The situation is all too common. A well-meaning, but somewhat green, real estate investor fueled by the knowledge of attending a recent real estate seminar dives head first into an HOA Foreclosure Auction. The investor can barely believe what he is hearing. Properties valued at hundreds of thousands of dollars being sold at pennies on the dollar to an awaiting and eager crowd. It sounds like a great opportunity, but without experience and knowledge, investments such as this could have potentially undesirable outcomes. Protect yourself by understanding the following:
1. Don’t forget to analyze the “carrying costs”
A common mistake made by investors that rely solely on the pricing differential for their profit is that they fail to realize the negative impact of carrying costs, such as mortgage payments, taxes, insurance and maintenance during a protracted marketing and sales period. Almost always, the purchase money loan is superior to the HOA lien and there could be many challenges in uncovering the origin and amount of the purchase money mortgage.
2. Prepare an Investment Strategy
Investors should also be very sure of what tactics to employ once the asset is acquired. One major question to be answered is whether the property will be “flipped” back into the market or whether it will be held and rented awaiting a market change before sale. A typical analysis would include: a specific strategy that includes the goals and manner for acquiring the property, holding the investment and disposing of the investment.
3. Do Your Research
Most items sold at auction don’t undergo a title search until after the sale. This is a potential risk to any investor as it opens up the door to many unknowns. A best practice is to perform a title search prior to the sale.
4. Define the Property’s Actual Value
Many investors make the mistake of calculating the value of the property at the amount of the intrinsic value minus the costs of the sale. It is much more wise to understand not just the price differential, but other attributes that could make it a success on the market. For example, consider whether the property is located in an area destined for redevelopment or improvement. The property needs to have unique qualities that make it stand out from the rest of the properties in the neighborhood or local market or that present some opportunity to create value.
5. Know the Homeowner’s Rights
If the home is undergoing foreclosure sale by the HOA, you need know that the homeowner has the “right of redemption” to get the home back within 180 days from the date the HOA mails the post-foreclosure notice. Tex. Prop. Code § 209.011(b) (West 2015). During this 180 days, a person or entity that purchases the lot at the foreclosure sale may not transfer ownership unless it is to the redeeming owner. Tex. Prop. Code § 209.011(c) (West 2015). In order redeem the property, the foreclosed upon need only pay all amounts due to the HOA at the time of sale, plus fees. Tex. Prop. Code § 209.011(d) & (e) (West 2015). (This timeline refers to subdivision lots with HOAs. There is a separate redemption period for condominiums.) This means that you could potentially invest in a property, only to break even and completely waste your time.
If you’ve recently purchased an HOA foreclosure sale property at auction and are afraid the homeowner will employ their right of redemption, please contact a trusted attorney.
Investing in foreclosures to build wealth is a viable strategy, but it’s not a way to get rich quick. To be successful, you will need a carefully crafted and executed strategy and an understanding of the landscape. For every rags-to-riches story, there are many more who have lost their capital because they did not keep abreast of changes in market trends or have a plan to mitigate the risks inherent to foreclosure investing.