Any experiences buying a foreclosure that is still occupied??

[ericrugiero]

I'm interested in buying a house as an investment property but haven't pulled the trigger yet because I haven't found the right house.  There is a foreclosure sale in my area that looks like it could have really good potential EXCEPT that it's still occupied.  This creates two issues.  I can't inspect the inside of the house which raises the risk a bit (if the price is right I'm OK with that).  Also, I could be stuck trying to evict someone from "their" house which could be a problem if they trash the house or create major headaches if they refuse to leave.   

I'm thinking about walking up to the house and talking to them in a friendly way.  My script would be something like this...
- Hi, are you living here?  I have a weird question to ask you.  Are you aware this house is being sold at auction after being foreclosed on? 
- Are you planning to bid on the house?  I don't want to get into a bidding war with the owner so if you are going to bid I'll stay out of it.  (At this point I'm OK with walking away so I'm telling the truth plus I'm hoping this will create goodwill.)
- If you aren't going to bid, I'd like to talk to you about what things might look like if I purchased the house.
- Would you be interested in something like cash for keys?  I would offer something like $2000 if you leave the house in the same condition it is right now (would need to walk through and take a few pictures) and leave within a month.  This would allow you to have a deposit and 1st months rent. 

Does anyone have any experience with something like this?  If they get upset I'd probably walk away and not bid on the house.  Best case, I would be able to see the house prior to the auction (need pictures to verify condition before and after) and have an agreement with the current occupant which is mutually beneficial.  I'm open to thoughts and concerns. 

Background info if it matters.  This is a 4 bedroom 1.5 bath home with 1700 square feet.  It's 50 years old but the pictures on Zillow from a few years ago look very nice.  (nice bathroom, nice kitchen, hardwood floors, etc)  I have no info on current interior condition.  The outside needs a couple minor repairs but nothing major.  If it was fixed up in very good condition value would be ~$120,000.  The auction site has it appraised at $80,000 (they haven't seen the interior either) with a minimum bid of $58,000 and no reserve. 

[Papa bear]

Do you know that the occupants are owners and not tenants?

I’ve bought a short sale that was occupied.  It was a 2 unit and 1 side had tenants.  There were no issues in that situation.

I’ve also gone up to houses that were scheduled for auction, knocked on the door, and got access to see the house.  They were occupied by tenants and were unaware of the situation, but were very open to showing me around.

If it’s owner occupied?  I would be more careful...


Sent from my iPhone using Tapatalk

[sammybiker]

Having a discussion won't hurt (except idk if it's allowed - but I'd have it anyway).  I was going to recommend the cash for keys, as you posted. Might even jack that offer up a bit...if you're able to get it for $70-80k and it only needs $10k of paint, updating, repairs, you're sitting pretty, even if you offer them $5k to leave the place clean and in working order. $5k is a lot of money for someone to start over.

If the cash for keys doesn't pan out and you're still able to get it under contract under $75k, you're probably not bad, even if they cause cosmetic damage.  Are you doing any of the work yourself? 

As long as they don't leave the faucets on and flood the place, cosmetic damage (punching holes in walls, doors, graffiti on walls, copper gone) isn't too bad.

[ericrugiero]

I don't know for sure but I'm guessing it's owner occupied. 

The auction web site says you aren't supposed to disturb the occupant.  I'm interpreting that to mean don't be snooping around looking in windows and trying to get inside. 

[FIRE@50]

So much going on here...

Is this a bank foreclosure or a tax foreclosure?
Have you researched the local eviction laws? Some localities make it almost impossible to evict someone.
If the occupants are not the owners and they do have a valid lease, you will likely have to honor that lease.
If you offer cash for keys, you may want to give a tiered offer. Like $5k for two weeks, $2k for one month, etc.
I wouldn't worry about a bidding war with the owner. If they had the money, they wouldn't be in this predicament.
Are there any other issues outstanding on the property? Trash fines, HOA fees, etc.

[ender]

I would fully understand all the relevant local laws before doing this.

There are many areas of the country where it could take you years to kick out squatters.

[theoverlook]

I've had a very similar question for a very similar situation near me. A lot of foreclosures list the property as occupied and say it's a criminal offense to "disturb" the occupant. I assume / hope that "disturbing" the occupant does not mean knocking on their door and asking them polite questions.

Here's an example; not a property I'm interested in but it's near me and shown as occupied:

https://www.auction.com/details/93-glen-drive-worthington-oh-43085-2747241-e_12174o

[ericrugiero]

So much going on here...

Is this a bank foreclosure or a tax foreclosure?
Have you researched the local eviction laws? Some localities make it almost impossible to evict someone.
If the occupants are not the owners and they do have a valid lease, you will likely have to honor that lease.
If you offer cash for keys, you may want to give a tiered offer. Like $5k for two weeks, $2k for one month, etc.
I wouldn't worry about a bidding war with the owner. If they had the money, they wouldn't be in this predicament.
Are there any other issues outstanding on the property? Trash fines, HOA fees, etc.

It's a bank foreclosure. 
Local eviction laws seem like a bit of a pain but not as bad as some places.  Looks like typical timeline would be 40-50 days and it has to be court ordered. 
A tiered offer seems like a good idea. 
The main reason I would offer not to bid if the owner was going to bid is to establish goodwill.  Plus, if the owner did get financing they would likely bid higher than I would as an investor. 
If I have a discussion with the owner and it goes well I might ask about any other leins. 

When buying a foreclosure how do other leins against the property work?

[FIRE@50]

"When buying a foreclosure how do other leins against the property work?"

They go in order. The bank with the primary mortgage would have the first lien. A potentially different bank could hold a second lien for a HELOC or something. An HOA could foreclose and have a third lien. A tax lien would likely supersede all of that.

If you buy a home at auction from the HOA. You would still need to pay of the other liens to actually own the property.

[ericrugiero]

"When buying a foreclosure how do other leins against the property work?"

They go in order. The bank with the primary mortgage would have the first lien. A potentially different bank could hold a second lien for a HELOC or something. An HOA could foreclose and have a third lien. A tax lien would likely supersede all of that.

If you buy a home at auction from the HOA. You would still need to pay of the other liens to actually own the property.

Don't they all get wiped out in the foreclosure process?  I know they go in order and get paid until the money is gone.  I think they are supposed to be wiped out by foreclosure even if they don't get paid.  Is that right?

[Fishindude]

Yep, I bought one a few years ago right next door.   Folks that moved in were real slobs and the place gradually got trashier and trashier, they divorced and it got worse.   The man was living there with a couple teenage boys and we bought the place with intent to remove the eye sore, plus it had a little acreage I wanted.   Bought it at sheriffs sale and the occupant was given 30 days to vacate.   When that time was up they were still there so I hit him up and asked what was going on.   They were flat on their back and had no money to get another place, so I worked a deal where I brought in a dumpster, told them to pick up and dispose of all of the junk around property and fill the dumpster and be out in 30 days at which time I would give him $500 for that clean up.   

The 30 days came and went and the junk was mostly picked up, but they had not yet left.   He asked for the money, and I told him as soon as they got out, I'd give him the money.   Another week or so went by with no progress, so I got the sheriff involved, occupant and myself showed up in court and explained everything and judge gave him 5 days to vacate or sheriff would come remove them.   They finally got out on the 5th day, I paid him the $500 for clean up and took over the piece of junk.

It was a modular home which I considered fixing up and renting, but after studying on it for awhile just decided to make it go away.   Put an add in the paper and sold the house for $10,000 and a guy came and hauled it off, gave the above ground pool to a buddy who had to come dismantle it, and still wound up with a whole bunch more junk to clean up, utility disconnections, abandon the well & septic, some bulldozer & backhoe work, etc.   Probably spent all of the $10,000 just getting the place back to a bare lot.   It's farm field now.

[ericrugiero]

Update:  I stopped by the house last night and knocked on the door.  The neighbor asked me if I was looking for the lady that lives there.  Turns out, her sister is renting the place.  I asked if she was aware the house was being foreclosed on (yes).  I told her that I was interested in the house but would like to talk to the resident and I brought up cash for keys so that I wouldn't be kicking anyone out of their home with nothing.  The sister seemed pretty interested in that and said the tenant wouldn't be back till Sun.  Since the conversation was going very well I asked if she thought her sister might even be open to letting me see the inside of the house.  She offered to walk me through the house.  So, I got to see the inside of the house and she showed me everything that she knew was wrong with it.  She took my phone number to share with her sister.  I'm now much more comfortable that I won't be getting into a mess with an occupied house.

In terms of conditions, for the most part it's in good shape.  One wall had black mold on it previously but they ripped out the drywall and it's gone now.  She thought it was from a water leak in the bathroom above.  No sign of current water damage but the drywall needs replaced.  Needs a fair amount of paint, some new carpet, a new sump pump and other small things.  It has a working furnace but no AC.  Everything I'm seeing except the AC could be fixed for $5K with us doing the labor.  We might think about installing a heat pump because I know a lot of people won't buy a house with no AC.  I'm thinking now it's worth $110,000-$120,000 after being fixed up. 

[nedwin]

"When buying a foreclosure how do other leins against the property work?"

They go in order. The bank with the primary mortgage would have the first lien. A potentially different bank could hold a second lien for a HELOC or something. An HOA could foreclose and have a third lien. A tax lien would likely supersede all of that.

If you buy a home at auction from the HOA. You would still need to pay of the other liens to actually own the property.

Don't they all get wiped out in the foreclosure process?  I know they go in order and get paid until the money is gone.  I think they are supposed to be wiped out by foreclosure even if they don't get paid.  Is that right?

Yes, generally junior liens are wiped out by a foreclosure.  However, property tax liens and other types of liens may not be wiped out.  You need to make sure the foreclosing lien is in first position.  I have seen second liens foreclose, and in that situation the first lien remains in place and could foreclose in the future if not paid.

You need to be aware of HOA liens, if applicable, and federal and state tax liens.  In CO, at least, HOAs can obtain a lien for 6 months of dues that have priority over first position mortgages even if the HOA lien is junior, which means that they are not wiped out by a foreclosure.  I don't remember the details of federal tax liens, but remember they are not completely wiped out by a foreclosure.  State tax liens vary by state.  To get an idea of the title on the property, you could obtain an Owners and Encumbrances report from a title company for $100-$200, which will show you all the recorded liens on the property.

During the great recession I helped a friend buy foreclosures.  If the property was occupied after he acquired title, he would offer them $500 or some other agreeable amount to move out.  He would offer about 1/3 of the amount up front so they could rent a truck, and the rest when the house was cleared out and the keys delivered.  He would have the cash in his hands as he made the offer.  Other times he rented it back to the occupants, in two instances I remember these were the previous owners.  He eventually re-sold one of these properties to the previous owners, they kept immaculate care of the property before and after the foreclosure.  Another he had to evict and it was a bit of a mess, but nothing serious.

During the great recession there was a federal law that required purchasers of foreclosures to honor legitimate leases with tenants whose homes were foreclosed on.  The federal law was scheduled to expire some years ago, but may have been renewed.  States may have enacted similar laws.

[sammybiker]

@ericrugiero  Sounds like you may have a deal on your hands and probably have info that others don't.  Nice work and good luck with the bidding process.