Posted by Ronald * Starr on September 20, 2001 at 24:46:46:
I got the following question about foreclosure investing in CA via e-mail. Seeing no question about privacy, I answer it here.
From: “Lucky Lady” | Block Address | Add to Address Book
Subject: Foreclosure/Trust Deed Auctions
Date: Wed, 19 Sep 2001 21:31:53 -0700
I came upon this web site and read some of your responses to others and was impressed with your generosity in giving advice. You also seem to be interested in auctions and foreclosure sales as I am. My problem is I’m new to real estate investing and as of yet have not done a deal…but looked at tons of property. I have some funds saved, have excellent credit and am pre-qualified with a lender. I’m sorry, I guess I should tell you that I live in So. Calif. I’m thinking about attending an upcoming Trustee auction in Oct. as I’ve been following several properties that are coming up. What can you honestly tell me about these auctions and does the little gal ever really have a fighting chance against the big money investors? Is there ever a way to get inside of these properties prior to possible purchase? I have looked at all three of the properties I’m interested in and have done as much snooping as possible without getting inside, unfortunately 2 of the properties are occupied. It makes me very uncomfortable to purchase without viewing the interior first, although on the exterior all three are nice. Is running a complete title search on each property the best way to check for encumbrances, tax liens ect.? Any information or advice would be greatly appreciated.
Jill Redfern -----------------
Sweet words will get you a response. Thanks, I like helping people.
The only way you will know for sure if you can compete in the foreclosure arena to go out and give it a try. The person who pays the most gets the property. No reason that couldn’t be you.
However. In my opinion it is not a good idea for a beginning investor to try to work the foreclosure sales. You have already pointed out one major risk – no idea of the condition of the interior or the structure of the property.
An Illustration. I and a partner bought a house about 18 months ago on the Sacramento tax sale at a very good price. I estimated about $6K in fixup costs after walking through it. City said we had to replace most of the drain side of the plumbing–a boot-jacked job was all wrong. Ok, add another $2.5K to $3K to our costs. When we tore up the floor to fix the drain we found major rot, termite, and powerpost beatle damage. Then in the walls of one of the bathrooms and and a wall of the kitchen we found still more damage. We put in over $20K fixing the place up. And it really should have been about $15K more, but, because I knew what I was doing, pretty much, I got the work done cheaper than most beginners would have been able to do so. And professionally done with a city building permit and inspections. Still had some troubles with a “plumber” who overstated his experience and skills. We compensated by understating his check at the end.
I think you would be better off doing some more traditional or even “creative” real estate deals for a few years. Then check back and decide if you want to do foreclosure investing. There is a lot to learn about real estate and properties. There is a lot to learn about forclosure investing. Trying to do both at the same time is not, in my opinion, a good idea.
It is very important to know what is owed on a property when you buy it at foreclosure, especially what will be coming with the property as a “negative gift” for you to owe. I do not recommend having a title company prepare a title report, as that is very expensive. Figure that for about 100 properties that get to foreclosure sale, about 5 to 8 will be good enough deals that you will want to bid on them. Getting reports on all of them would be prohibitively expense. You have to know how to research title yourself, in my opinion.
In a place like So CA, there are hordes of foreclosure investors. The chances of your being the successfull bidder is very low. You will tend to either bid too much, so you have low profits, or even losses, or you wlll be outbid by people with more money and judgment sharpened by years of experience. So you will get no deals.
Now, that said, foreclosures can be very profitable. Which is probably why beginners are attracted to them. And every successfull foreclosure investor had to start with the first successful purchase. But these days it is not easy in CA. You see, it used to be that people could make good money by buying and holding rental properties. Then, prices got so high in Coastal CA, it was difficult, close to impossible, to find a good cash-flow property. At that time, many investors started looking for quick-resell profit properties. That led them to foreclosures. There are huge numbers of the those investors still out there.
And the good times we have been through for the past four years or so has meant few good foreclosure deals. When the market is hot, defaulting borrowers can easily sell properties by listing them with real estate brokers. And they will have appreciated enough to make it easy to pay off the loans. So very few foreclosures now. Of course, if the CA economy stumbles very badly, the number of foreclosure deals with mushroom. And many investors who have been doing plain vanilla fixerup-quick-profit deals will swing back to to doing them.
If you really want to work foreclosures, you probably should try the midwest, southeast, or perhaps the mountain states. Perhaps in some rural areas of other states like WA, OR, or the northest. I know, why don’t you go to where JT-IN is in Indiana? There is profit to be made there. He’s doing great. In southern CA? Doubtful, in my opinion. You might find some place where the competition in foreclosures is not too intense.
But CA? I doubt it. I am involved in foreclosure buying in most of the northern counties in CA. It is hard to get a good deal these days. We don’t even try to buy in San Fran, Marin, Santa Clara, Sacramento, etc. There is too much competition. Too many people with too much money and knowledge, not to count the beginners who will drive up the prices to unrealistic levels.
Go to a trustee’s sale with a good deal–12, 15 or more bidders. How do you get a good deal there? This spring there was a U.S.Marshalls sale of a rundown house in a good location in Oakland, CA, where I live. There were 98 bidders cards passed out to the crowd And every bidder had to prove they could afford the minimum bid, in cash. (cashier’s checks, really).
So, is it possible to become a foreclosure investor in CA? I would not say it is impossible. But it is not easy.
I counsel you to try some less competitive and less dangerous approaches for your first few deals. Sure, go to a few trustees sales so you can assess the situation where you are. But, many, many would be foreclosure investors drop out after a fruitless 3 to 7 months. My suggestion to you is Drop Out Early, save the time. Use it to find good deals some other way.
Good InvestingRon Starr*