Thursday, July 24, 2008 at 09:45AM
Foreclosure Hunting
Thinking about buying a property at, or before, the trustee sale? At first glance, there looks like some properties that are being given away - is that happening?
For those who have followed the foreclosure market on a website like Realty Trac, you'll see some properties getting foreclosed that have ridiculously-small loan amounts - can you really buy a house in Olivenhain for 20 cents on the dollar?
Let's look at 2605 Lone Jack - the trustee sale scheduled for yesterday (but postponed to next month) was over a $170,000 balance. Aren't those million-dollar homes on Lone Jack? Indeed, this 3 br/3 ba, 3,655 sf house on a half-acre is currently listed for sale at $1,399,000.
However, further investigation shows that the $170,000 is the second mortgage - but most foreclosure sites don't tell you that there is also an underlying first mortgage. In this case, the first is $335,000, and that's the starting balance from 1994 - hopefully it's less now.
Do we have a possible giveaway candidate here? Say that the first has been paid down to $250,000, and add that to the second loan the combined balance is only $420,000 - not bad if it's a million-dollar house.
If the $1,399,000 list price is overly optimistic (market time is 47 days) and it's only worth $900,000 - there is still a nice profit available if you buy it at the trustee sale for the $170,000, and take over the first loan of roughly $250,000.
But wait - you have to keep looking for more. We also found the dreaded federal tax liens, which like the first mortgage, don't get washed out in the trustee sale - the new buyer has to pay them off too. In this case, liens of $51,579, $33,759, $126,173, and $29,143 - that's over $240,000 and those are just the ones that were easy to find.
You might still be interested though, the total is $420,000 + $240,000 = $660,000.
The property's ownership was transferred into a professional trust - there might be additional liens in the individuals' names, and more searching required. You really need a preliminary title report to know exactly what liens are on record.
One of the burdens of buying at a trustee sale, however, is no title insurance - but with the right investigation you can get reasonably good assurance about what liens will travel with the property. Make sure to double-check on the morning of the sale too!
Once you have checked that the equity position is sufficient enough, then it's time for the field investigation. Ideally it would be nice to find a vacant property, at least you don't have to worry about evicting some upset folks. But if there are occupants, you can try to gain access to inspect the interior - it'll take some sweet-talking, and possibly some money, but it's worth a shot. You may want to review some old 'Rockford Files' episodes before you go.
if you find a property that you feel comfortable with, call your insurance agent to make sure you can obtain coverage immediately upon a successful trustee sale.
Check the comparable listings around the property, and search for other notices of default too - try to predict where the next few sales in the neighborhood could take the future value. Look back in time as to what year's price you are comfortable paying - are you getting in at 2003 pricing? 2002? At this stage of the game you should be buying a trustee-sale property at 2002 prices or older, depending on area.
Some of the guys who buy properties at the courthouse steps for a living are happy to buy at $50,000 off, but I think you should expect to pay at least $100,000 below today's prices to ensure an adequate buffer for any problems that could arise - especially other low sales that may be a result of a future buyer using your sale for a comp.
Jim the Realtor
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Reader Comments (14)
If you buy at a trustee sale, do you still get the $7000 tax credit for buying a foreclosure (over the two year period)?
If you buy at a trustee sale, do you still get the $7000 tax credit for buying a foreclosure (over the two year period)?
It isn't a tax credit, it's a $7,500 interest free loan from the government. You must pay it back at $500 a year for 15 years, or the remaining balance immediately if you sell or rent the house.
Jim, nice post. You make an excellent case for using a realtor such as yourself that knows what they are doing when it comes to finding and purchasing a property at a trustee sale. Great info. Keep it coming!
"You may want to review some old 'Rockford Files' episodes before you go"
That was a great show (with great theme song!),until it jumped the shark with too much "Angel" ....
Between this post and the recent one regarding the decision process the banks have when REOs get mutliple offers, it's no wonder there is a slow market out there. I wouldn't have the time or energy to investigate a property adequately to bid at the courthouse steps, whereas a bank does. When bidding on a REO, cash buyers certainly seem to have the upper hand as well.
I like the idea of buying a note on the property at discount, if I want the property at foreclosure sale to begin with. That way I get a good return if I dont get the property. If I get the property, I saved some dough. You NEED to know a lot about foreclosure buying to get involved. Its not for everyone.
Good luck..........
What I don't understand about this Housing stimulus act, if a lender can voluntary chose to jump through hoops and let someone refinance out of a loan at 90% of market value plus pay a 3% fee to FHA (so say they net 87% of market value), why not just go ahead and foreclose and get 100% of market value? Am I missing something? Why would any lender even entertain this idea? Just for the off-change of sharing in future appreciation which seems pretty far-fetched at this point.
I suspect that "market value" based on appraisals and comps is somewhat higher than what an REO will actually sell for after sitting in a down market for the ridiculously long time it seems to be taking for banks to actually sell them. Plus, a bank foreclosing on large numbers of homes has to spend money on staff to handle them. Plus, larger numbers of foreclosures will just drag the values of properties already REO'd even faster and further down than they're already going..
And then there are all those people like me who read Jim's blog and decide that buying REO property sounds like way more trouble than it's worth.
I'll have to dig out my portable business card printer like Rockford kept in his Firebird!
Buying a house at a trustee sale sounds like less fun than pounding nails through my genitals. Though I'm sure there are those who are proficient at it and laugh all the way to the bank.
More "one more things" than a Columbo re-run.
I'm interested to see if the bottom isn't actually reached until we have tax lein sales.
I like the whole housing bill write off scheme. The banks stand to lose 13% off the assessed value + the loss of the original depreciation...
Some banks aren't going to go for this write down and will have to either auction a house off or sell as an REO (which we've seen). This will cause the assessed value of the neighborhood to decrease. Thus more banks won't want to participate in the housing bill because the amount of $ in write downs will increase in value. It's a vicious circle.
Yay for first time buyers!!
(BTW, thanks for the info Jim, this auction stuff sounds like too much of a headache for a novice)
IMHO, any mortgages that are "written-off" need to be included in new comps; after all, that was the true price the "owner" could pay when originally buying the house -- if they are properly qualified this time around.
There was no true buyer for the inflated price, so that sale never really happened -- I define a "true buyer" as someone who could pay off the mortgage loan based on the original terms/duration of the loan without the need for refinancing or housing appreciation, and based on their income at the time of purchase.
The foreclosure market is not "below market" as well-priced foreclosures are quickly bid up to market price by real buyers. The foreclosure market IS the housing market, and qualified buyers are more than willing and able to buy houses **when they are correctly priced.** This is NOT a dead housing market and there is NO shortage of buyers!
Federal Tax Liens (aka 'IRS liens') only attach to a foreclosed property for 120 days after the Trustee Sale, during which time the IRS has the right to purchase the home from the winning bidder for the amount of the winning bid and resell the home, presumably for some higher amount to paydown the tax debt. After 120 days, the lien disappears and the Trustee Sale winning bidder doesn't have to pay one red cent to the IRS. Of course, 4 months can hurt just as bad in this market.