If you were a lender or mortgage servicer, you’d be thinking about adjusting your “liquidation strategies” right about now.
The foreclosure moratoriums provided some delay of the inevitable, but ultimately were good for nothing. Thankfully, you don’t hear anybody talking about new moratoriums today.
Uncle Sam’s attempts to push loan modifications are fully engaged, but they’re providing no significant help in stopping, or even slowing defaults. You could also surmise that they could make it worse. Loan-mod candidates who don’t get the terms they want will have one more reason to mail in the keys, justifying it with the old standard, “the bank wouldn’t do enough for me”.
The mortgage servicers have to be eyeing the trustee sales as a great way to liquidate their defaulted properties, for three reasons:
1. Sold “as-is”, with no liability whatsoever.
2. No costs/worries about the evicting, repairing, cleaning, evaluating, and selling.
3. Quick and easy, as long as they get the price right (give them away).
Servicers have to notice how well things are selling on the court house steps. In SD County over the last 30 days there have been 1,243 trustee sales, and 309 of the properties, or 25%, have been purchased by third-parties.
Buyers want a deal, and those with cash are considering trustee sales as an alternative.
Snagging a trustee sale will always carry the burdens/risks of occupancy, no title insurance, and physical damages + costs of repairs.
The first step is to be willing to accept the costs and hassles of dealing with the above.
Here’s an outline of possible costs:
Occupancy – $10,000 cash-for-keys should be enough to inspire any occupant to move. Your housing costs incurred while waiting for occupancy should be considered too.
No title insurance – The primary threat is from undetected liens on former owners, and a reasonable range of risk would be $10,000 to $50,000. The disputes that could arise from boundaries/easement issues with neighbors can be identified in advance, especially in tract neighborhoods.
Repair costs – You’d have to have a level of comfort with the occupants if we were willing to take a chance on buying an occupied trustee-sale property. “Comfort” would mean that there was assurance of the occupants vacating the property, but there can always be unexpected problems. Let’s budget of $5,000 for additional repairs caused by occupants. Yes, if they pour concrete down the toilets it could cost $25,000 to replumb the house, and that possibility should at least be on the radar screen, but if you didn’t feel comfortable with the occupants, don’t buy the house.
Miscellaneous – $5,000.
Let’s figure that if it took less than $30,000 in additonal costs to buy a trustee-sale property, then we did alright. Let’s make sure it’s reflected in the purchase price. And yes, if things really went crazy you could eat hundreds of thosands of dollars, but with proper investigation you can minimize the risks.
I have been developing my plan to offer assistance with the investigative service. My trustee-sale service plan includes:
A. With 10,172 properties in the county on the foreclosure auction list, we have to narrow it down. I am working on maintaining the list of “50 best buys” in North SD County Coastal, and have hired another person to assist with the compilation.
B. Determining, and sizing up the occupant, plus I want to arrange for a physical inspection of the property every chance possible.
C. Have title experts evaluate for liens and encumbrances.
D. Have money sources lined up.
Since posting this idea a few weeks back I have had many inquiries, which I appreciate. I have been reluctant to commit full-speed, but as of today I am willing to pursue these in earnest because of these two reasons:
a. The increased likelihood of more properties be sold at trustee sales.
b. Getting an assistant to help with the research.
Cash buyers who save the cost of 5-10 points on borrowing the money have a viable opportunity with trustee sales. For those with big down payments, there is still possibility, but it would take more people being more comfortable, and the cost of that would push the sales price (and need for a ‘deal’) down further – which could limit the properties available.
Trustee -sale buyers are going to save the 1% that they usually pay for title and escrow services, so I think my 2% commission for the investigation looks reasonable.
But you have to be comfortable with the risks, because trustee-sale properties aren’t for everyone.
Looks like more new building is starting in no County–Further sign of a bottom???
http://news.yahoo.com/s/prweb/20091025/bs_prweb/prweb3103284_1
When you compare what you are offering to the 5 points that a buyer gets charged at a REDC type auction, you are offering quite a value.
Jim – we have been buying/fixing/flipping Trustees Sales in the Phoenix Metro for about 12 months now. Having a trusted ‘advisor’ who is highly seasoned and helped us build our investment model (street, age, zip, size, rent, comps) and execute on leasing, mgt, repairs, etc has been flawless (cannot do it remotely from SD).
We have been party to over 300 transactions either as a private lender to 3rd parties for the flip or buyers ourselves (for discretionary client funds).
Your services should be very well received and compensated.
Clearfund–Do you know a guy named Randy? He bids daily there at the Phoenix Courthouse Steps.
Sounds like an excellent deal, Jim!
The problem with your model is that if someone is looking at one particular house…be prepared for a lot of frustration. Expect multiple postponements…and then a min bid too high. Or postponement, postponement, cancellation. The trustee sale setup is advantageous for those that are prepared to be there every day bidding on multiple properties.
Local Boy – Don’t know Randy as we don’t personally go to auctions (here in SD). I hear we do have apx 8-10 ‘people’ at the auctions which is up from 4-5 early in the year…they don’t all bid, but the lookers have taken a sick day to go pretend to be ‘real estate pros’ all over again.
Similar to Jim’s thesis, we have partnered with a firm specializing in this niche and provide them capital, thus we are more of a private equity JV partner.
If I can ride this out and never attend the auctions in person, major victory!.
How would a 2 percent investigative commission work? Jim, you may have to “investigate” dozens of potential properties before one is successfully bought. Would you expect to receive a commission on each?
Perhaps a flat-fee service per property for investigation, supplemented by a commission on the successfully purchased property?
Clearfund–A partner of mine in Scottsdale and myself have been doing the same thing, just about 1/10 of your volume–we started in about the same time as you guys-it makes more sense than SD, and alot more passive–I have had no success at the TD sale here.
Be Well!
Thanks clearfund for the support. Kingside and CA renter too!
George – I’m with you, and I’m trying to be long-headed about it. If I can provide a library of properties for many to plug into, I’ll make it up on volume.
Local Boy – After getting comfortable with the numbers of cost/rent in Phoenix, etc, it made San Diego seem like most everyone here was still benchmarking reality on the peak of the bubble and not playing in the new reality. Kind of like people who were excited after the dot com bubble burst that Sun Micro was 50% off the high….and it went to 95% (or so) off its high…still holding onto the highs as a strong benchmark is wrong and will cost lots of SD folks money.
Funny, I am an optimist by nature, but my Wall St. real estate training has painted a very different picture of the near term than most folks are operating under. Guess the difference of opinions is what makes it all flow.
PS: We feel Phoenix is fairly close to a bottom (trustees sales at $60k-$100k) but Vegas is not yet there…watching it closely to open up another shop there in due course as it should follow Phoenix, albeit with an unknown lag period, due to its low cost, etc.
Clearfund–I think the rules at the TD sale in Phoenix helps make it attractive as well–$10K to bid, 24 hours to bring in the balance of funds–Opens up hard money situations as well as JV’s. If those rules applied in SD you would have an ABSOLUTE FRENZY–right now it is very tough and frustrating for the small guy to do TD sales in SD–Lot’s of funny biz going on as well.
Exactly right LB, being able to fund the following day makes the process much more accessable. sure beats carrying around cashiers checks for unknown purchase prices.
Clearfund,
I’m with you for whatever reason SD prices seem to be more sticky on the way down than other areas. Why? I have no idea only gueses.
I think this makes the most sense for rich cash buyers looking for generic rental properties. That is, they go to the auction with a list of a dozen houses and maybe place one or two bids.
Somebody who is looking for a single house to live in is mostly going to be disappointed as that one particular auction is most likely to be posponed several times.
Is there any way to get financing on these? Throuhg hard money lenders, that is, or will they not even touch this due to needing the cash upfront (unlike in Arizona as Local Boy says).
I have the same question. Can a buyer get a hard money loan, buy at the auction, then refinance?
Shadash – My personal opinion as to the why SD has remained ‘sticky’ is the “San Diego Ego”. Ever notice how everyone here thinks this is the center of the universe? Yeah, its spectacular, but incomes here are no different than elsewhere with but much higher housing prices here. Quality of life here (financially speaking), x-weather, is much lower than elsewhere.
San Diego folks have a chip on their shoulder that our real estate is coveted world wide and everyone wants to live here and will pay whatever it takes to do it, thus we must be immune to downturns, a carlsbad track house must be $1mm because the ocean is kinda close, and we have pandas and koala bears…whoo hoo.
IMHO we still have much to fall to get back in line with history and reality and incomes.
17: have much to fall to get back in line with history and reality and incomes.
agreed – prices need to fall a long way to get back in line, but I do not expect that to happen. Prices never were in line with incomes but very much a function of what people can borrow. With FHA loans and down payments paid for by the government, prices are being propped up every which way.
There may be folks who think SD is a little slice of heaven – how does that make their quality of life suck? The climate is envied. Most people think where they are from is the best – why would they stay there. The quality of life in SD is very much better than say Tijuana – where it is a lot cheaper or LA where you can spend much of your free time sitting in traffic.
There is a lot that could be improved about SD and many of its property owners are delusional about their entitlement to price appreciation – but hey – its worked for many of them so far. There are many many people whose home has increased by 100s of 1000s of dollars. It’s in those people’s interests that the prices stay up, its in the tax collector’s interests and the people holding the mortgages. Screw the little people.
Well, I for one have been trying to secure a hard money loan for an owner occupied purchase at the Trustee sale and it has not yielded anything……..yet.
The logistics problem of having to meet me down at the Trustee sale with the money coupled with not being able to secure their interest beforehand has turned out to be a stumbling block (even though I have 50-60 percent skin in the deal).
The other issue has been if the place is going to be owner occupied. Evidently there is some recent legislation that makes these lenders have to abide by the same lending guidelines that the conventional mortgage guys have to play by, and I’ve had a couple of them back out just because of it.
There is a lender up in L.A. county that specializes in Trustee sale funding, but I couldn’t talk them into the drive down to San Diego.
Murf2222
A question for those familiar with the Phoenix Trustees Sale process:
I was always under the impression that the lender was legally (or at least by policy) obligated to bid the full amount of the outstanding loan balance. Thus for properties underwater this essentially eliminated any sort of potential deal as the property would always go back to the lender.
hey murf2222 …who is the lender??