They have a saying in politics, “all politics are local”. The same applies to real estate. In Orange County, it has become very difficult to achieve the American dream of increasing wealth through real estate. Prices remain high and double digit appreciation has disappeared. After months of putting great deals together on foreclosures, tax sales, and with distressed owners, I believe I have perfected a system for the best deals yet, capitalizing on Orange County Trustee Sales.
In prior years, investors would buy real estate at retail and it would increase in value by 20%, year over year. Under these conditions, it didn’t matter what you bought, you were going to make money. If we figure on in and out cost of 7%, that still left a hefty profit. But the rules have changed. And appreciation is out the window at least for the moment. If you want to make money in Orange County real estate you’re going to have to buy it right.
“Buying it right” means different things for different people. This will change based on the amount of money you have to put down and your time frames. With more money down, buying and holding becomes a very feasible strategy. With the right down payment, the property can carry its mortgage. Rents are very strong in Orange County but the break even point for cash flow may be as high as 35% to 60% down depending on the type of property and location. If buying and holding is a possibility for you, then you have a lot of choices regarding buying the right property. Bank foreclosures, REO, tax sales, and distressed sellers all may good sources for finding the right real estate deal that may perform well and increase in value over the long run.
But many people don’t have the ability to tie up large sums of money long term. Furthermore, they may not want to risk decreasing values in the short term. In this case, fix and flip may be their best bet. But to utilize this strategy you are going to need to buy the property at least 10% to 15% below market. This is no small feat. In Orange County, bank foreclosures are selling around 3% to 5% below market. Tax sales have been rather slim and distressed sellers will typically sell if they discount their real estate by 5%. Furthermore, investors have to be very careful not to violate California equity purchase laws. These factors have made typical sources for Orange County foreclosure properties worthless if you want to find fix and flip properties right now.
But wait! There is hope. The trustee sale. What is a trustee sale you ask? When a bank forecloses, there are 2 processes that a bank can use to foreclose, the judicial and non-judicial foreclosure. (See our article on California non Judicial vs. Judicial foreclosure and Borrowers Redemption Rights) For our purposes we are interested in the non judicial foreclosures as prior owner do not have redemption rights. This means we can resell the property immediately. With the non judicial foreclosure, when the Orange County real estate is foreclosed, the holder of the trust deed hires a company to auction off the property to the highest bidder prior to giving the real estate to the bank. The amount that is asked is typically the cost of the outstanding note that is foreclosing plus the cost of the sale. As an example, if we take a $600k home that has a 1st trust deed of $450k and a second trust deed of $100k and if the 1st trust deed is foreclosing, then that means you can typically buy the home for around $455k assuming the price is not bid up. That is about 25% under market value. Now we are talking. We just made some serious cash. Net profit might be around $105,000
Now for the tough part. If it was easy everyone would be doing it, wouldn’t they???
Here is the catch. First, you must pay cash for the property at the time of sale. You must show up at the court house with a cashiers check for the full amount of the property for sale. In our example above, that means $455k.
Second, the property is bought “as is” without warranty. That means you will be responsible for anything wrong with the property, including all liens not wiped out by the foreclosure. In our example above, the second would be wiped out, but if there were property taxes, hoa dues, special assessments, IRS liens etc., they would still exist and you would now be liable for many of them. So the bottom line is you better do your research prior to bidding. Performing a thorough title search will help, but even a thorough title search may not be without risk as liens are sometimes recorded just prior to the sale. So buyer be ware! Even though the payoff can be large, it is not without risk.
Last, many times the property must be purchased sight unseen. For many people with no tolerance for risk, this may be the deal breaker. However, if you know the product that you are bidding on, you can hedge your bet by estimating possible costs against your potential gain.
If you are trying to purchase Orange County trustee sale properties on your own it can be exhausting. Most people don’t have the ability to do a good job with title searches and may not have the experience to identify problems. It is labor intensive to tract properties going to sale. They are published regularly in local papers, but when you go to the auction, you will find that they are typically postponed for various reasons including bankruptcy and bank work outs between the owner and bank. In order to successfully bid on the property you may have to return a week or more later when the bidding process resumes. Last and most importantly, in order to know what price to bid on a property it is important to have current comparable sales in your target properties neighborhood. I ‘m not just talking about sales in the last 6 months. I mean current active listings. If you are going to flip this house, you must know what your competition is and what price will cause the home to sell within 30 to 90 days. We recommend setting a conservative price as market conditions may erode depending on the time of year and buyer demand. In order to get recent comparable sales information, the MLS is probably the only complete source for timely information.
If you want to bid on properties at Orange County trustee sales, most investors find it invaluable to have an expert on their team. A professional can help research properties and provide valuable experience when making important decisions. We have a program for investors that will make this process easy and profitable. Call John Daniel at (949)481-7358 for further details or visit www.JDanielRealty.com.