Friday, September 7, 2007

Foreclosure auctions

I attended my first foreclosure auction this morning. I had bought some houses before foreclosure earlier this year but have never been to an actual auction. After I saw a real estate transaction for the first house I tried to do a short sale on (which sold for $26k after I had tried to buy for $47k by negotiating with 2 banks that did not bid at the sale), I decided to attend an auction.

This was for the nicest property yet that I have tried to buy using short sale techniques. The home is in my area where houses typically sell for $110/sq for (this was a 2500 sq ft home). I had negotiated a deal with the second mortgagee to take $12k for their $30k note, but decided not to follow through when the payoff of the first changed from my estimate of $203k to $212k. The home needs a little work and the owner is intransigent (so it will take some doing to get him out). I figured the home is worth ~$215k.

There were 2 auctions this morning. The first was a property in the next town that was owed $112k. Bidding was furious and ended at $191k. I figured that the property I was interested on would have an equal interest.

However, there were only 3 of us interested and I did not even bid. The second lien holder had sent a young scruffy man to bid on the house and he had announced that he was going to bid $240k. So no one bid on the house. Obviously, no one believes that it is worth $250k at this point. I was the only one who had been inside the house and knew the condition.

I've sent a note to the second lien holder and offered to buy it at $217k. They are a West Coast investment group that bought the note from a major bank. Obviously, they have a distorted view of real estate and especially are unfamiliar with this market. This will be an interesting one to watch. I think that they will lose their lunch on this house. I have yet to work on a foreclosure where the bank did not lose more money by going through with the foreclosure rather than accepting my offer.

People (investors) often don't know when to cut their losses. It's probably the hardest thing to do is sell when you are going to lose money. I have faced the same dilemma with stocks. Bought $50k of my company stock at $66 per share, watched it go to $84 per share and then drop to $38 per share. It took me 5 years to sell it at $48 per share and still today it sits at $46. I missed a great stock run-up holding on to a loser due to an unwillingness to take a loss. It's hard to admit a mistake.

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