Focus on Foreclosure, Part 3
Buying Foreclosures After the Auction

By Jordan Taylor

Foreclosures are on the rise in the U.S., creating tremendous opportunities for savvy investors. In this final of a three-part series, Jordan Taylor looks at how to buy foreclosures after the auction from lenders and other investors.

In previous issues, we've discussed buying preforeclosures, which means buying the property after the foreclosure process has begun but before it's completed. If you are unable to prevent the foreclosure, the property will go to auction, which is another buying opportunity. If you are unable to buy at the auction, you still might be able to get a good deal on a foreclosed property after the auction.

There are two ways to buy after the auction. First, if the property doesn't sell at the auction, the lender that foreclosed takes possession of it and you have the opportunity to negotiate a deal with the lender. Second, many investors who buy at foreclosure auctions do so with the intent of reselling quickly to either end users or other investors.

Taking REOs off the bank's books
The common term for foreclosed properties on lenders' books is real estate owned , or REO. These are nonperforming assets that do not reflect positively on financial statements. Lenders are often eager to unload them, even if they have to take a loss.

If you're going to make an offer on an REO property, the best time is to do it very soon after the auction, before the lender has a chance to list the property with a real estate agent. Because most of the other liens are wiped out at the auction, lenders will often take care of any tax liens so that they can provide buyers with a clear title.

How good of a deal you can make depends on a variety of factors, including the condition of the property, how willing the bank is to work with you, whether the property has been listed with a real estate agent (which means commissions have to be paid), and how long the lender has been holding the property (if you don't make your offer immediately after the auction).

Many lenders have departments dedicated to managing their REO properties. This is the department that will likely review your offer and make a decision to accept it, reject it, or counteroffer. When you put together your proposal, include as much information as possible about the condition of the property, necessary repairs and improvements, and other details that will affect the value. REO asset managers know that investors need to buy at below market value; you can help them make a decision in your favor by providing them with the information they need to justify selling the property at the price you're willing to pay.

Buying from other investors
One of the challenges of buying at the auction is that you must have cash, typically either at the auction or within 24 hours. Some established investors with sufficient cash reserves have found it lucrative to buy at auction and quick-turn those properties to other investors or end users looking for a bargain. Buying from another investor after the auction gives you a little more time to get your financing lined up.

Here's an example of how buying from another investor after the auction might work: The property sells at auction for $125,000. Its current fair market value is $140,000 and its after repair value is projected at $165,000. The cost of repairs is estimated to be $12,000. The at-auction buyer could do the repairs and sell the property at retail for a $28,000 profit. Or he could sell the property to another investor for $130,000. In that situation, the at-auction buyer makes $5,000 on the deal, and the other investor stands to make $23,000 (or potentially more, if he holds the property as a rental).

You can identify this type of investor by attending the auctions and paying attention to the bidders who show up and buy time after time. Introduce yourself, give them a card, and tell them you're interested in buying one of their properties. If you strike a deal, be sure to do your due diligence and research any liens that might not have been erased with the foreclosure so that you get a clear title on the property.

Each phase of the foreclosure process—preforeclosure, at the auction, and after the auction—provides savvy investors with the potential for a profitable deal. The key is to understand the strategies, apply them effectively, and be willing to walk away from any deal that doesn't meet your requirements

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Jordan Taylor is the editor of Cashflow Generator newsletter. For more information about advanced foreclosure training, including how to buy REO properties from lenders and other investors after the auction , through Wealth Intelligence Academy®, visit www.wiacademy.com. Some states have enacted legislation that could impact how you participate in foreclosure and/or preforeclosure activities. As of September 6, 2006, we are aware of nine states (CA, CO, GA, IL, MD, NY, MO, MN and RI) that have enacted legislation. Check with a competent real estate attorney in your state to determine what regulations apply.