I’ve run into into a number of deals lately involving fix and flips... not a surprise with the huge demand among first time buyers as the April tax credits expired.
So the question often arises, how are these flippers able to purchase homes for 60 or 70 cents on the dollar before rehabbing and relisting them for sale?
Often, it involves buying foreclosed properties at the public trustee’s sale.
When a house is foreclosed on, it is first offered for sale “as is”, with no warranties, inspections, or rescission period, subject to any and all liens and encumbrances, on the county courthouse steps.
Normally, a bank will authorize a bid with the public trustee up to whatever it is owed on the property. If the borrower being foreclosed on owed $144,000, for example, then the bank which financed the property would bid $144,000.
But what if the home is worth $200,000?
In this is the case, you can bet investors will take note. Because foreclosure actions are matters of public record, many investors scour the foreclosure records, looking at each foreclosure filing, how much is owed on the property, and then figuring out roughly what the property is worth.
If the outstanding loans are close to (or exceed) the value of the home, then it's best to keep looking. But every now and then, you do find a foreclosure on a property with significant equity. At that point, for investors, the game is on.
If an investor is willing to buy the house sight unseen, not knowing what it looks like inside, and is willing to pay on the spot with certified funds (no financing), then he or she has a chance to purchase a property with built-in equity.
The process is fascinating, but also fraught with risk.
Check out this video:
