HOA Foreclosures in Las Vegas - Part 2

There are four primary scenarios encountered as we pursue clear title on a property:

1. Our attorney pursues quiet title on the home in an attempt to get a 100% free and clear title on the property that is marketable, can be insured, and allows us to resell the home at any time.  Although it is not the norm, there have been many cases when this method has worked and the buyer of the HOA delinquent receivables has walked away with a free and clear title from the quiet title procedure.  Since many investors are buying these HOA receivables at 5-10 cents on the dollar, when quiet title does occur, it generates a huge return on investment.
2. If a lending institution still holds a lien (1st or 2nd mortgage) on the home, a second strategy is to hold onto the home to generate cash flow for as long as possible while the bank tries to foreclose on the property.   If properties are bought at a low enough price, and the foreclosure is not completed quickly (as they usually are not,) there is a very good possibility that this will end up being a positive return situation for our investor client.  In addition to rents collected, the probability of receiving the majority of the investment back from the bank during negotiation is also very strong.  The bank may have to pay the investor the super priority lien amount plus the overage of what was paid at auction.  If this is the case, the investor receives all of their money back, less the rehab costs, plus any rental cash flow generated during the foreclosure process.   This seems to be what most investors are banking on and are now starting to bid properties up to 20% of the property’s value at these HOA auctions.
3. The third scenario is one that has generated personal success for my clients and I and one which I believe will become the most profitable and prevalent of all.  Once an investor has possession of the home, and has hired an attorney, it becomes very costly and time consuming for the bank to battle to get their home back.  If the bank were to foreclose on the home, their goal would be to eventually list and sell the home anyway.  So why not sell the home to the investor that currently has possession of it?   We have successfully negotiated with the bank through our attorney to buy a home at 70% of BPO.  On this particular home, the client had only put a little over $4000 into the purchase.  This $4000 includes the cost of the lien at auction, rehab, maintenance, management for a year, and attorney's fees less the rental proceeds from the months the home was rented.  The bank agreed to sell the home to our investor for $84,000 and the home is worth about $145,000 in today’s market. 

Another example of the benefits of having a good attorney can be seen in a recent transaction where our client purchased liens for two condos and after negotiation the bank simply wrote off and completely released their liens on the properties.  In that case it appeared that the bank understood that it wouldn't be economically beneficial for them to fight and spend upwards of $30,000 in legal fees for a $50,000 condo. 
As you may have gathered from trying to understand this new form of investing, there is a tremendous upside to it and very little downside based on current legislation, court cases, and history that we have seen so far.  I have personally been involved in approximately 30 of these transactions and have sold around 50 others to my client base of investors. 
If you are interested in learning more about the HOA foreclosure process and how you can use it to generate returns, please give me a call directly and I can answer any and all questions you might have.  I can also describe in detail how we are able to partner with investors to buy these homes, townhomes, and condos at 5-20 cents on the dollar and manage them effectively while getting the maximum return out of each home that we obtain, manage, or sell. 

HOA Foreclosures in Las Vegas - Part 1

 

As many of you know, there has been very little bank foreclosure activity lately in the Las Vegas marketplace (an average of 270 homes per month over the last 3months-May, June, and July 2013.)   However, a new development in the Las Vegas real estate scene is HOA foreclosures. Home Owners Associations (HOA’s) are now foreclosing on homes within their jurisdiction for unpaid HOA fees.

We have been working hard to secure many of these foreclosures for our investor clients using two  paths:

1. Buy the HOA delinquent receivables for homes, townhomes, and condos at auction (Trustees sales, collection company auctions and/or private attorney auctions.
2. Approach HOAs directly and buy their receivables for these delinquent accounts, foreclose on the homes ourselves, and gain title to the homes through this method.

When we buy at one of the auctions, we usually end up paying between 10-15% of the property’s value for the home.  We get a foreclosure deed, we record it, and this gives us legal possession of the property.

If the home is vacant, we rehab it and rent it out for cash flow.  While we are collecting rent on the property, our attorney negotiates with the bank to obtain "quiet title" for free and clear ownership of the home, or our attorney negotiates with the bank to buy the property at a discount from current market value.

If the home is currently occupied with a renter, we place the home in our property management division and rent comes directly to us.  If rent is not paid, we treat the property as a normal rental and evict the current tenant.

If the house is occupied by the former owner, we give them three options. 

1. They stay, sign a lease, and pay rent as any other tenant would do. 
2. They stay unlawfully and we have them evicted (unlawful detainer.)This process takes approximately two months.
3. They move out voluntarily and we are able to rehab the home and get it rented. 

When we approach the HOAs directly and negotiate the purchase of their delinquent receivables, we pay off the collections costs, foreclose on the homes (with their assistance), and are able to acquire the homes by paying approximately 5% of their current market value.  We are able to acquire more homes at a cheaper price through this method, but the time frame is much longer.

Gaining possession of the home is very important. It allows us to control the rental and management of the home.  This control does not grant us free and clear title which is what we are ultimately seeking, but it does allow us to generate cash flow on the property while we pursue title. 
 

How To Determine The Value of Your Las Vegas Property Part 1

Today, I continue with part 2 of my series discussing how to value your potential investment properties using the method I use for Broker Price Opinions.

Adjustments

Once you have obtained your comparables, adjustments are then made to the comparable properties to reflect their features that are superior or inferior to the subject property.  IMPORTANT: The adjustments are calculated on the price of the comparable properties, not the subject.   For example, if a comp sold for $180,000, then you will add or subtract adjustments to that $180,000 in order to account for positive or negative relative features of the subject property. After the necessary adjustments are made, we are left with a reasonably accurate picture of the worth of the subject property. It can be confusing at first, determining whether an adjustment to the price of the comp should be positive or negative, but it gets easier with practice. The basic idea is to use a negative adjustment on the comparable property, if the comp has superior features to the subject property and positive adjustments on the comparable property if the comp has inferior features to subject property.  A BPO looks much like an appraisal, and the adjustments work the same way. Below is an example of a typical BPO/appraisal adjustment spreadsheet.



Based on the above comparables and adjustments, the subject property is worth between $439K and $509K.

How to Calculate Adjustments

Calculating adjustments is a judgment call based on an individual market.  When adjusting for square footage, one should take into account the average price per square foot at which comparable properties are selling in the specific neighborhood being evaluated. As a general rule of thumb, extra bedrooms are worth around $8,000. It is often surprising to people to learn that upgrades like pools and exceptional finishes don't necessarily add much to a property in terms of appraised value. They do, however, make the property easier to rent and easier to sell.

How To Determine The Value of Your Las Vegas Property Part 1

As Las Vegas home prices continue to rise, many homeowners are finding themselves in a position to sell their homes.  Investors, also, may be looking to cash-in for a profit on properties they purchased at the bottom of the market.  Clients often approach me asking for guidance on their list price.  They want to know what their property is worth.  Certainly, there is no substitute for a Realtor that really knows their city and can help you understand the intricacies of pricing within certain neighborhoods, price points, and subdivisions. But even an out of town investor, with little familiarity for the Las Vegas market, can calculate a reasonable value for their property by knowing how to adjust local comps.

Over the years, I have completed numerous broker price opinions (BPOs) for banks.  Broker price opinions help lending institutions determine values on properties.  Using the BPO pricing format can help you to generate your own reasonable evaluation of what your property is worth. When completing a BPO, you are required to reference three sold and three active comparables. Those comps should be as similar to the subject property as possible. But, since comparable properties can vary tremendously between those that are very similar to the subject property (such as model matches) and those that are quite different (areas with limited inventory) the key to an accurate BPO is making accurate adjustments. Every home is different and making accurate monetary adjustments to account for those differences is the key to producing an accurate BPO.
Let's begin by examining the typical bank guidelines for selecting comps to use in valuing a property.

BPO Guidelines

• Distance:  All comps must be within 1 mile of the subject property if it is in an urban or suburban neighborhood.

• Age:  All comps must be within 10 years of subject property, unless the home is over 50 years old.  At that point the age brackets can be widened as necessary.

• Size/square Footage:  Square footage for possible comps must be within 20% of the subject property.  Basement square footage and finish are evaluated separately from above ground square footage and is valued at a different rate.

• Property type:  Comparable properties must be the same type as subject.  Single family detached homes must be compared to single family detached homes, duplexes to duplexes, condos to condos, etc..

• Bedroom/bathroom count: Comparable properties must have a bedroom and bathroom count within one unit of the subject property.

• Style:  Although not required, it is advisable to compare similar styles of home.  Two story homes should be compared to two story homes, split level to split level, ranch to ranch.

• Sale date:  Sold comps should have a close date within the last six months. Many banks prefer three months.

Exceptions to Guidelines

Not every property has three perfect sold and active comparables in the same neighborhood.  If you have to break the guidelines, make sure that you are breaking them because you legitimately have to, not because you are using comps that provide you with a higher (or lower) price target. When preparing a BPO for a bank or other lending institution, brokers are required to thoroughly document any exceptions they have made to the guidelines.  This is a good practice for private investors as well.

In my next article, I will discuss the adjustments that must be made to comparables to arrive at an accurate BPO.