Foreclosures FAQ
General Foreclosure Strategies
Q. What are the main types of auctions?
A. There are numerous types, but the three basic types that you will encounter for tax and mortgage foreclosures are:
- Judicial Foreclosures
- Sheriff Sales
- Trustee Sales
The first two types involve a lawsuit, a court process, and an auction held by either the court (judicial foreclosures) or the sheriff (sheriff sales). The third type is much speedier, since the property owner never really owns the property. In this case, the lender simply files with the county recorder that the property is in default and within 120 days the property is auctioned off.
There are also auctions held by HUD, the IRS, and homeowner, condo or co-op associations (when someone stops paying their dues). These are far more rare and have different processes.
Q. Can I buy the property before the auction?
A. Yes. Most properties never actually make it to the auction. Savvy investors use a combination of mailings, phone calls and site visits to reach owners and make lowball offers. There are excellent books and investor programs to assist you in this process. If you'd like us to recommend a few, call us at (718) 715 1758.
Q. If I want to buy before or at auction, how can I get a mortgage in such short time frame?
A. The short answer is: you don't. You find a way to hold off the bank and postpone the auction or the closing long enough to get the deal done. Many bidders either have a pool of capital from a group of investors or they tap into short term capital sources, such as hard-money. Eventually, once you have possession of the property, you can go through the usual process of refinancing
Q. Do banks cooperate with investors buying properties before the auction?
A. Banks do not like to have properties go to auction. They will
do almost anything to avoid it. They will reach for any viable alternative like
a drowning person clutching for a rope.
Why? Because the secondary markets
that purchase mortgages from banks do not like to see banks with high foreclosure rates.
The federal bank regulators also give extra scrutiny to the banks with the highest
foreclosure rates. Also, banks don't like getting stuck with properties. It's a big unknown to them. They often lose money.
A classic example of a bank cooperating with savvy investors is the "short sale", whereby a bank accepts less than the total amount of principal outstanding. There are very books which explain how this works.
Q. If I want to buy before the auction, how do I hold off the bank?
A. There are several ways. Here are a couple:
Q. Do brokers sometimes represent properties in foreclosure?
A. Of course! At any given time a small percentage of the properties being marketed by
any of the major brokerages are facing foreclosure. Obviously, the brokers won't tell you this.
But armed with the right knowledge, you'll know when to make the lowball offers with
no contingencies.
A PropertyShark user ran into this once - he was very interested in 36 West 128th in Harlem and offered $799,000. It was a conventional offer with a financing contingency. Then he found out it was facing imminent foreclosure and quickly withdrew the $799k offer, got together with a friend, and offered $500K "all cash, quick close". They didn't get it because someone else with just a little more cash was using the same strategy.
Q. What if a property goes to auction, but I don't have the cash to buy it outright?
A. You're still in the game. Usually the people who buy at auctions are professional "flippers" or "wholesalers". They have the capital to buy the properties at auction. They clean up any obvious problems and then look to resell them quickly. If you are interested in a property but don't have the cash to buy it at the auction, go anyway. Slip the winner a letter explaining your interest in purchasing the property. You can probably work out a conventional mortgage purchase deal.
Q. What if the bank buys the property at auction?
A. The bank just wants to get rid of it. Corner the bank's representative and give him or her a letter saying you want to buy the property. You can offer less than the bank paid for it since obviously nobody bid more than the bank. Generally speaking, banks only buy those properties which are "underwater", meaning that these properties have liens/debt in excess of the properties value. However a lot of this debt is "interest, penalties, and fees" imposed by the bank. If you buy from the bank after the auction, not only are they likely to waive their interest in these extra amounts, they may even discount the property slightly off the outstanding principal in order to get it off their books. Be sure to get the bank's attention before they pass the property off to a broker to sell. By that time, it's generally too late to get a good deal.
Foreclosure Investing as a Process
Q. How do I work the foreclosure process efficiently?
A. First, you need to realize that the odds of you getting any particular property are low. Someone may get there first, someone may offer the owner more for it, or the owner may get out of financial trouble.
You need to cast a wide net, filter through lots of properties, and make offers and bids on dozens of them. Also, track the properties over time. It is very common for auctions to be announced, cancelled and then rescheduled. Keep trying. Finally, be flexible about how you profit from a property. Be prepared to buy it before auction, at auction, or after auction. If you are a real estate broker, maybe the owner would like you to sell it. Maybe the owner has more than one property; make offers on all of them.What to expect at an auction in New York City
Q. Funny Auction Story from Matthew Haines, founder
A. Once my investment partner, Charlie, and I didn't have our act together. We had been chasing a property for weeks. We had done all the homework. We had made all sorts of offers to the owner and to the bank. We were sure the owner was going to declare bankruptcy and delay the auction. But the night before we found out that, inexplicably, she hadn't.
We were prepared to bid up to $450,000 at the auction. But we didn't have our cashier's checks ready. The auction was at 9:30 am - too early to make it to the bank beforehand. So we made a plan. My bank opened at 9:00 am in midtown. I would go there and hopefully be the first person in line. We knew the bank would take some time to write a cashier's check for $45,000. Meanwhile, Charlie would go downtown and do everything possible to delay the auction until I showed up. He would ask lots of questions during the reading of the terms of sale. He would ask to have things repeated. He would complain that he couldn't hear. And to cap it all off, Charlie had a little more than $8,000 in cash in small bills in an emergency fund in his sock drawer. He got a bag, rumpled up all the bills, threw them in, and shook it. The plan was that when the referee inspected the money, Charlie would shove the bag in his face and blurt out, "I'VE GOT $50,000 IN CASH, DO YOU WANT TO COUNT IT???" In the end, I got there in time, but the auction was canceled. But it turned out that we wouldn't have gotten the property anyway. Nobody else at the auction had done as much homework as we had. They didn't know about the organized tenant litigation that was going on, and they were prepared to bid much higher than we thought the building was worth.