Hello my friends and welcome to another episode of Ask Marco where I answer your investing related questions.
Today’s question comes from Jayco, I believe that’s how you pronounce your name. Uh, he says, Hey Marco, this is Jayco from Indianapolis. Thank you so much for your good information that you bring to us for free. I want to buy properties at foreclosure auctions at the county sheriff sale, but I don’t know how to finance them since they want all the money up front. If you have any suggestions I will greatly appreciate it. Well Jayco thanks for the question.
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Simple one here, but things to consider. So how do you finance a foreclosure that you purchase at the County Sheriff’s sale or any courthouse steps for that matter across the country? So this is true in pretty much every state. Um, there are judicial, non judicial States. Often, it’s a trustee that’s selling the properties that are have been foreclosed or taken back by the lenders in the non-judicial States and in the judicial States.
They are typically done by, well often the trustees at the courthouse steps. You just have to check your jurisdiction, but how do you finance these properties? The answer to that question is you typically don’t, so if you don’t have the capital for it, and most people don’t walk around with tens of thousands or hundreds of thousands of dollars in their pocket. Although I did know one individual who actually did that, you will have to finance it with your own cash or friends and family or other people’s money. Essentially it’s private money meaning non-institutional money. You have to accumulate these funds through your own efforts through friends, family, other investors or partners. It’s all private money. Now there are people out there that want to lend and will lend under the right terms and conditions. If you know what you’re doing and you’re providing them a favorable return and it is backed by that real estate, meaning that they have a lien on it, like a first lien position for the monies that they’re lending to you.
However, a lot of people are going to be pretty reluctant when it comes to foreclosure auctions. They’re more likely to want to lend you capital if you’re purchasing it through the MLS because you have the ability to do more due diligence. And I’ll get to that in a minute, but first, ask yourself why you want to buy a foreclosed property? Is it because you want to buy, fix and flip properties and create yourself a flipping business, essentially a transactional business where you are flipping property to create chunks of cash and then you take those chunks of cash and you reinvested into other properties that you buy and hold in a portfolio that you own? Or are you looking to equity buying a distressed asset, fixing it up and essentially creating or forcing equity in that property where you’re essentially putting in the sweat equity to create the equity in the property?
And there’s nothing wrong with that. It’s just, it requires certain skills and tolerances and team of people and an understanding of how it all works and it’s doable. But there are a lot of moving parts and it can be stressful and sometimes there’s a lot of brain damage and I’ve done many of those. I’ve probably flipped close to 300 properties since January of 2015 I don’t do that anymore. I pretty much have gotten out of that. It was just too draining and stressful and a lot of brain damage, a lot of moving parts and getting ripped off by contractors and on and on the list go. So there are a lot of negatives, if you will. And I’m not saying it’s a bad thing, it’s just not for everybody. Just understand who you are and understand what you want and your risk tolerance and your resources and your level of knowledge and the people that you would have on your team and what you would be doing.
So again, full circle, it goes back to the whole question of why, ask yourself why you want to buy foreclosures and make sure you understand what’s involved. And I’m going to kind of wrap up here by pointing out some risks and things to be aware of. First of all, when you’re buying foreclosures, you’re buying these properties as is. They’re exactly as they sit. There are no warranties or guarantees or representations being made, so you don’t have the luxury of having contingencies in place like an inspection or an inspection period. There are no inspections. If you’re lucky enough to be able to get into the property. Generally they’re locked up and sometimes you can get in if they are listed on the MLS and you can get a hold of the agent and get into the property, but often they’re not. If they’re on a trustee’s list, they’re just going to go to auction and there is no inspection.
So unless you know what you’re doing or you can get into the property. And my ex-partner and I have broken in to many properties in the past in a very professional way, but essentially walked onto the property and if we could find a way to get into the property, we’ve done that just to check things out and you’ll be surprised and sometimes shocked at what you see and what you find in these properties. It can get pretty gross and smelly and disgusting, but there’s no inspection you’re buying as is. Secondly, this is a, you know, an actual personal story, but you may be inheriting one or more issues on that property. For example, there was one particular three bedroom home that I had purchased from a trustee at a trustee sale and we had actually walked the property and it looked pretty decent, but the basement, the concrete walls in the basement were coded or covered with a false wall.
Essentially. They had dry wall in front of it, so it looked like it was finished or mostly finished and we didn’t think there was any issue. But after we purchased the property, came to find out that the foundation was badly. It had lots of foundation issues and the foundation issues are very hard to repair and when they are repairable, they’re very, very expensive. So we actually had to Jack this property up and do foundation repairs, which became very expensive and we didn’t know that and we didn’t see it because it was behind drywall. You don’t have the luxury of basically breaking into all the components and the mechanicals of property, especially if it’s foreclosure, because odds are you’re not going to have running water, gas, or electricity. And so it may be difficult to do some of the things you want to do from a due diligence perspective if you do get into the property, because let’s face it, if it’s a foreclosed property, it’s probably been vacant and without utilities for a period of time.
Last but not least is the competition in hot markets or markets that are very active. You’re not alone. The, believe me, there’s going to be a good number of people, if not a lot of people going after properties that are foreclosed, all hoping to get a great deal on a distressed property. And so it’s not just you. You’re going to often be bidding for that property with other people and sometimes they get bid to the point where you are outbid beyond what is your maximum bid price. And so now it no longer makes sense from a financial perspective and there are other people who are willing to pay more than what you’re willing to pay just to a squeeze you out because you’re a new face and they don’t want to see you there again and they’re willing to overpaid just to get rid of you.
And second, they are sometimes willing to pick up a property with less profit or less margin and do a less costly or cheaper renovation or repair on that property. Again, to just scoop up that property out from anybody else who’s bidding on it. And it’s just a way for them to control that market, if you will. Anyway, I don’t want to discourage you from buying foreclosures. A lot of people do and do well at it, but understand what you’re getting into first. So again, educate yourself on it. Make sure you’re working with the right people and have the private money or private capital available because you are going to meet be needing that. It’s an all cash transaction.
All right Jayco I hope that helps. And for the rest of you, if you have any questions about investing or real estate or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button at the top right. Submit your question and I will answer it for you here or in an email. If you haven’t subscribed to the show, remember to do so, just click that little purple subscribe button. Help us share the show with other like-minded people just like you who can benefit from this show. Visit us on iTunes, leave us a rating and review. I greatly appreciate it. So I’m going to thank you in advance and with that said, thanks for listening. I’ll see you on our next episode.
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