Foreclosure Forecast Newsletter

On the weekend of March 17-18 Hudson and Marshall auctioned off 450 bank owned houses in the Detroit and Warren areas of Michigan. The many different lenders who owned these REO (real estate owned) properties had one goal in mind – to get these properties off their books. Most of their foreclosed houses properties were already listed on the MLS (Multiple Listing Service by Realtors) but were sitting on the market unsold. There is a reason for this.

These foreclosure properties were in the most highly depressed area in the country. As Detroit reels from job losses in the U.S. auto industry, the depressed city has emerged as a boomtown in one area: foreclosed property. The city, which has lost more than half its population in the past 30 years and struggled with rising crime, failing schools and other social problems, largely missed out on the housing boom that swept much of the country in recent years.

Michigan is loosing 31,300 jobs a year (close to 2% employment loss annually) with median price homes barely moving in the last 10 years (currently at $177,500). Detroit, where unemployment runs near 14 percent and a third of the population lives in poverty; you can see why nobody wants to live there. Now you know why these lenders wanted these properties sold.

So these REO owners decided to do something different. They hired this top notch auction firm to promote a bigger than life event – to spark an interest in a very non-interesting market area. The auction house also had their goal – make the most money possible (as they are paid a big percentage of every sales price).

Good Morning America

Hudson and Marshall did a great job promoting this local REO auction nationwide. So well, that Good Morning America (GMA) heard about it, interviewed me on the Friday before the auction to get my expert opinion on how these auctions work and what to expect, then aired the show live on the Monday after the weekend auction. You can see and read their segment here:

“Foreclosures Could Mean Cheap Homes for Buyers. Research Rules, Auction House and Market Value before Bidding” by ABC.com Good Morning America.

See the video interview here.

The perception is that a foreclosed house at auction is being sold at auction; it must be a deal, right? WRONG! Now let me share with you, what I shared during my GMA interview.

The REO Lender Has Options

Since the actual foreclosure auction, at the court house steps, has already passed and no one bought the property, it is now a bank REO foreclosure. All the state regulated foreclosure laws (read about your states foreclosure laws here), the bank can now decide exactly how they are going to sell their non-performing assets. Their choices are:

1. Hire an Agent and List it on the MLS
2. Sell it directly to an investor, through their REO Asset Management Department
3. Hire an Auction House to market and sell it (as with this Hudson & Marshall auction)

Once they make this decision, they can then set the price and terms of the sale of their property as they wish. Of course their goal is to make it to sell it, so they will price it as close to market value as they can, to maximize their price and minimize their hold time. Think of REO banks as your competition, with only deeper pockets. They will do what any good business person will do to get the most they can with the least amount of hassle.

The Terms for the Detroit Auction

In this particular auction, Hudson & Marshall did a great job getting the biggest crowd they could get. They knew that if they got a big enough crowd, the bidders would feed off each other, and the spirit of competition would get their top properties bid up. That is exactly what happened. Here is all you needed to qualify to bid at this auction:

1. $3,000 cashiers check deposit per property.
2. 30 days to find financing and close on the property.
3. If you don’t close, your only loss is your $3,000 deposit.
4. Open houses to inspect the properties before the auction.
5. Full title insurance and properties free of all liens and encumbrances.
6. Commissions paid to Buyers Agents who attend the auction with their Buyer.

Here is what I said would happen:

1. Homebuyers came with their “short list” of houses they wanted to live in.
2. Investors came from all over the country with “their best rentals” list of houses they wanted to own for cash flow.
3. When there were more than a couple bidders interested in the same property, the final sale prices were at or above the current market value of the property. In a nutshell, competitive bidding worked in the REO lender and Auction House’s favor.
4. When there were properties offered, that were not on anyone’s list, they sold for much less than market value, or did not sell at all. Here is my exact quote:

“If you are looking for a deal, it is not going to come on the nice house on the nice street; it’s going to come in something else,” said Alexis McGee, president of Foreclosures.com. “If there is a lull in the auction and there’s not much bidding going on, you can jump in and get a good deal because that’s when the deals come.” Alexis McGee

And here’s what happened:

1. A large amount of houses were sold at or above the listed price of the homes in the MLS. The auction was a huge success.
2. The bidding stalled on some of the least desirable residences in Detroit’s collapsing housing market, even the fast-talking auctioneer was feeling the stress.

“Folks, the ground underneath the house goes with it. You do know that, right?” he offered. After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: “The lumber in the house is worth more than that!”

At least 16 Detroit houses up for sale on Sunday sold for $30,000 or less. A boarded-up bungalow on the city’s west side brought $1,300. A four-bedroom house near the original Motown recording studio sold for $7,000. “You can’t buy a used car for that,” said Izairi. “It’s a gamble, and you have to wonder how low it’s going to get.”

In the most spirited bidding of the day, a sprawling, four-bedroom mansion from Detroit’s boom days with an ornate stone entrance fetched just $135,000. Realtor Ron Walraven had a three-bedroom house in the suburb of Bloomfield Hills that had listed for $525,000 sell for just $130,000 at the auction. DETROIT (Reuters)

So is it Worth Attending these REO Auctions?

YES! But you must prepare in advance. Rarely is someone willing to do the work that is necessary to be prepared to get the great deals. If you are, here’s what you have to do:

1. Preview EVERY ONE of the properties being auctioned. Do not make a “list”. They all must be seen and researched.
2. Estimate repairs on every house. That means visiting them and preparing your own repairs bid sheet, or bringing your contractor with you. You’ll have to pay him for his time of course. And with 450 houses, that’s alot of time.
3. Estimate market values on every house. There is no time to order an appraisal. So you will need to do your own appraisal on every house. Yes, all 450 of them.
4. Create a Maximum bid sheet for every property. It doesn’t matter how much you hate it. Everything has a price. You need to get to that number on every house. If it’s really bad, then maybe you pencil in a bigger profit, then in the good neighborhoods. I make sure I have at least 15% off the resale or $30,000 no matter what.
5. Walk when it goes over your top price. Do not get personally connected to any house. There is no reason to get caught up in a bidding frenzy. With this many houses going to bid, you will have your chance.

So now we have FIVE different ways to find foreclosure deals. Here is some quick free reading for you to learn more on each. Of course the full details of what to do and how to do it exactly, step by step, is answered in my learning programs here.

1. Pre-foreclosure investing: from the owner in default who has equity to buy, before he looses everything at the auction. Learn more here.
2. Foreclosure Auctions: on the court house steps for the amount owed to the foreclosing lender. Learn more here.
3. Note Investing: buying a junior mortgage who is at risk of being wiped out by a senior mortgage who is foreclosing on their note. Learn more here.
4. REO Investing: from the lender who just foreclosed on a property. Learn more here.
5. REO Auctions: from the REO lender who has foreclosed on a property and now using an outside auction house to sell many properties in one day (as described above).

Good luck and happy investing! Alexis