Access Wealth Strategies

There has been much hype about buying foreclosed properties in mainstream media and on the internet. You may be wondering:

What is it really like bidding at the foreclosure auction? Are there good deals to be had? What does it take to get a good deal?

Last week I interviewed John Ray, owner of a foreclosure auction bidding service firm located in Phoenix, AZ. John has been in real estate for 20 years and is a wealth of knowledge when it comes to bidding on foreclosed properties at the trustee sale auction.

John’s company BidAZForeclosures.com has been bidding at Maricopa county foreclosure auctions on behalf of investors for 7 years, currently buys about 100 properties a month, and is one of the largest bidding groups.

This interview lasted over 30 minutes; it has been captured on video and edited into 4 parts. It is well worth your time to watch all 4 parts because you’ll learn John’s insider perspective on getting a good deal at the foreclosure auction and how to avoid common mistakes investors make.

Topics Covered in Part 1 of This Interview

• Are there good deals at auction?
• How many properties are bought at the auction?

Overview of the foreclosure auction process:

• How do properties end up at foreclosure auction?
• Why do some foreclosures get postponed?
• How does the bank establish the opening bid?
• What is a “total debt” bid vs. a “specified” bid?
• What really happens at the trustee sale?
• What happens after you win a bid?
• How do you get title to the property?
• How do you take posession of the property?

Topics Covered in Part 2 of This Interview

• How does the current market cycle compare to the previous one?
• What’s happening with bank REO properties?
• Why aren’t banks doing more short sales?
• How do you buy properties at auction?
• Why do investors use your bidding service?
• How risky is it?
• What are some common mistakes?
• What due diligence do you do before bidding on a property?
• What happens when you make a mistake?

Topics Covered in Part 3 of This Interview

• Is there any truth to the “old boys network” that controls the auction?
• What is it like bidding at the auction (examples)?
• What is blind bidding?
• What are dropped bids vs. jumped bids?
• Where do you get the property listing info?
• How are you different from other bidding groups (examples)?

Topics Covered in Part 4 (Final Part) of This Interview

• How do new investors get started?
• What is the Jump Start program and how does it work?
• What are some common beginner mistakes and how do you avoid them?
• Do you really have to pay all cash at the auction?  Are there other options?
• What is “hard money” and why do people use it (examples)?
• How does an investor work with a bidding service like yours?
• How do we contact you for more information?

Please let us know what you think of the interview, whether you love it or hate it, by leaving a comment. If you enjoyed this interview, please rate the videos on YouTube as well.  Thank you in advance for your feedback!

If you’d like to see a video of live bidding at the Phoenix (Maricopa County) trustee sale auction, see my prior post:
Phoenix Foreclosure – Video of Live Auction at Trustee Sale

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.

When is the right time to buy an asset for investment purposes? This could the most important question an investor asks himself or herself.

There is not one right answer for everyone that applies at all times. Instead it takes judgment and applying core principles to answer this question.

The most successful passive investor of all time, Warren Buffett, provides a few guiding principles in answering the question, “When is the right time to buy an asset?”

Let’s take a look at a few of Buffett’s famous quotes.

“A public opinion poll is no substitute for thought.”

My transation: Just becuase something is popular doesn’t mean it is the best buy in the marketplace.

“The investor of today does not profit from yesterday’s growth.”

My Translation: If you buy an asset today you DON’T get the past profits, only the future profit from the investment.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

My Translation: The best time to buy (or sell) is when everyone else is doing the opposite.

So, we see that from Warren Buffett’s perspective, the time to buy an asset might be when people think he’s crazy to do it.

Think back to fall 2008 when Warren Buffett made a multi-billion investment in both General Electric and Goldman Sachs. At the time the financial world almost failed, yet just over a year later he has a multi-billion dollar profit plus 10% preferred dividends while he waits. Not too shabby.

What do you think? Have you seen Buffett’s principles at work in your investing life? Or do you have a different way of timing your asset acquisition and how much success have you had? Please comment below and let us know.

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.

Do trillions of dollars of failed loans and losses lead to great lending times?

With the recent collapse of the credit markets, the economy, real estate prices, and the stock market, lenders around the world will take massive losses on their loan portfolios. Large lenders such as Washington Mututal, Indymac, and related entities have already failed.

The write downs on collateral and loan values could make most (if not all) lenders insolvent. So doesn’t it seem strange then that lending on real estate assets could deliver both a high yield AND safety (low risk)?

As strange as it sounds, hard money lenders are well positioned in this market cycle to generate the highest income with the most security. Let’s look at why.

Why Are Hard Money Lenders Needed In Today’s Market

In today’s market with a huge inventory of distressed properties such as foreclosed homes and even commercial real estate, investors and “flippers” are buying these properties at a huge discount.

There’s only one problem: These distressed deals usually require a quick close (sometimes as little as 1 day at a trustee sale auction).

Most traditional lenders would not be much help in these scenarios – not that they are willing or able to lend money on real estate purchases these days. Even if they were, it would take too long (45-60 days) and require perfect credit from the borrower.

Of course, deep-pocket buyers could pay all cash to buy the distressed properties all day long if they wanted. But what if they want to buy but don’t have enough cash of their own? Or, they do have the cash to buy one property but want to buy multiple properties at the same time?

For some experienced flippers, the number of properties they can buy at one time can make a huge difference in their bottom line profit.

Enter the hard money lender, who can fund deals quickly and is willing to overlook the borrower’s less than stellar personal credit, as long as the property meets their deal criteria.

Typical Hard Money Loan Terms

• Short term: 6 to 18 months
• Application or due diligence fee around $500 to $1000
• Origination points 0% to 5%
• Interest rates 10% to 18%
• Prepayment fee (if the loan is paid off earlier than expected)
• Recorded first trust deed (lender has first lien on the property)
• LTV of 60% to 80%

Why would hard money lenders fund deals that traditional lenders reject? We’ll discuss the 2 main reasons in Part 2. Meanwhile, please add your comments and questions below.