Every once in a while, you’ll see some real estate guru start a “mentorship” business and brag up and down about how much money he made in foreclosures.
And it is true, there is money to be made in that market. But if you take a closer look, you may well find that our wealthy friend (if, indeed, he’s not bluffing – and that happens a lot in the real estate guru world) isn’t quite working the foreclosure market, but working around it.
The fact is that it is tough to get a big enough discount on a property you are buying at the foreclosure auction itself. By the time the house gets to the auctioneer, chances are that a number of very qualified investors have already looked at the house and passed on it.
Know the Landscape
It’s a little inside baseball – but you should know that it’s usually just a handful of attorneys and loan officers/foreclosure processors in each town that handle most of the transactions. These attorneys and other adjunct professionals have friends. Indeed, their friendships have been carefully cultivated by savvy investors – and chances are they’ve slipped a word or two to someone about a nice looking property with a motivated seller.
So the short-sale market eats up a lot of the more promising, profitable flip opportunities before they make it to the auction.
Line up the Ducks
Specific foreclosure auction rules vary from county to county. In some areas, don’t bother showing up without a cashier’s check for the full value of the property. In other markets you can get away with having 10 percent on hand in a cashier’s check, or other verifiable documentation from the lender. This can knock a lot of people out of the running right away. In fact, chances are good the inside crowd lobbied hard for this rule to exclude newer competing investors just like you. (This is what proponents call “shaping the environment “ in their favor, and what those on the outside call “rent-seeking.”)
If you do buy a foreclosure property at auction, you will need to arrange for hazard and liability insurance on the property right away. But lots of insurers don’t like to underwrite vacant properties. So even if you have the winning bid, you can still have a problem if you don’t have everything ready to go.
Deals can and do fall apart at the foreclosure itself, or within days of it, when the auction winner doesn’t have his ducks in a row.
Reconnaissance – Never Invest Blind
Just as with any military operation, reconnaissance is paramount. Many people go into a foreclosure auction knowing nothing about the property they are bidding on. There’s little or no opportunity to inspect the interior of the home, for example. You have no idea what repairs may be needed.
But your competition may well have been in the home, prior to the auction. They would have bought it pre-auction, but perhaps someone got the higher bid – and then the deal fell apart. But if they’ve been in the home already, they have a huge bidding advantage against you.
Remember, the people bidding against you at foreclosures have some deep pockets. They can afford to take a bath on the occasional house. Chances are, you can’t. Don’t bid blind.
Be a Flipping Insider!
This underscores what we’ve been hammering on here in the Flippin’ Insider. For most of us, it’s not enough to rely on public foreclosure announcements and public records. All the pros and all the institutions already have those websites on their favorites list on their computers.
You have got to develop your own market, and your own network of informants in your own community. And that takes hard, grass-roots work and relentless ground pounding and hand-shaking. Your goal: to be sweeping up the best properties in the area, almost before the lender knows there’s a problem. That’s what it means to be a flipping insider. The closer you get to foreclosure on the property, the more competing bidders you can expect.
There are two ways to be a flipping insider. You can be an insider with the network of attorneys and agents who routinely work with distressed properties. This is great, and can lead to a steady stream of tips and referrals – especially if you’re connected enough to reciprocate. (Otherwise the hot tips and referrals will go to someone else who can.)
The other path to being a flipping insider is to work the neighborhood. Get to know everyone in it. Reinforce your personal contacts with direct mail. Be a part of the community. Attend worship services there. The more plugged in to the community you are, the better your intelligence network is going to be.
Your goal: Have everyone in your church, your daughter’s soccer league and your son’s school’s PTA organization think of you as “that guy who buys houses.” As in, “Oh! So you’re Bill! The house-buying guy!!!”
Business Development Tip: Know any financial planners? Not so much the transactional ones that mostly sell a few mutual funds and annuities and call it a day, but people who really do some detailed work? Are you working with one? Call him or her up. Ask if they have any clients who could really use a fair offer for their home. They can’t name names, of course, because of confidentiality rules. But they will certainly want to attract referrals to new clients by being a hero. You may get a phone call from the planner in his office with a struggling couple who needs to sell quickly.
This is a powerful argument against being a do-it-yourself financial planner, bookkeeper, accountant, or lawyer. Don’t be a cheapskate with your own financial planning needs. Hire and work with people who work with the people with whom you want to work!
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.