Buying a foreclosure property at the auction?

You better have the money lined up ahead of time.

Cash is king at the foreclosure auction.  In some states you have a day or two to pay for the property, while in others the auctioneer won’t even gavel the property sold until certified funds are tendered.  Generally you have to be prepared to pay your entire bid amount right away.

Most other creative real estate investing strategies focus on how to buy or control a property with low or no money down.  That just doesn’t work with foreclosures — at least not at the auction stage.  You might find a pre-foreclosure or REO strategy that lets you get by without cash…. but not a foreclosure auction.

Here is a summary of the most common ways to pay for a foreclosure property.

1.  Cash

Well, that’s obvious, right?  If you have cash in hand (or in a checking account), you don’t need to look further.  Get a cashiers’ check from your bank.  Pay for your property.

Just make sure your bank account is available as cash.  Your CD or money market account might have penalties for withdrawals.  Your “cash management” brokerage account might take longer to liquidate than you think.  Find out in advance how long it will take to get those accounts turned into cash or certified funds.

Obviously, you need to have some idea how much money to bring to the sale.  Will you be making a 5% down payment… or do you have to pay the entire bid amount?  And you need to know the form of payment accepted– cash, cashier’s check, attorney trust account check, money order, etc.  Very few auctions accept a personal check…

If the auction just requires a deposit, most investors will bring a variety of small cashier’s checks and some cash.  So if you are looking to buy a $100,000 house and the rules require a 5% deposit check, you might bring a $5,000 cashier’s check… and a little cash in case you get caught up in the bidding.

2.  Retirement or Insurance

Most people don’t know their IRA can invest in real estate… as long as you have your account with a custodian that permits you to “self-direct” your investments.  With a SD-IRA, you can buy foreclosures, although the timing of getting your cash to the auction can be tricky.  You need to be prepared in advance.  Usually you will need to make arrangements to wire money from the custodian to an attorney or escrow agent (since giving you the money directly is not allowed).

Permanent life insurance (think whole life here… not term) also has cash value that can be borrowed quickly and inexpensively.  But again, you need to talk to your insurance agent ahead of time to know you will have the cash in time for the auction, and how the repayment of the “policy loan” works.

3.  Bank Loan or Line of Credit

Forget about traditional home loans and mortgage brokers.  Banks won’t lend without collateral, and they are not going to cut a check for a foreclosure property you don’t yet own.  They can’t put a mortgage on the property until redemption and objection periods expire. So these lenders won’t lend money when you are looking to buy at a foreclosure auction.

But with good credit and collateral, you might be able to obtain a personal line of credit or a loan secured by some other valuable collateral (your home, business assets, etc).  Small local banks and credit unions are your best option here.  These are easy-to-access loans, with minimal paperwork.  And you usually incur no costs until you use the money on the line of credit.

Most investors have a substantial line of credit as a security blanket, even if they don’t need the money as a funding source.  Just in case.

4.  Credit Cards

Credit cards?  Really? Do you really want to borrow on credit cards?

Actually, if you have a low, introductory interest rate, a low-cost cash advance option, AND a great investment opportunity, credit cards might just work.  But do the math first.  Make SURE the investment warrants the high cost of borrowing on plastic.  For most investors, this would be the last resort.

But every experienced investor has run across somebody who made their first deal work on credit cards.  At a foreclosure auction, it is unlikely they take credit cards as payment, so you will need to make arrangements to get a cash advance or have checks to cash at a local bank against the credit account.

5.  Friends and Family

For many people, the LAST place they would ever look for money would be friends or family.  It’s embarrassing to ask, you don’t want to owe any favors, and you just know they are going to try and talk you out of this whole idea.

For others, friends and family seem like an obvious source of funds.  But be careful.  Even if they believe in you enough to lend or partner with you in exchange for a cut of the profits or a nice interest rate, is it worth the risk?  Do you want to be reminded of “Johnny’s Stupid Idea” every Thanksgiving for the next 20 years, if things don’t go exactly as planned?

But definitely ask them. Friends and Family are almost always going to try to shoot you down and  explain why your plan won’t work.  But that’s a good test of how well you can articulate your plan.  If you can convince them … you might be ready to start investing.  On the other hand, they might convince you that you have no business doing it.  Which also might not be so bad either.  If you can’t convince friends and family, maybe you just aren’t ready…

6.  Partnerships

Years ago a realtor told me “partnerships are sinking ships”.  Wisdom to live by.

The problem with partnerships is that very few partnerships start with a clear, mutual understanding of exactly what everybody is expecting out of the partnership.  This can lead to huge problems.  That’s why EVERY partnership should be reduced to writing.  Anticipate the problems before they come up to keep everybody happy.  It’s a lot of work… and a bit of a buzzkill… to think through all the negative things that might happen, but it will never be easier to address these issues than right before you start.

Most foreclosure partnerships involve one partner putting up the money and the other partner doing all the work, with a split of profits at the end.  But every partnership is different.

As you get more experienced, you can put together a syndicate with many partners to increase investment opportunities and share the risk.  But you don’t want to start raising money this way without solid legal advice.

While we use “partnership” as short-hand for people teaming up, realize that a General Partnership has its own legal status, and partners become liable for the debts of the other partners.  So a lawyer would usually recommend the “partners” use a different form such as an LLC, Corporation or Limited Partnership. All have the same basic idea– some people put up money to make a passive return, while others do the work.

7. Investors

Also called “private money lenders” in some circles, investors are simply individuals with money to lend.  Look for the “money to lend” ad in the classifieds or on Craig’s List and you’ve found an investor.

Unlike partners, investors are looking for a specific return, not a cut of the profits.  Some only lend with outside collateral, such as your home.  Others lend based on their opinion of your experience and ability. Expect high interest rates and short term repayment schedules.  Plan on pitching an investor the way you would a commercial loan officer at your bank: explain your plan, articulate your expectations and generally sound like you know what you are doing.

8. Hard Money Lenders

Hard Money Lenders are easy to confuse with Investors.  A Hard Money Lender is generally an individual making short term, high interest loans to people who can’t borrow the money they need from a bank.  The difference is that Hard Money Lenders are generally more interested in the collateral than the borrower or the profitability of the deal.  They will only lend if they think what you are buying at the foreclosure sale is worth a lot more than you are paying for it.

Hard money is expensive, but it can work great with foreclosures you intend to flip.  The loans are approved immediately with no red tape, and the lender doesn’t care that the property needs to be rehabbed.  But hard money generally is repaid in six months to a year, so it limits your exit strategies– you don’t want to buy and hold with hard money.

9. Wholesale Flipping

Most people understand flipping.  You buy, rehab and sell.  But Wholesale Flipping lets you make money without ever actually owning the property.  Just as you can assign a contract for cash in a normal real estate deal, you can assign your purchase rights at the foreclosure sale to another investor who wants to do the rehab and sell the property to the end buyer.

As a wholesaler, you do all the legwork, inspections and bidding… then you get a preset fee for assigning the deal.  You make a lot less than you otherwise would if you handled the entire deal, but you don’t have the same risk and work as the rehabber will.  Good wholesalers have a list of qualified buyers lined up before they bid on the foreclosure auction…. or they end up walking from the deposit.

Conclusion

So now you know how to raise money to buy at the foreclosure auction… which method are you going to use… and are you ready to start?