Few things will have a bigger impact on your success as a real estate investor, than your ability to accurately estimate property values, repair costs, and the time it will take to perform those repairs.
The auction investor only gets one shot a property and profit or loss depends on research and preparation. For all investors it’s important to have all the ducks in a row, or as many as can practically be lined up. What’s worse than missing out on a good property? Buying a bad one that you thought was good simply because you didn’t kick over enough rocks. In the first case, it’s a story of the one you could have had. In the second case, it could be a story of how you were had.
A record number of properties are going to trustee sale. How do you choose what to focus on?
Area. Choose an area to work as your home base. It can be where you live, but it doesn’t have to be. It doesn’t even have to be an area where you would want to live. Transitional areas can provide very good ROI. It should be an area where foreclosures are plentiful, properties are selling, and the margins are there to enable you to make a profit.
Type of property. Not all properties are created equal. Some sell or rent better in a particular market than others. In your area that might be the 3BR/2BA, or properties with a pool, or properties without a pool. Study the market to find the sweet spot and use that to weed out properties less likely to generate revenue.
Lenders. Focus on the lenders who have a track record of discounting aggressively at auction. You can use ForelcosureRadar to find this information by tracking sales to third party investors and use charts and graphs in the Foreclosure Trends feature to see auction discounting by area.
Postponements. The courthouse records the NTS, but if that sale is postponed, there is no public notice of the rescheduled date. As a result, these properties escape the notice of many auction investors. You can reduce your competition by tracking postponements and being ready for when they come back up. ForeclosureRadar automates this process for you, making it easy to track even multiple postponements for a property.
Title Research. If you’re good at title research, you can focus on properties where the address is unknown or the title history is complicated. Many investors will pass those by as involving too much work. This means less competition for those properties.
Typically auction investors don’t have access to the inside of the house to determine the condition. But it’s important to have as much information as possible about the condition of a property before the auction date. Information gives you a bidding advantage. But, you don’t know which properties will postpone or cancel. If you spend an hour at every home on your list, you could be wasting your time. Find the right balance for your investing style.
Some investors focus on detailed knowledge of the condition to hone their numbers. Some apply a formula, such as $10 per sq. ft., for repairs and don’t attempt to get detailed information. However, if the detail guy knows it will only take $2K to restore an 1,800 sq. ft. house instead of $18K, he has a $16K bidding cushion to outbid the formula guy and still make money.
In addition, if you’re good at renovations and repairs, that could give you a competitive advantage in that you could do them yourself for less than your competition, who has to contract it out, which means you have margin to outbid them at auction.
External assessments. At the least you should do a drive by and see as much of the outside as possible. Don’t rely on just the street view if you can get other angles. One investor was late to the auction. He did a drive by on the way to the courthouse, it looked fine, and he proceeded to the sale and won the bid. However, if he had turned the corner and taken a look at the back, he would have seen there had been a major fire and there were holes in the wall and roof. He bid without that knowledge and learned a $100K lesson in assessing condition.
- Exterior status reflects interior condition. Usually the outside condition is an indicator of the inside condition. If there are cars on blocks in the yard and oil stains on the driveway, don’t bid as if the inside were immaculate. On the other hand, if the outside is maintained, the lawn manicured, then the inside is probably nice.
Tales from the Trenches: Exceptions to the inside/outside condition rule
While it is usually true that outside condition gives you a clue as to the inside condition, there are exceptions. Twice I’ve bought houses at auction that were perfectly manicured on the outside, only to discover when I took possession that they were a disaster on the inside.
In the first was a situation, the husband started a major remodel, tearing down drywall and even walls and ran out of cash. They lived in an unfinished construction zone for a year with no ability to complete the project. The stress was a factor leading to a divorce. The husband was gone. The wife had kept the outside immaculate, but the inside was destroyed because she didn’t have the money or skills to fix it. I lost money on that one.
The second was a house in Coalinga. The owners were absent and the neighbors had been caring for the house and the grounds. The windows were professionally boarded as if the owners had done so to project the interior from vandalism or storms and I had no reason to believe the inside didn’t match.
When I took possession and opened the front door, I discovered the entire house was six feet deep in garbage. I learned that trash pickup was expensive in this community and rather than pay for it, the neighbors had been using the house as their own private trash dump for household garbage. Rotting food, chicken carcasses, hundreds of dead rats, over sixteen dead cats, all of which had been composting inside the house for over a year.
I contacted a cleanup company. The first day of the job I got a call from the owner saying his entire crew was in the yard, throwing up. The second crew fared no better. The third company came in hazmat suits and finished the job. I lost money because of the cost of the cleanup.
- Drive by viewings and safety concerns. In some environments there may be safety concerns. Unhappy owners have been known to come out the front door with a gun when someone pulls up and starts taking pictures of their house. In rural areas, dogs could run free.
- Ladders, rooftops and second-story windows. How aggressive you get depends on your temperament and risk tolerance. Some ring the doorbell to see if anyone answers. If so, they strike up a conversation while trying to see past the owner to the condition inside. If no one answers, some investors will try to look into windows and even go into the back yard for a better view. Just remember you may encounter a dog or the owner sunbathing. If your competition is more aggressive, they can outbid you.
Tales from the Trenches: Beating the competition
I went to do an assessment on a house with an absent owner, but the windows were covered from the inside with black plastic. I discovered later that another investor had been there first, found the house unoccupied, kicked in the back door and inspected the house. It had a lot of nice upgrades, which meant it was worth bidding higher for because the sale price would be higher than expected from looking at the outside. He blacked out the windows with the plastic, repaired the back door and locked the place up. He came out ahead, but if there had been a concerned neighbor, he could have just as easily come out with a breaking and entering charge on his record.
Financial analysis. As with any investment, the numbers need to be inspected to see if they make sense. What numbers you need and what you do with them depends on your desired outcome. The analysis of the numbers for a fix-and-flip strategy will differ from a buy-and-hold strategy. See the tutorial on Financial Analysis for a detailed look at how to do the analysis and how ForeclosureRadar.com simplifies the process by filling in a lot of the blanks for you.