Last Wednesday at 10 am, I found myself in the office of the Boulder County Trustee, awaiting the foreclosure auction. It was a packed house with about 30 people crowded into the small space, most of whom, by the looks of their Carhart jackets, were contractors. The atmosphere was casual and I got the sense a lot of the attendees were regulars. Two men near me chatted about a great deal one of them got on a home recently.
On Monday afternoon I had printed out the pre-sale list from the trustee’s website, which includes the bid by the lender on the property. The bank must make their bid by noon on Monday, and the list is posted that afternoon.
On this particular Wednesday, 13 of the 14 homes up for auction were sold to the lenders. Things got exciting with one home on Sumner Street in Longmont with two parties bidding. The bank’s opening bid was just over $100,000, and the two parties drove the price up to $120,000 in increments of $1-$5,000.
The winning bidder had a deadline of 1:00 pm that day to deliver funds – in cash, cashier’s check or wire transfer -- in order to receive the Certificate of Purchase. However, a CP is not the same thing as a deed. Holders of liens, including second mortgages and home equity loans, have the right to redeem the property by paying the holder of the Certificate of Purchase what they paid, plus interest.
This redemption period can be tricky for investors, and it can drag on for months. The shortest period is 15 days. The itch to get started on the fix and flip is strong, but purchasers will not be paid for any improvements if a lien holder redeems the property. A Boulder County Trustee representative told me there’s a lawsuit underway right now over $3,000 worth of HVAC work done by a Certificate of Purchase holder, before the bank redeemed the property.
So, back to the Sumner Street property. Was it a good deal? Maybe. The 2-bedroom, 1.5-bath home sold in 2003 for $180,172, but then foreclosed and sold to the bank for $153,000 in 2005. The bank sold the home for $164,500 in 2006, before it was foreclosed again. Remember, the winning bid was $120,000.
I think we can assume the winning bidder knew what she was doing. Just the day before her holding company had sold another home in Longmont for $169,900 that they had bought at auction last June for $101,500. They have another home in Greeley under contract with a list price of $94,900 that they bought at auction last July for just under $61,000.
Still, once you factor in improvement costs, broker commissions, and closing costs, the profit margin is, well, marginal. Before jumping in, I would recommend considering the hassles of buying at foreclosure auction:
- Can’t inspect the home before purchase -- what if there are foundation problems?
- Need to have total purchase price in cash that day by 1:00 pm
- Have to honor any leases, giving month-to-month renters 60-day notice
- Home might be redeemed by lien holders
- Homeowners may need to be evicted
Next week, I’ll write about other opportunities to invest in “distressed” real estate, including bank-owned or REO properties and short sales.
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