Access Wealth Strategies

I visited a live trustee sale auction at the courthouse steps in downtown Phoenix where the bank trustees auction off foreclosed properties to the highest bidder.

See the video below for the live action at the trustee sale.

The video gives you a good idea of what goes on at a trustee sale auction. However, it was not as busy and chaotic as it could be. I will probably go back another day to get more “action shots” for you.

Let me know what you think or what else you’d like to see by commenting below.

A reader emailed us a question on how to get the list of homes to be sold at the trustee sale auction. I’ll answer that question in this post.

The first part of the answer is that it depends on where you are located. Each county has its own method of posting properties pending foreclosure. There are also different types of foreclosure, depending on the location and the instrument used to secure the property as collateral for a loan.

For the areas I am familiar with, foreclosures are listed by the trustee in a local newspaper prior to the property being sold at auction. The listing should include the property ID, date of the sale and the loan amount. Often the opening bid, set by the bank, is not released until a few hours before the sale takes place.

There are two common things which interfere with an investor buying a property at the trustee sale auction:

1. The sale often gets postponed.
2. The bank most of the time (80% to 99%) gets the property back because they are the highest bidder.

One other option to find out about soon-to-be-foreclosed properties is through list service providers. These are companies that will research the properties and sell that information to investors. One popular service here in Phoenix is Arizona Investors Alliance, also know as Bid AZ Foreclosures.

Watch the video below for my second visit to this upscale Desert Ridge home, as I tour the house and point out the changes made.

After Renovations

Before Renovations

For your reference, the “before” video (just 2 days after the home was purchased at the Phoenix trustee sale auction) below:

Ask yourself this question:

Would YOU buy this home for approximately half of its peak price at the trustee sale?

Related post: Real Estate Investors Turning to Trustee Sales for Bargain Purchases

In Part 1 we discussed why the market is ripe for hard money lending, now let’s look at why hard money lenders are willing to fund deals traditional lenders reject.

Hard Money Lenders Can Charge Much High Interest Rates

Hard money lenders demand much higher interest rates (10-18% or 2-3 times higher) than banks do because they fund deals that do not conform to bank standards.

Banks have very specific standards because they are highly regulated and need standardized systems to make many loans. In contrast, many hard money lenders are individuals or small groups who are willing to work in narrower markets with niche products.

It’s All About the Asset / Collateral

If you could own an asset (e.g. real estate) that is worth $200,000 for only $100,000 (getting it for half price), would you do it?

Hard money lenders provide short-term loans (usually 6 to 18 months) based primarily on the value of the hard asset (such as real estate) that is collateral for the loan. In contrast a traditional lender bases the loan on the borrower’s ability to repay with the collateral as a secondary factor.

The two best quotes I’ve heard from hard money lenders are:

“Only lend if you’d rather have the asset.”

“Drive by the asset and think: do I want to own this?”

The “asset” referred to above is real estate, typically a single family home. Now think from the hard money lender’s perspective: You’re making a loan based on the asset, so what’s the worst thing that could happen?

Answer: The borrower defaults and does not pay you back.

So what happens when a hard money loan is defaulted upon?

If the hard money lender has properly recorded a first lien on the property / collateral, then the lender can follow the legal procedure to foreclose on the property – i.e. the hard money lender becomes the owner of the property which was the collateral for the loan.

Let’s see how the math works out in an example:

Imagine a new home bought in 2005 for $400,000 (inflated price in the bubble) and is now worth $200,000 (realistic market price today). The home owner who owes more on the home than it is worth today and who lost their job in the recession has stopped paying the mortgage and been foreclosed upon.

A flipper can buy this home at the trustee sale auction for say $120,000. The flipper buyer gets a hard money loan for 80% of the purchase price, or $96,000, and pays the remaining $24,000 cash himself.

So, assuming the home is really worth $200,000 (realistic price a retail buyer would pay today), the hard money lender’s basis in this property ($96,000 loan amount) is roughly 50% of today’s retail price ($200,000)!

That is a VERY secure position for the hard money lender.

So, in the “worst” case where the borrower defaults on the loan, the hard money lender gets to own the asset that’s worth $200,000 today for only $96,000 (ignoring fees and other legal costs).

How to Win Even If You Lose!

Hard money lending in this market is lucrative because you get to “win even if you lose”:

(1) If the borrower pays you back with interest as promised, you’ve received double digit yield on your money in a short period of time (6-18 months). This is an attractive yield compared to 0-3% on bank CDs and not much more for corporate bonds.

(2) If you “lose” and the borrower fails to pay you back, you can take ownership of the collateral property for what amounts to about half the current market value (e.g. $200,000 property for $100,000).

So, as a hard money lender, you can receive a double digit yield in most cases AND have the security of making even more money if the borrower defaults and you get the property at a cost below the REO or trustee sale price.