Buying a real estate investment at Tax Foreclosures (Tax Deed Sales) and Foreclosure auctions really is an art that requires skill. There are many potential disasters that you can fall into. Here you will learn how to make smart decisions when buying foreclosures. If you’re considering purchasing at a tax foreclosure or an auction, you won’t want to miss this article.
What’s the big secret to tax deed sales and foreclosure auctions?
First, it makes sense to actually understand what these two terms mean. What is a foreclosure auction? A foreclosure auction is what happens when the borrower stops paying his or her mortgage, for whatever reason. When mortgage payments are no longer being received, the legal process of foreclosure begins; the home ultimately goes to auction either by county, or parish.
A tax foreclosure (or, tax deed sale) is what occurs when the property owner stops paying their property house. In this case, the home is typically sold as a tax lien. If and when the tax lien does not get paid within a specific timeframe, the property goes to the real deal…actual foreclosure.
A creative real estate investor is one that works entirely with a seller; not through an agent, the MLS, or foreclosure auctions. However, if you also are a creative investor, there can and will be times where it is smarter to let the house go to auction. When is it wiser to let the house go to auction?
▪ When there are serious issues with the title
▪ When there are extra liens on the title
▪ When a death occurred that left multiple heirs to the property
▪ When the heirs to the property did not have the funds to pay for probate; in this case, the property simply went to auction
▪ When the title is too complicated to bother with; in this case, it’s easier to just let it go to auction so that the whole thing can be cleared and started fresh
The real estate business is tough. Sometimes, people procrastinate. They’ll wait until the very last minute. In these cases, you won’t be given enough to to call the lender. Be aware that even if the deal seems like a done-deal, you won’t have the time necessary to get all of the information you’ll need from the lender to literally purchase the house. Even if you’ve got enough money, you won’t have the time to.
Should you ever do a deal that goes to auction?
In some cases, it’s a good idea to do a real estate deal that goes to mortgage or tax auction. Why? Because you must pay when the auction occurs. This nixes out most of your competitors, because many of them don’t have the entire sum of cash that they’ll need to buy the house right then and there. In order to do a good deal on a foreclosure property, you’re going to have to get any bit of information you can on the property. It’s crucial that you go to the auction prepared. What information does this include?
Evaluate the value
Of course, it may not be possible to really get the full idea of the value without physically being able to go into it, which you typically can’t until the auction. Keep in mind, it is always worth going to the property and seeing if a door is open where you can get in to view it. Of course, it’s not advocated to break into a property, but if it is currently vacant and one of the doors is open, there’s no harm in looking.
Assess the condition
Assessing the house is easier in regards to exterior rather than interiors. First of all, the utilities are almost never on (because there’s no one to pay them), so even with that one factor, it’s going to be hard to tell what’s working and what’s not. For example, perhaps the AC unit doesn’t work, or the plumbing is really bad and needs to be repaired or replaced. It can be hard to assess a property when you aren’t able to know what’s really going on inside of it.
You can get some level of knowledge by looking at the “comps,” or, comparable sales, in order to get an idea of what the house could potentially sell for. You’re looking for two things: what the house is currently worth right now, and what you could get if you fixed it up.
Knowing these two things is going to help you determined whether or not you should bother with the deal. Then, when the auction opens up, you compare what the property is actually worth, and then the potential profit.
In the United States, there are two types of foreclosures. There are judicial foreclosures, and there are non-judicial foreclosures. A non-judicial foreclosure is one that is going to actually show you what the opening bidding price is. In a non-judicial foreclosure, you’re going to see what the judgment amount is.
What is judgment? Judgment is the amount that the foreclosing mortgage company is owed on the property. This calculation includes the amount of the back payments, as well as any lawyer fees and interest. Usually the opening bid is going to be for the lender; it usually starts at a hundred bucks. Yet really, it is not for a hundred dollars because there is going to be a bank representative bidding to increase the sale price to at least what the judgment price is.
How do you know if the property is worth investing in?
A good way to know whether or not the property is worth purchasing is if the opening bid amount is incredibly close to the value of the property. For example. If the auction is opening up at $300,000 and the property is worth $400,000…it probably won’t be worth your time. Why? Because the lender may go all the way up to the $300,000 in his bidding; if this happens, you’re going to be bidding with other competitors (fellow investors) once the bank has tapped out. There’s not going to be much room for profit if you get the house. Many times the lender will do a “drive-by appraisal” directly before the auction. They’ll do this in order to assure they bid a reasonable amount on the house. Understand that if the opening bid on the house is below the value of the property, you’ve probably good a good deal that is worth your time on your hands.
Always do research on the title
Doing a title search on the house is essential. Now, why is this? The reason you must know what is on the title is that some liens actually survive the auction. Therefore, the current property taxes, IRS tax liens, and generic tax are there to stay. You also must know about any remodels on the house that didn’t ever close off on building permits. Why is this important? Renovations must meet certain codes. If you’re purchasing a house (not just a foreclosure, but of any kind), you’ll want to know that the remodel met code. Otherwise, you’re going to have to finish or re-did what they did to bring the house up to code.
The point is, you don’t want to buy a property that’s going to have issues that extend further than the closing. You really should consider paying for a professional title search. It’s not required that you do this, but it’s the best way to go even further to make sure you don’t run into any issues later on. You don’t want to buy a property that’s got a “quiet title.” A quiet title is something that has to be filed after you close on the house in order to be able to re-sell it. When you purchase a property at auction, you do not get title insurance. Remember that.
What is a “quiet title?”
You won’t always have the ability to give title insurance to a buyer when you re-sell a property you’ve purchased at auction; specifically, tax deed sales. Therefore, it’s not always possible to avoid a quiet title. You must realize the importance of this. It is so important to find out as much as you can regarding the title of the property. You’ll regret it later if you don’t do your homework.
Always go into the auction knowing your maximum bid
Figuring out your max bid can be really tricky. You should only do this after you’ve fully analyzed the property and are in the position to bid on the house. You have to go to the auction with an actual plan, otherwise you may end up bidding way more than the house is worth, or more than you can afford. Many investors get caught up in the thrill during an auction, and it is imperative that you know when you should (and have) to walk away.
Have a real estate attorney
If you’re going to invest in a foreclosure property, you’ve got to have a good legal professional on your team; either real estate attorney or a foreclosure attorney. You want an attorney that works with real estate. You could avoid a potentially very costly mistake by having one. Now, that mistake doesn’t necessarily mean money, either. A disastrous deal can steal a lot of your time, and time is money. So either way, you will lose money if you don’t do your homework and get professional legal help when buying a foreclosure property.
Right of redemption
What is a right of redemption? This means that the owner comes back at some point down the road after you’ve bought it and tells you that they still own it and want it back. Imagine spending money fixing up a house, and the owner re-claims their old house, only you’ve newly renovated it for them for free.
Some states do not have right of redemptions on mortgages; this is because the deed of trust or mortgage is going to make it null. Keep in mind, that HOA foreclosures still have the right of redemption (and the tax sales). The property lines can also affect the right of redemption.
The auction itself
Auctions aren’t always in person. Sometimes, they are online. No matter which is the case, if you’re dealing with an auction, you need to keep the following tips in the front of your mind.
▪ One thing you never want to do is go into the auction and change your bid impulsively. You must go in with a pre-determined amount that you are willing to spend on the property You do not want to go into the auction and on the fly change your bid.
▪ Don’t fall into the trap that others do at an auction; they’ll see bids flying right and left and think to themselves that maybe the house is worth more than they thought it was, or a much better deal than they thought it was if so many people are bidding, or the price is going to high. You will be tempted to think the house is more valuable than you thought.
▪ Remember that you have no idea what people’s motives are when you are in that room. Come up with your max bid, and don’t go any higher than it.
Realize that it’s OK to lose!
It’s OK to lose the auction! By nature, humans are competitive people. We want to win. It’s important that you start to be okay with losing. Many times, the people in those rooms bidding too much aren’t doing it because the house is more valuable than you thought. Many times it’s because they are inexperienced. Be smarter. Stick to your max bid. There’s always someone on the sidelines ready to over-pay for a property.
If you do win the property, then great! Just make sure you get insurance on it. It’s so easy (and common) to forget about insurance. But realize that you are now the owner. This means you need insurance on the property. Even more so since the property will be vacant. You have no many idea how many people love to “squat” in properties.