U.S. Foreclosures(2)

I think I will share my limited experience buying a foreclosure on a bank auction. I have been studying foreclosures in US since the beginning of the year but I am sure I only have limited knowledge so read with your own judgement and do not make investment decisions based on this post.

There are four stages for a forclosure. These are:
(1) Short Sale. When a property owner is later on mortgage payment, the bank will issue a notice, this stage is called the pre-foreclosure. If the owner manages to sell the property at this stage, it is called a short sale. If the owner does a short sale, his/her credit score will not be effected.

(2) Bank Auction. If the property is not sold in the short sale period, then it will goes to the auction. The auction will be held at the stairs of or outside of the county courthouse, and buyers have to pay cash on the spot, and there is no view of the inside of the property. There is not time to arrange for a mortgage, the payment must be in cash or cashier's check from an American bank. The risks involved are (a) there may be multiple mortgage/liens on the property, and (b) there could be intensive damage inside, but potential buyers are not allowed to view it.

(3) REO. On the bank auction, the bank will set a beginning bid amount, if there are bidders, then the amount will be bid up and sold at a higher price to a buyer; if there are no bidders, then the property is "sold" back to the bank(because the beginning bid amount is considered to be the bank's bid, if there are no bidders, then the bank wins the bid), and the property becomes bank-owned, or REO, which stands for Real Estate Owned.

(4) Once a property is a REO, the bank will clean up the title, maybe even clean up the inside of the property, and then put it on the normal mls market. Or the bank can give it to an auction house to be sold on auction house auctions. The auction house auction is totally different from the courthouse auctions in that: (a) the property now has a clean title; (2) the auction house will hold open houses for potential buyers to view inside; and (3) a mortgage can be arranged.

On May 6, 2008, I flew to a city in Texas and bought a single family house there. The auction was held outside of the county courthouse. There were about a hundred people, but I was told the majority of them are on-lookers, not buyers, and every month there will be new on-lookers. There are about five to ten regulars who went to the auction every month. Anyway, there were five hundred foreclosures posted, and three hundred got cancelled in one way or another, and five trustees representing various banks announced 200 foreclosures, and twenty of them got sold to buyers, and the rest were sold back to the bank to become REOs. Of the properties got sold, normally there are at least 30% discount from the current market value.

I bought a three bedroom, 1,800 sqft brick veneer house, built in 1986. On this particular property, the bank started the bid at $93,750. I got it at one dollar above that since I was the only bidder.

There are restrictions on foreigners investing in RE. There is NO restrictions on buying. But a foreigner cannot manage the property and do physical work if it is a rental property. So the property has to be given to a property manager to manage, a part(15%?) of the rent has to be held by the government each month for year end tax purpose, so cash flow during the year will be effected. If the property is sold, a part of the sales(10%?) will be held by the government, again for year end tax purpose.

On Friday(May 16), I got the word that it is a done deal. My local contact immediately went into the property because it is vacant. He told me that the inside is very clean and well kept. After touch-up painting and carpet cleaning, the property should be in rentable condition!

I will have many things to do: buy insurance, find a property manger, find a mortgage broker to put a mortgage on the property so that I can take part of the money out. My local contact said I am lucky to get a clean house, and I should not expect the same in future purchases. I had my beginner's luck, I guess.