We’ve discussed doing your homework to find a foreclosure worth bidding upon at the courthouse steps (or wherever it is in your jurisdiction).  Now, what about bidding strategies?

Some investors seem to feel that you get the best deals early in the auction.  Many bidders are there to see how it works, and others are just sizing up the competition.  That leaves the initial sales to the experienced and aggressive participants.  You should go to a few auctions and observe the process for yourself before you actually bid. 

Usually, the lawyers running the auction for these properties are on the phone with the lenders involved, taking their last minute instructions (minimum acceptable bid, etc.).  These conversations are not disclosed.  Then the lawyers check your eligibility to bid.  They ask that bidding parties show them their certified funds in the amount advertised.  No exceptions!  Any exception to the process makes the sale subject to legal challenge – a costly mistake for the lender’s attorney.

The attorney will ask for a specific initial bid amount.  If the crowd thinks the property is not worth this amount and nobody makes a bid, the foreclosure sale is concluded and the lender ends up owning the property.  The property then goes into their REO (real estate owned) department, a real estate agent is hired to get the property ready for sale and it is put on the retail market.

If there is equity above the lawyer’s asking bid, offers will be shouted out or there will be a raised hand.  You need to know the range of offers you are willing to make and stick with it.  You can sit back to the last call and try to make a final bid above the last bid to win the property.  I prefer to watch what the ‘regulars’ are doing for awhile, then join in.  It helps to get a better sense of what my competitors feel is the value of the property.  You need to ask yourself why the regulars are not bidding over you.  They clearly think they cannot make money at that level.  But this does not necessarily mean that you cannot make money if you win the bid.

The highest bid will be announced and you will be asked to come forward, endorse over your certified funds, and sign a number of legal documents making you responsible for the property and going to settlement after the court validates the sale.  The validation process can take as much as 6 to 12 months depending upon how backed up the court is, any appeals by the former owner, and any problems with the sale itself.

You can use this period to get your financing in order to settle on the property, to arrange for the eviction of any residents in the property, to visit the property and to determine the level of effort necessary to rehab the property.  The eviction process and property improvements cannot start until after the settlement.  You will usually get 30 days notice of the settlement date.  The newspaper announcement for the property will explain that you may be paying all the closing costs including the transfer and recordation costs which can be large.  So include all these costs in your analysis before the bid.

You always need to hope for the best, but plan for the worst regarding the condition of the property.  This is why in our investment club we tend to buy foreclosures with a long term hold strategy.  Time (and capital) tends to heal most problems with “tired” real estate.

Also, you need to be aware that not all lenders will finance foreclosed properties because the appraisal may require access to the inside of the property that you cannot get.  Some small community banks will do these loans but usually at the 60% to 75% loan to value range.  The valuation may be low because the exterior of the property is poor and the lender wants to be conservative.  So you also need to plan on refinancing your capital back out of the property once it is repaired / renovated and the lender can get inside.  These costs are duplicative of the acquisition costs, but they help you get your capital back for the next deal.

Finally, I cannot overemphasize how important it is to use a good attorney for these transactions.  A good foreclosure attorney can save you lots of money.  Just as an example, in certain circumstances, they can petition the court to reduce your costs as you wait for settlement.

Feel free to contact me  with your questions.  I look forward to hearing of your success.

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