Post REO Auction

The fourth way I know you can make money in real estate, for sure, is the post REO Auction. In the foreclosure era, many auction companies flourished. You have Hudson and Marshall, REDC, etc. Each month they held auctions across the nation selling properties that were given to them by lenders for quick sale.

Usually, when a property does not sell as an REO listed by a local realtor within 90 days the last resort is for the lenders to hand that property to an auction company.

The Process

The post REO auction can be a lucrative way to earn a decent living as a real estate investor. Here s one quick example:

Around October 2010 I was approached by a first-time home buyer. This guy told me that he had very little in the bank yet he wanted me to help him get a home. He said he had worked with another agent to no avail and someone had recommended that he meet me. He did and confessed to me that I was his only hope. Well, not being someone who gives up easily, I looked for ways to assist him. I referred him to a contact at Mason McDuffie for a pre-approval. Mason McDuffie offered him a 1% down loan with up to 6% in seller credits. We d have to go to a seller who would agree to that sort of a hybrid loan.

Usually, I do not personally show homes to first-time home buyers but since this was a special case and given that this guy had such faith in me, I decided to take a Saturday to show him homes in Pittsburg. I printed a long list of homes that met his specifications. We saw one home after another. There was a particular home that he fell in love with. He loved the floor plan and the fact that the home was close to the BART station. He liked that because that would work well for his commute to Oakland where he worked. The problem was that that particular home needed work and would not qualify for the conventional FHA loan. It would qualify for the 203K (renovation) loan just fine but that meant that it would not qualify for the Mason McDuffie program. The seller would simply not gift the buyer 6% while his new lender paid for the rehab as well.

Our offer on the house was rejected. I received a call from the agent stating that the home was going to the post REO auction. My guy was distraught. This was after all his dream home. He envisioned what he could do to make it cozy. He asked if the bank would sell it to him AS IS and he d do all the work himself after he moved in. No was the answer. His lender would not allow that unless he went for the 203K loan, which required at least 3.5% down from him. Given that he was very short on cash, this would not work.

We did our best. The only hope was to go to the post REO auction and pick up the property from there.

I related the case to one of my associates who happened to be loaded with cash. The plan was for us to pick up the property at the auction at a discount, fix it up and resell it to the first-time home buyer and make a small profit. This would be a win-win situation for all of us.

That Saturday, the first-time home buyer took time off work and came with us to the auction. The published starting bid was $78,000. We were excited. We d get it for $140,000 max. We waited hours for the auction company to get to the subject property. They did. However, instead of starting at the published bid price they immediately zoomed above $100,000 and before we realized it, they had passed our maximum bid point. A Filipino couple who sat in the row next to ours picked it for $165,000. Our first-time home buyer was distraught. I felt his pain.

All of a sudden I felt a brainwave and thought I should approach the couple. It turned out that they had not been to the property and knew nothing about it. How funny! I explained to them our situation and begged them to sell the property to our guy. They had a ready buyer once they fixed up the property, I told them. In fact, I wondered if they could resell the property to us on the spot and make their cool $5000 right there. They refused our offer but said they d consider selling it directly to the first-time home buyer. We exchanged business cards and left with the assurance that they d honor their promise and resell the property to my buyer.

A month or so later their transaction with the auction company closed and they called me asking if we were ready to proceed. I structured the transaction in a way that would benefit all the parties. The buyer would purchase the property for $215,000 and would get a credit from the sellers for up to $10,000 to help with his closing costs. I d get 3% of the sale price and the sellers would net the difference between their cost and the sale price. Their cost included their initial purchase price, a 5% premium payable to the auction company, the cost of the minor repairs needed to make the property compliant to the buyer s lender s requirements, the NRCC (non-recurring closing cost) credit to the end-buyer and the commission to me. 

They ended up with a small profit of about $20,000. Not that bad. In fact, they could have netted more should they have breached their promise and made the property available to the general public. As a matter of fact, at some point during the loan process, I was required to list the property on the MLS. I complied and listed it for $220,000. I put no lockbox on the property, yet I received calls upon calls. An offer came in at the asking price. I wonder how the buyer and his agent had gotten access into the property. I turned out that the market had improved and properties in that particular area had become hot potatoes. Cautious not to let my guy lose the property he had labored so hard to get and in total compliance with his lender, I removed the property from the MLS just after two days of listing it. The fact of the matter is that I would have found myself in a multiple offer situation and would have had to counter all the offers for a higher bid. The sellers would have netted over $30,000 instead of the $20,000. I had let them know that a kind deed is sometimes better than more money in one s pocket. They had gotten less in terms of money but more in terms of gratitude and humanitarian effort. At the time of writing, the first-time home buyer and his family had moved into the property. I received a heart-warming testimonial from the buyer. He s become one of my raving fans. I am sure he sent the same kind words to the sellers.

You, too, can make money from post-REO auctions. You can have a quick interview with the listing agent of a property you are particularly interested in. You can ask her about the buyer activity surrounding the property, if there had been any interest and the reason why the property is heading to the post-REO auction. If there had been any interest, ask her what sort of interest and if you can get hold of the buyers or their realtors. Once you are armed with solid info, together with the comps in the area, you can now proceed to the auction with your bid price in mind.

You can purchase these properties all-cash or financed and there are lenders on the spot to qualify you for a loan, if that s the route you want to take.

Post-REO auctions are certainly one of the ways real estate investors are making money out there and you, too, can join the bandwagon.