and are pretty much broke. Once approved by the bank, the owner sells the home for a reduced amount. At this point, to us, the Short Sale starts to look a lot like a REO in that it gets assigned to a broker who specializes these. Yet again, it pays (literally) to be tight with a SS broker. These are very good deals.
Distressed Leads
These are my favorite. But they cost money, and can be very expensive, as much as $350 a lead. But the hit rate is high, 1 in 7 or 15%. These are websites that draw the attention of distressed owners. Recall if you will my eloquent description of a poor huddled borrower who has been receiving thousands of letter from investors as they (the borrower) sink closer to foreclosure. When the court judgment shows up, I told you that they will go out to the garbage or the garage and grab some of those vulture letters. Remember? Most don’t actually keep those letters. When the court judgment shows up they go on line and search for phrases like “buy my house fast”. They are then lead to these sites which are clearing houses that bring distressed owners and investors together. We are the top Suffolk County investor for one particular site and I see 10 to 15 leads a month and close two. Many of my successes have been with owners who just wanted to get out fast, and I put them into contract and wholesaled the contract to another investor for $50,000. Yum.
Mostly, I followup a lead, and endeavor help the owner out of the house with a few bucks in their pocket. Look if they are contacting me they are in trouble, and I am their salvation. I can stop a foreclosure, or get them through bankruptcy and if there is enough equity in the deal, after we pay off the bank, I’ll give the owner $15,000 to relocate. There are times where the owner isn’t in dire shape, and as brokers, we take a 90 day listing and if we can’t sell in that time period, we buy the house. All good.
Probate and Inheritance
Are you looking for niche? This is it . Why? (again with the questions!). Cuz it takes a lot of leg work. I’ll assume everyone reading this (all three of you) know what probate is. What you are doing in probate is offering the estate of a dead person a way to liquidate the estate and cash out the hiers. Who does that? The estate administrator or executor. The difference between the two is that the administrator is appointed by the court if there is no will, and the executor is named in the will. They both perform the same function, mainly take control of the deceased assets and distribute to the heirs as per the will or law.
The way to work this is to head over to the County Court or offices, and ask where the dead people section is. Believe it or not, it really isn’t filled with dead people. But it is filled with dead people records. You are looking to find out, aside when they croaked, who the administrator or executor is. At times the executor is a child or worse a parent. I can not stress how gingerly you need to move in that situation. What we do is send a letter to the exec stating only that we recently purchased real estate in the area and we would like to make an offer on any real estate they know of that’s for sale. We do not mention the loss. We then do a phone followup. If the estates is being liquidated, the exec may look at you as an opportunity to cash out the heirs. This is much easier to do if the executor is not a relative.
You can also find these leads through probate lead clearing houses, much like I mentioned earlier with distressed leads. They are pricey. These services will even send the letters out. Be prepared to be cursed out by relatives who are grieving and think you’re a vulture, but in reality, you are performing a service that will ultimately result in the heirs coming out financially whole, as much as their situation will allow.
Before I close on Probate, there is also inheritance leads. The main difference is that departed estate had been put into a living trust. That means it will not go into probate and will be available to plunder as soon as they’re stiff, whereas probate can take a year.
So, we have covered all the major ways to find million dollars deals using some else’s money as we reside in our COVID-19 Barco longer. These aren’t the only ways to find investment quality homes to flip, but are in my opinion the most common.
Next up, performing valuations of target properties. So long Houseketeers.
How can you lose?