Flipping Phoenix Houses

There’s a lot about the 80’s I don’t miss. Take parachute pants, for example. They were expensive, uncomfortable and difficult to clean. And who in their right mind ever thought the mullet haircut looked good, or that 25 years later some people would still have them?

As for the 90s, I’m certainly glad the whole purple and teal color scheme didn’t last. It seemed like everything from family room carpet to ski boat hulls contained those awful shades of grossness.

When I look back at the 2000s I can’t really think of anything that I’m glad is gone. However, there is something I’d like to come back– the “subject to” real estate deal.

In a “subject to” transaction the distressed seller signs the title of the property (usually a Quit-Claim Deed) over to the investor. However, the deed of trust remains in the original homeowner’s name. The investor brings the loan current and makes payments on the mortgage until the property can be sold. Of course, if the investor doesn’t make payments the original owner is still responsible for the note.

Why would a seller agree to do something like this? Three reasons:

1. The seller can’t afford to make the payment.
2. The seller is about to lose the house to foreclosure.
3. The buyer gives the seller some cash in exchange for the deed.

From 2004-2006 I acquired more than 100 properties using this “subject to” acquisition strategy. It required no credit and little cash. All I needed was a few bucks to bring the loan current and pay the homeowner for the deed. I purchased exclusively from sellers in foreclosure within 1-2 weeks of their trustee’s sale. Best of all, every one of these properties had substantial equity so I knew I’d make money on the flip.

Nowadays, locating a homeowner with enough equity to do a “subject deal” is difficult. However, I stumble across one occasionally.

A few weeks ago I contacted a seller in foreclosure in who I thought owed around $110,000 on his mortgage. The after repair value of the property was $160,000. Not a bad deal. We agreed to wait on writing up a contract until after the payoff came back from the bank and I’d had a chance to inspect the property. Below are some photos and as you can see it’s in pretty bad shape.

I elected not to do the deal. However, it had nothing to do with the repairs. I got the payoff from the bank and it was $119,000. Apparently the seller hadn’t made a mortgage payment in almost two years and the bank had just finally gotten around to starting the foreclosure. With an additional $9,000 in arrears there was no way the numbers would work.

Boy do I sure miss the 2000s.

They say that truth is stranger than fiction. If this is really the case I wonder why the producers of the new reality show ‘Property Wars’ on Discovery Channel blatantly staged, reenacted and otherwise artificially created drama when it wasn’t necessary (if you’ve never heard of the show click here for my full write-up on BiggerPockets.com from August 3^rd, 2012).

‘Property Wars’ pits four investment groups against each other for properties sold at the Maricopa County Courthouse steps. Known as trustee’s sales in Arizona, these foreclosure auctions often have as many as 20-30 bidders competing for a single property.

In the show these investors yell, scream, and pace on their cell phones while standing in the driveway of the properties they are bidding on. As you’re about to see from the series of videos below, none of this behavior is necessary, or ever really happens.

Why? Technology.

Companies like AZBidder.com have automated the bidding process so that investors in Phoenix never need to drive by a house or pace around aimlessly on a cell phone to place a bid. Their website is easy to navigate and is very inexpensive.

Watch these 8 videos and you’ll see how it works. I recorded them last year so the fees they charge have increased. However, the information and service AZBidder.com provides is incredibly valuable. And for what it’s worth, I don’t get a dime from them for this post or any other referrals I send their way. I just like the way they do business.

Every morning, Monday through Friday, my Google calendar pings at 9:50a. It lets me know that its time to start shopping. Beginning at 10a, I methodically go through the long list of properties in Maricopa and Pinal counties (usually around 150-200) scheduled for auction the next day, looking for the ones that meet my buying criteria. Once I find them (there are usually 6-8 a day) I begin my research. That’s when real fun begins (if monotony is your kind of fun).

The next step in my research is to type the addresses of those houses that meet my criteria into the Arizona Regional Multiple Listing Service site (only licensed Arizona agents have access to this database). I do this to see if any of these properties are currently listed by a Realtor, or have ever been before. If any of them have I can look at the pictures. This information can sometimes help me determine my bid.

I find only about 1 in 4 houses scheduled for auction are actually listed by a Realtor. Unfortunate when you consider how much easier it supposedly is to complete a short sale. In any event, hardly a day goes by when I don’t come across a listing on the multiple listing service that makes me laugh, cringe, or feel sad. Last week, I found a listing that made me all three.

Below are the public remarks from the MLS Plano for a house a bid on last week (a Plano is the data sheet Realtors use to describe a property and it’s features):

“Hi, My name is Larry… I just got out of a destructive relationship. I am in a healing phase right now. I use to sparkle like chocolate diamonds set in rose gold. I have awe-inspiring mountains right behind me. I believe they will give me the strength to find a new and loving family to grow old with. Please view all the attached photos as they depict all the scars from my previous relationship. I have further damage that is not appropriate and extreme caution is given for those who visit me. I look forward to meeting you. If you have any further questions please see the FAQ’s in the Document section of MLS.”

And here are those attached photos Larry promised:

The Kitchen (notice the paint on the island and knife in the cabinet door)

Victim #1 – The cabinet door – maybe Larry was practicing to be a circus knife thrower?

 Victim #2 – The kitchen island – notice the empty Gatorade bottle (at least Larry stayed hydrated while going on his rampage)

Victim #3 – The hallway – Considering Larry’s emotional state his penmanship is exemplary. The message is quite poetic too. Perhaps he could land a job with Halmark.

Victim #4 – The bedroom door – Not sure what Larry was going for here with the muscle bound stick figure but he sure showed that bedroom door who’s boss.

Clearly Larry was distressed, both financially and emotionally. Losing his home and the woman he loved was too much so he took his revenge out on the property.

For what it’s worth, this listing is 3 years old. That’s about how long it takes to mend a broken heart. And, ironically, the amount of time required to become eligible to buy a home again after a foreclosure. Hopefully, if Larry hasn’t been institutionalized or put in jail, he’s turned the page on this chapter of his life. By now maybe he’s found a new love, new house and a new set of kitchen knives.

Okay, I probably just won the “longest title for a blog post in the history of social media” award. Sue me. I couldn’t come up with a shorter name.

I’m often asked how to find a property in foreclosure. Specifically, a house in foreclosure in Maricopa County, Arizona. Even more specifically, Phoenix, Scottsdale, Glendale, Chandler, Gilbert, Peoria, Avondale, Buckeye, El Mirage, Laveen, Goodyear and Mesa. Well, I got tired of answering the question so I put this little video together. In six minutes you’ll learn everything you need to know about how to search for and track a trustee’s sale here – including how to find the sale date, sale location, original principal loan balance and opening bid. Best of all, the resources I share with you in this video are online, and free.

Enjoy.

If your plan is to start acquiring pre-foreclosures, houses at the foreclosure auction, or bank-owned properties then you need to understand how the process works in your state.

Legal Disclaimer: I’m not a real estate attorney. My understanding of the foreclosure process is limited to Arizona, where I operate a fix and flip business. I have limited legal real estate knowledge in states not named Arizona. I also have limited knowledge when it comes to blowing glass, building skyscrapers and doing laundry. However, the latter is by choice. Please consult an attorney or real estate professional in your state for a more detailed explanation of the process.

Judicial States

In judicial states like Illinois, New York and Florida the lender must take the delinquent borrower to court in order to foreclose on the property. This process can take years to complete. For the real estate investor, buying houses in judicial states can be problematic because the auction sale date is a moving target. It will likely be postponed and changed many times as the case works its way through the legal system. These changes aren’t usually published so the investor must track the sale carefully.

In 2006, I decided to expand my fix and flip business to Illinois, specifically McHenry County. As I mentioned earlier, Illinois is a judicial state. I found identifying properties and following them through the process to be extremely difficult. Apparently when judges, attorneys and distressed homeowners get in the same room together, time stands still.

However, if you live in a judicial state there is good news. The less efficient a system is, the more difficult it is to master. The more difficult a system is to master, the fewer people there are willing to master it.

I never mastered the foreclosure process in Illinois. The distance from Phoenix and the housing market crash were too much to overcome. Nevertheless, I found that while tracking sales there was difficult, I didn’t have as much competition.

Non-Judicial States

In non-judicial states like Arizona there are no courts involved. The process is governed by state statute. The lender issues the delinquent homeowner a notice of default, or notice of trustee’s sale, and the clock starts ticking. The auction date is published in the notice of default and the whole world is alerted in a very public way. With an auction date set at the start of the process the homeowner feels a greater sense of urgency, which can benefit the real estate investor.

Of course, with greater efficiency comes greater competition for real estate investors. And not just for pre-foreclosure deals but at the foreclosure auction and for bank-owned properties as well. Because the process is simplified and easier to follow, investors tend to flock to non-judicial states like the sparrows of Capistrano.

After the real estate market crash in 2008, non-judicial states began to recover more quickly because there were few, if any, formal legal proceedings to navigate. Nor were there many robo-signing scandals in non-judicial states.

Bidders surround the auctioneer (in blue jacket) at the Maricopa County Courthouse steps

Foreclosure. What does it mean exactly? According to Google dictionary, foreclosure is:

The process of taking possession of a mortgaged property as a result of the mortgagor’s failure to keep up mortgage payments.

Well stated. Foreclosure is a process, something that happens to a property, not what the property becomes. It really bugs me when I hear someone say, “I want to start buying foreclosures.” Really, you want to buy a process? I’d much rather buy a house. There are three phases in the foreclosure process:

1. Pre-foreclosure – the period of time between when the lender officially informs the homeowner they are in foreclosure and the actual auction date for the property. In Arizona, for example, homeowners have 90 days from the day they receive their foreclosure notice (notice of trustee’s sale) to either bring their loan current or pay it off. If this doesn’t happen the lender may foreclose on the 91^st day.
2. Foreclosure Auction – If the homeowner fails to bring their loan current, or pay it off, the lender will foreclose. In many states, these auctions take place at the courthouse steps. If the opening bid of the property is low enough the home will sell to the highest third-party bidder. These bidders are usually private investors looking to fix and flip or buy and hold. However, more and more people are buying their primary residences at the auction.
3. Real Estate Owned (REO), Bank or Lender Owned – A home in foreclosure will end up in the hands of the bank if no third-party bids. This happens a lot because lenders usually set the opening by adding the past due payments, late penalties and interest to the original principal mortgage balance of the loan. Because property values have dropped significantly after the crash, most homeowners owe more than their homes are worth.

You probably noticed that short sales aren’t included in the three phases of foreclosure. There are two reasons for that:

1. A homeowner doesn’t have to be in foreclosure to do a short sale.
2. If a homeowner is in foreclosure and is doing a short sale then it’s considered a pre-foreclosure because the bank hasn’t foreclosed on the property yet.

Now that you’ve read this post you’ll avoid ticking me off and sound a lot smarter around your friends. You can make intelligent comments like, “I plan to invest in pre-foreclosure properties.” Or, “Because I have significant cash reserves I plan to purchase homes at foreclosure auctions.”

Man, is it hot today. How hot you ask? It is so hot outside that I just saw two dogs fighting over a tree. It is hotter than a snake’s butt in a wagon rut. It’s hotter than two mice in a wool sock.

I’ve got a million of them. I could go on all day. But seriously, it may be a little toasty out there but at least we don’t have to shovel sunshine in Arizona.

If you follow my blog then you know that the real estate market is hot here too. Just today Catherine Reagor of the Arizona Republic reported that Metro Phoenix home prices continue to rise. Median home prices are up 32% from May 2011. Inventory on the Arizona Regional Multiple Listing Service is dwindling putting further upward pressure on pricing.

So that begs the question – are all the good deals in Phoenix gone?

No.

I mentioned in last week’s market update that in June 2006 I bought 13 houses. This was at the height of the housing bubble when practically everyone had equity in their homes. Foreclosure levels were way down too. So how did I do it?

Door knocking. I knocked on the doors of homeowners in foreclosure and asked a simple question – would you like to sell your home? Most said no. A few said hell no. But every now and then someone would say yes and I would create a win-win.

But that was 2006 you say? Homeowners are all underwater now you say? You can’t buy a house now without doing a short sale right? Wrong.

This week I downloaded a list of homeowners in foreclosure that bought their homes from 2009-2011 (yes, there are lots of people who bought in the last 3 years that are already in foreclosure). After weeding out the properties that don’t fit my buying criteria I narrowed the list down to 98 homeowners.

Next, I did some quick comp analysis on every property. I found there were six homeowners that had significant equity. How is that possible? Well, for starters these people bought at the bottom of the market. Next, they bought distressed properties (either short sale or from the bank) so they got an even bigger discount. And now, three years later, their property values are up on average 20%.

Of course, there’s no guarantee any of these homeowners will agree to sell to me. Most, if not all, will figure out a way to bring their loan current. But, eventually a deal or two will come my way – hopefully one that is hotter than the 4^th of July.

Is it possible that banks are finally running out of homeowners to foreclose on in the greater-Phoenix market? The numbers suggest this may be the case.

Take a look at this graph from Michael Orr’s Cromford Report. Note the three bottoms in April 2010 ($89.37), September 2010 ($82.37) and again in August 2011 ($79.14). Since last fall we’ve seen a steady increase here of almost 12%.

This next chart shows that new notices of trustee’s sales, while up slightly the past two months, are down significantly from this time last year.

Now take a look at this last graph. It shows how many homes were foreclosed on since the crash began in the 2nd quarter of 2007 through last month.

Almost 200,000 properties have gone through the foreclosure process since Q2 2007. According to the Arizona Regional Multiple Listing Service, approximately 232,000 homes sold during the bubble-era (2005-2007). Thus, it’s logical to conclude that nearly all of those unfortunate souls that bought a house during the boom have already been foreclosed on.

Of course, there’s no way to know how many homeowners that bought pre-boom and refinanced during the bubble are included in the total foreclosure numbers. And CoreLogic estimates at least 40% of Arizona homeowners are still underwater. Who knows if these borrowers will elect to pay or walk away?

It’s difficult to know how many more foreclosures are on the horizon. However, the data suggests the worst is behind us.

I don’t believe another “wave” in Phoenix is eminent, unless of course California drops into the ocean. And if that happens we’ll all be underwater. Literally.

Robin Lane Short Sale - Paid 180K - Under Contract for 245K

The last house I bought at a trustee’s sale was November 22^nd, 2011.  The last REO I purchased was December 20^th, 2011.

It’s not from a lack of effort.

The last week of February and the first two weeks of March I bid daily, on as many as 6-8 houses.  The closest I came on one property was $11,000 short of the winning bid.  Needless to say, it’s silly season down at the courthouse steps.

The offers I’ve written on bank owned properties on the multiple listing service are being countered with “highest and best” language from the listing agent.  With less than 12,000 single-family homes available on the Arizona Regional Multiple Listing Service the greater-Phoenix housing market has become a seller’s dream.

Michael Orr with Cromford Report released this startling fact yesterday – home prices here are up 8.68% the last 30 days.  Not the last 3 months, or the last year – the last 30 days!

However, since late last fall I’ve bought 4 short sale properties and have a 5^th under contract to buy next week.  With another 15-20 in the negotiation stage I’m confident we’ll close at least 10 by the beginning of summer.

I believe it’s a perfect storm for fix and flip investors like me to gobble up what the retail buying public doesn’t want to digest – short sales.

There’s also enormous political pressure on the banks to execute short sales instead of foreclosure.  It’s less expensive AND less harmful for everyone involved.  The trick for us fix and flip investors is to have multiple offers out at all times.

I suggest you build a team of Realtors that are constantly scouring the multiple listing service for possible deals.  If you are serious, have cash, and can make decisions quickly there will be no shortage of agents willing to work with you.  But, you must make the situation a win-win.

If a Realtor finds a deal for me on the MLS they get to write the offer AND relist the property when the rehab is complete.  I also respond within 24 hours to any prospective deals sent my way.

For more on finding short sale diamonds in the rough check out this video:

Editor’s Note:  This is the second of three posts about buying a house at a greater Phoenix metro-area auction (Maricopa and Pinal County).  I’m not an attorney or expert when it comes to foreclosure.  I’m not buying 3-5 houses a day at the courthouse steps.  I don’t even purchase 3-5 houses a month.  However, I’ve done my share of deals, about 20-30 a year for the past three years, so I feel like I’m qualified enough to explain in generalized terms how it works.

Do Your Homework

Before you show up at a trustee’s sale you better do your homework.  That’s good advice from professional bidder Dusty Figgs of AZBidder.com.  What does he mean by do your homework?

For starters, you need to know if the opening bid is set low enough to join the gang down at the courthouse steps.  About 60-70% of the time the opening bid is set at what the homeowner owes, plus arrears.  This is why so many houses go back to the beneficiary (the bank).

Where do you go to find out the opening bid?  If you have a copy of the Notice of Trustee’s sale, which can be found on the Maricopa County Recorder’s website, there should be a phone number with the sale information.  There are also third-party websites, like AZBidder.com, that publish this information for free.  Many of the trustees have their own websites where you can check for opening bids.  The trustees are required to publish the opening bid 24 hours prior to the sale, but they play fast and loose with the rules.  Sometimes they’ll do a “drop” bid hours or minutes before the sale.  If you’re not at the sale, or have some at the sale to represent you, you’ll have no idea the opening bid was lowered.

Next, you need to know what lien position you’re bidding on – anything but the 1^st lien and you’ll have to pay off all senior lien holders.  Let’s say, for example, you bid on a property with an opening bid of $90,000.  You bid all the way up to $115,000 and win, only to find out there’s a senior lien of $150,000.  Guess what?  You now have to pay off that senior lien holder to get clear title to the property.

How do you find out what position the foreclosing lien holder is in?  You order a title report from a reputable title company or bidding service.  The title report will reveal all sorts of stuff – junior lien holders, child support judgments, state and IRS tax liens, HOA judgments, unpaid property taxes and pending bankruptcy.

Once you’re certain the foreclosing lender is in first lien position it’s not a bad idea to drive by the property you want to bid on and make sure it hasn’t burned to the ground.  If the house is vacant you can probably peek through the windows and over the fence.

In the event the house is occupied you’ll have to take your chances.  Sure, you could knock on the door, explain to the homeowner that you plan to buy their house at the auction and then ask for a guided tour.  WARNING:  This tactic usually doesn’t work.  Expect to have the door slammed on your face, or to get punched in the face.  If the house is occupied and you win the bid the homeowner must be evicted, like a tenant that hasn’t paid their rent.  There are several law firms here in town specializing in evicting foreclosed homeowners.  This process can be done in about 3-4 weeks.  Of course, you can also bribe, I mean offer cash for keys to the occupant.  I’ve found a $1,000 will get just about anyone to move out in 7-10 days.

Winning a Bid

The trustee’s sale works a lot like a traditional auction.  Bids are placed in increments of $100, or more, depending upon how low the opening bid is set for and how many bidders are involved.

If you win a bid the auctioneer will require $10,000 in certified funds made out to the trustee.  The remainder is due the following day at 5p in the trustee’s office.  Don’t expect a traditional bank to finance the purchase of your property at the trustee’s sale.  You’ll need cash, or a hard money loan.  There are numerous hard money lenders in Phoenix that will finance your purchase in 24 hours for 25-30% down at 16-18% interest.

For more insight into this part of the process here’s another interview with Dusty Figgs of AZBidder.com: