Foreclosure Sales – Be Careful out there
me prices continue to drop, especially in some parts of the country. The media are filled with sad stories and frightening predictions. In some parts of the country home prices have declined 20-30% and many people owe more than their house is worth. Many more can’t refinance their way out of trouble because they no longer have enough equity to meet tougher lender qualification rules.
Unsettled times like this bring out the “wolves” looking to profit from the confusion. Seminars on how to profit from foreclosure are popping up all over. They charge thousands of dollars for their materials and training and assure attendees they can make thousands per month risk free.
If only it were that easy.
“The world is full of sheep waiting to be sheared. Someone is going to do it, so it may as well be me.” is the operating philosophy of many in the business. Whether you are a buyer or a seller you had better keep that in mind.
I think there are two major factors which make foreclosure investing so dangerous:
- It involves large cash transactions. When you buy on the courthouse steps you pay cash.
- No single professional adviser knows enough to protect you completely; you must be able to synthesize the advice from many advisers.
A foreclosure transaction probably requires the following:
- An accurate market value estimation in a troubled uncertain economic climate. Your standard residential Realtor is probably not the person you should be talking to.
- Accurate rehab and renovation estimates. A contractor might be the person from which to get your advice, but an experienced rehabber will know endless tricks for doing the job cheaper and faster.
- Title work. By the time a foreclosure happens lots of bad things have probably happened. The financial stress may have caused a divorce, there are probably multiple outstanding loans, bankruptcy may have begun. Sometimes there may even be unrecorded loans, fraudulent transactions, obscure redemption rights, forged signatures, etc.
- Legal work. You need legal advice but the typical attorney is trained to keep you out of trouble. By definition, if you are buying foreclosures you are inviting trouble. You will have to know enough to direct your attorney so he can protect you as much as possible but still get the deal done. You will be tempted to do it on your own…
Securities law. Most foreclosure novices don’t have enough cash of their own to do multiple deals. They make money on the first one and get some friends together to do another one. Good people are doing jail time because they didn’t understand when soliciting and mingling funds became securities law violations.
I know a guy who has been doing foreclosures for the last eight years. He is very bright. He works hard. He has a track record of many successful deals. He understands trusts. He knows real estate values. He knows every word on the standard forms. He sets up a new LLC for every property he buys. He is known (favorably) by many bank officers, trust officers and others in the business. He has subscriptions to a variety of expensive research reports that inform him of upcoming actions and events. He has private lenders willing to hand over cash on very short (hours) notice.
He doesn’t drive a fancy car. He doesn’t wear expensive clothes. He doesn’t stand out in a crowd. He doesn’t talk, brag, display his knowledge or do anything else that would draw attention at the courthouse auction. He will be standing in the back where you have to turn around to see him. He doesn’t care about any one deal because he knows there is always another one.
He’s your competition for profitable foreclosure deals.
