Did you know that it’s possible to bid on foreclosure auction properties even after the auction? That’s right! Founder of AfterAuctionBid Matt Kelley returns with some amazing information on the way to buy auction properties in California after the auction has taken place. That might sound confusing, but Matt explained how you could do this and get some incredible deals. He chats with Dan Deppen to speak more about the benefits of bidding after auctions and to explain how it works from the legal side of things. Tune in to learn more about after auction bidding and a more regulated way of buying properties.
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How And Why You Can Bid On Auction Properties After The Auction With Matt Kelley, Part 2
We’re now on part two. Dan and I had a brief conversation where we’re talking about some other areas that he wanted to be covered. One of which is which entitled investment type is best for you. As there are lots of different avenues to invest in lots of different places one can invest. I did talk about all the different ways in which one can source a product, which does not narrow it down to one specific type or another. That’s for virtually all different types that are out there.
I do want to stress and this is, again, my humble opinion, that wise investors will pursue an opportunity as it does take place in many forms. The debates will eternally continue, but I strongly feel there’s no best answer, but rather the most appropriate given opportunity, capital, experience, resources, and the investors’ comfort level. I have purchased first liens, second mortgages, and commercial paper through brokers, partnered with other investors, direct purchases from banks, and acquired real property on the courthouse steps.
First liens are generally considered safer as there are fewer ways in which they become unsecure. The greatest risks and most common mistakes with first-lien investing are paying too much for the asset because of missing critical underwriting information, not properly estimating timelines, and property valuation. Underwriting of the property is emphasized in this scenario because it is less common for modifications, workouts, settlements, and other alternatives than taking the property back via closure or deed-in-lieu of foreclosure.
Acquisitions of first liens tend to be a manner of acquiring property prior to general MLS listing and a foreclosure sale. It’s moving up the food chain. These are things that I’ve done in the past where I would be looking at the title and seeing how it is. If this is a good deal for me, how is it that the person in front of me was able to get this at a price where they can comfortably sell it to where I still think it’s a good deal?
Again, determining factors certainly assist in determining the likelihood of the desired outcome, such as the homeowner keeping the house via reinstatement or modification, where everyone comes to terms with the shortened timelines, and again, higher returns. These liens tend to be more expensive due to higher balances, and are largely based on the property value in addition to the investor’s estimated yield. Dan, you primarily invest first. What’s your opinion?
I’ve only done first. I was going to ask you the same question because a lot of people ask me, “Should I do 1st or should I do 2nd?” My opinion on it is it doesn’t necessarily matter, but it’s good to go deep in whatever area you decide to go. I view first as making larger investments. They’re going to tend to be less volatile. In seconds, you’re going to have smaller investment sizes and more volatility. You’re going to want to do more of them, so it works out. I don’t view it as one or the other’s necessarily better, but I had started inverse, so I’ve continued to go on and go deeper down that lane.
Not every deal is right for every investor. Click To TweetI believe that part of what you said, everything else I’m going to disagree with you on. This is a good thing. For everyone reading, we’re going to end up on the same page. We’re all ultimately going to agree on everything. This is primarily in regards to opportunity and you found a good vein of opportunity in regards to first mortgages. The same thing exists for second mortgages. Second mortgages, by basic definition, are usually smaller balances. Therefore, they tend to be smaller investments, at least dollar-wise. There are different risk, but a lot of them tends to overlap. This is very popular.
The differences between 1st-lien investing and 2nd-lien investing are minimal. The primary difference is that first liens have a lot of considerations whereas the second lien primarily worries about the first lien. Non-performing second mortgages tend to have lower balances, thus the lower purchase price due to their institutional common classification of a charge off.
It is important to note that a 1099-C has not been sent regarding the outstanding debt. Second liens do tend to be smaller balanced loans, but available in sizable principal balances, including hundreds of thousands of dollars. Underwriting for these second liens is less data-driven than the first mortgages thus, less expensive on a scale while also simplified as the information needed for basic review.
Although anything can happen in distressed debt investing and it absolutely applies to second mortgages. They tend to be available nationwide, including in non-judicial states, whereas first mortgages are much more rare to find in Downtown Los Angeles. I have acquired mortgages that are in San Francisco, Miami, and other A areas. Desirable cities relating to offering first mortgages tend to be more rural areas in judicial states. Basically, anywhere describe with a belt, the Sun Belt, Bible Belt, Rust Belt, you name it.
Most seasoned investors can fall into habits of focusing regionally on areas in which they’re familiar to have a strong legal network or local representation. This is not bad, but it can certainly be limiting. Not every deal is right for every investor. For these reasons, in the past, I’ve partnered with friends, and respected investors, to take down larger portfolios of notes. Certainly, there are ones which I’ve preferred and other ones that have not always been great experiences.
There is a lot when it comes to sourcing opportunities. Most often, none of us, especially you and I, are in the business of saying no. It’s identifying that, I’d be a moron to say, “I only do second mortgages.” No. If I find a good deal with first mortgages, all of a sudden, I’m doing first mortgages now. The same thing applied to second liens in the past, which is why you also requested as I mentioned AfterAuctionBid.com. I’ll talk about some of the things I’m doing now.
I would like to learn more about that. I’m giving you permission to share again.
Ask questions because there’s streamlining success as this is growing from one end to another. These promises relating to distressed debt investing made by many educators and funds to raise investor capital usually can include margins and potential returns, which would make your banker blush. Truly, passive income is often marketed as mailbox money, where you pick up your checks or fast money from flipping paper rather than real property. These can and have been true for some, but also catastrophic for other well-intentioned and misinformed investors.
I’ve got a theory on that. Everybody in the investment world wants passive income and my theory is that it doesn’t exist. Sometimes, I get lucky and I buy a note or something that pays and I never do much with it, but at a minimum, I’m doing due diligence upfront. I’m doing something associated with it. Usually, if I’m ever getting money in the mailbox and I’m not doing anything that month that means I did some work in the past, but it feels like it’s never passive or it wouldn’t be there.
I get it. What we’re talking about is it can and has been true for some but catastrophic again for others. A more accurate is that it does carry risk, measurable, manageable, and predictable. Issues encountered by seasoned and reputable investors most often relate to growth, cashflow problems, or personnel problems, but when one is able to identify some of that risk and make it manageable and predictable one can do the work oneself.
Whether that be collecting upon the debt, putting it into foreclosure, exercising rights and remedies available to oneself, or it can be simply being creative in terms of the structure of a modification so that this is now an affordable good debt that can be paid over a period of time, even recapitalized and sold to larger funds at a premium.
Can you talk a little bit about what AfterAuctionBid is and does? How people can use it?
It's very easy to overanalyze and become inundated with a lot of the information that is available. Click To TweetAfterAuctionBid is completely separate from notes. Notes are something that a lot of people struggle with, not in the concept that is easy to do. Some of the attorneys that I’ve talked to and asked them the very question, “Why it is that you do not do notes?” The most honest response I’ve received is that there are two different types of investors. One that knows very little and one that knows everything. There are very few that are in between.
There’s success found by both many times over as it’s very easy to overanalyze and become inundated with a lot of the information that is available because there’s a wealth of information available about everyone and everything. The thing is the actual asset, the underlying property, but also the individual that is going to be paying back the debt.
It’s possible to overall analyze those things as debt and drown in the information. Whereas if it can be broken down simplistically, it’s much easier to make some of those decisions, and there are other programs out there that can assist with it. I have my opinion about some of them and that they all do some good, but they’re not necessarily whole, and there is a requirement. One of the things I do love about note investing is it does require the human touch. It does require some actual insight into it and putting all the data together and determining is this a good investment or not.
AfterAuctionBid.com is a site that is specific to the state of California. In note investing, we have to take into consideration a lot of things for that and that would be, “Are they going to sue me? How long is it going to take to collect? What is the outcome? Is it going to be them paying me over a long period of time? Is it going to be a complete loss? Is this something where I’m going to get the property back?” There are a lot of considerations that need to come into it. What AfterAuctionBid is you don’t have to worry about 9 out of 10 of those things, because there was a law passed in the state of California called the SB-1079.
How it works is this is SB-1079. This is acquiring real property, there are no notes, licensure, debt collection, and requirement for mini-Miranda, nothing. Anyone can do this. To qualify to do this one either needs to qualify as a prospective owner-occupant that’s legally defined within the California Civil Code and the other most popular one is an eligible non-profit bidder.
This is a California-based nonprofit whose primary activities are the development and preservation of affordable housing. Is it possible that nonprofits make money? You bet. Nonprofits can also borrow money from another LLC to be able to engage in these investments as this money that’s borrowed is also a business purpose loan. Usury does not apply. These can be very high percentage interest rate loans and that’s all perfectly legal. Including that may be that if I were to have a nonprofit and borrow money from another LLC of which I may have some controlling interest. Certainly, there are ways to do that legally as well.
This website that I built takes advantage of this law. This is not a hustle. This is not something where it talks about sending out letters because this requires no homeowner authorization. This also requires no bank authorization. This is right. I have the right to buy this property for the price it went to a foreclosure sale. Back in 2013-ish, I was standing on the courthouse steps wind in the rain and the snow trying to buy a property, trying to be the right person at the right place at the right time, but that no longer applies.
This applies now to investors like me. I no longer have to make a decision within a few minutes when that bid is released. I can now buy a property after the fact and I have 45 days to do my research. Whereas those that showed up on the courthouse steps, those hedge funds, maybe have only had a few minutes. Additionally, those hedge funds cannot bid against me in this right that I have to acquire this real property because they’re a for-profit company, a hedge fund, a REIT, or some entity along those lines, whereas I do have the ability to buy it.
We’re talking to the State of California only. There’s a property that goes to Sheriff’s auction.
In the state of California, it’s called a trustee’s sale because it’s a non-judicial foreclosure. Sheriff’s sale is the judicial term in judicial states. Please note in non-judicial foreclosure, there is no right of redemption. The homeowner after the fact doesn’t have the right to pay this money and get their property back. It’s done and over with as of the moment of the sale.
When it comes to investing in notes, I do have to worry about a lot of things and the what-ifs, “What’s going to go on in the future? Is someone else going to buy it that’s on the courthouse steps? Am I going to end up with a property? It’s going to turn into a long-term workout and all those things, but with this, I don’t have to worry about any of the future. I worry about the past or what has already happened. I don’t have to worry about, “Is something going to go on sale? Are they going to file bankruptcy? Are they going to sue? Are they going to do a lot of these things?” It’s because none of that applies.
This auction happens, property sells at some price, and then you’re saying you can come in after the fact and buy it at that said price or higher?
It’s not where you purchase. It’s also not when you purchase. It is how one purchases. Click To TweetGet daily updates on all the sales. This is all the foreclosure data for the State of California. Not everything is a good deal, but I do believe that there are opportunities. As many of these properties were purchased by a third party on the courthouse steps. It’s not the ones nobody bought. This includes the stuff that people did buy. I have the right to buy the property and my money is trump theirs.
It’s because you’re a nonprofit.
This is to provide affordable housing. This provides a legal mechanism that whenever the law changes an opportunity for some and a disadvantage for others. It provides an opportunity for those that want to purchase direct. Again, those LLCs, hedge funds, and REITs have the fiduciary duty to sell things for as much as possible, whereas it’s not necessarily creating affordable housing at all. It’s worsening the problem in many respects. This creates a legal avenue for prospective owner-occupants to purchase property on the courthouse steps directly, but also nonprofits that are in the business of creating affordable housing to acquire real property as well.
I believe that it is no longer the case. It’s not where one purchase is because I would not advocate it in certain areas that are better than another. There are certain opportunity zones. Those are BS terms to be very honest with you. If you see some of those, it’s a giant red flag, or at least it is to me. It’s not where one purchases because everywhere is pretty damn high. Whether it’s going to go up a few more percent or not, that’s fine, but it’s also a consideration, “Is it going to go down by 5%, 10%, 20%, or more in certain areas?”
The next of which is not when you purchase because again, everything is high right now, even interest rates have been going up and will continue going up into the near future. It’s also not when you purchase because that time is not now. It is how one purchases. This is the only mechanism I’m familiar within the State of California and it does not apply in other states. This does exist in some other areas for other states. In other states, subordinate lenders have the right of redemption, and in other states, the homeowner has the right of redemption, so one could buy the homeowner’s right to redeem in certain states or the lender’s right to redeem in certain states. It gets complicated. We’re not going to go there.
This is a very streamlined and easy process that I’m elaborating about AfterAuctionBid.com, whichever things are also explained. This is a system that I built for myself and made available to others. It’s $50 a month. We’re going to have some lower-priced options and some more expensive options with some educational materials and opportunities available.
I see some of these properties went for less than a $100,000 below market value and some of which were significantly less than that. Not everything is an opportunity. There’s one that went to sale for more than it was worth, at least according to Zillow. That’s the most often because the debt exceeded the property value, but the lender didn’t drop the price at all. Other ones can be significantly more. I do have some other ones tagged and also made this available. One area I don’t know or care about is Sebastopol.
That’s by Santa Rosa.
It went for $923,000 and the property value is almost $1.5 million. It’s not so bad. There’s a San Jose property that went for $1.6 million and on Zillow, it’s about $2.1 million. That’s some pretty healthy little margins right there. There’s a Bakersfield property that went for over $300,000 and the Zillow on it is close to $700,000 unlike in some of those margins, but there are ones that are very low cost because similar to 1st mortgages and 2nd mortgages.
There are other properties that are significantly lower costs. One in Buena Park, which is close to where I’m at, went on sale for $49,000. One in Fallbrook, a friend of mine is going to be bidding on went for $62,000. There is an existing first mortgage on the property that was in the original amount of about $515,000, but the property is worth about $1.5 million. The first mortgage is around $515,000 plus the purchase price of a minimum of $62,000. That one pencils out. That one is good. We also did make available some of the underwriting tools to individuals, like the ability to purchase a title report. We have some very expensive and high price tools that we can pass on to others for a discount. People can purchase title reports for $25.
If you purchase those title reports, are those only for California or can you get title reports from other states?
We have it set up so that it’s only California, but if anybody needs other title reports, they can always contact me, and I’m sure that we can work something out, but it is nationwide access.
This is written into law. Whereas note investing is very unregulated, and there's an opportunity that exists within that, there's also an opportunity for some scams to take place as well. Click To TweetOnce you buy these properties, you’re buying them with a nonprofit, what can you do with them afterwards? Can you turn around and resell it?
Yes. You can even sell it to another LLC. You can sell it any way you want. It’s yours. There are no covenants, restrictions, and deed restrictions. You can sell it. Do anything you want with it. The actual process of how this works, these are not properties that we own, and these are not listed on the MLS. This is a very niche opportunity. The phrase of AfterAuctionBid is, “Be the first to know before REO.” This is before the MLS listing. This is after the actual foreclosure auction has taken place, but before it is bank-owned.
What takes place and what the website does is it aggregates all the foreclosure sales data for the State of California. In it, we can pick one of the properties that look pretty good. The process is within fifteen days of the actual foreclosure sale, we can generate what is referenced as a notice of intent because within fifteen days, I need to submit a form. This form is automatically generated by the website and it has instructions on how to submit it and where to submit this form.
This form is non-binding as it does not include any financial information. There are no bank accounts or statements, or even what I might bid is merely fulfilling the legal requirements of filling this form saying that, “I am a prospective owner-occupant,” or I declare that, “This is my notice of intent and I’m eligible nonprofit,” and can submit that form accordingly. That’s within the fifteen-day timeline. There are another 30 days thereafter I have to fund and my bid takes place in the form of certified funds as it would on the courthouse steps.
There’s a lot that goes into the bid. This is explained more fully on AfterAuctionBid.com. The bid is submitted directly to the foreclosure trustee and this is all pursuant to the California Civil Code. It is the law. It is a right. This neutral third-party trustee is the one that will issue the deed. If you lose, you get your money back, and if you win you get the property. It is a blind seal bid.
That’s pretty cool. I don’t see many opportunities like that.
We’ve seen a lot with the note world and it can be somewhat similar in terms of buying from brokers or from other sellers in terms of submitting a blind sealed bid, highest and best number wins, but this is considerably more regulated. I like how this is written into law, whereas note investing is very unregulated, which there’s an opportunity that exists within that, but also an opportunity for some scams to take place as well. You and I have both seen that far too much. Fortunately, we both avoided the majority of it as never been involved in it ourselves but also being able to underwrite not only homeowners and properties but for others whom we may do business with.
Matt, thank you so much for coming on.
You’ve got to ask more questions next time.
That was perfect. I didn’t have to ask too many questions because you had a lot of great information there. Thanks again. We’ll have to do it again.
Some of my contact information is Matthew Kelly and my email address is Matt@AfterAuctionBid.com. For those that have questions or concerns, my direct number is (949) 939-5334. You can send me a text or give me a call. I happily and freely answer your questions or concerns that one may possess. I always look forward to some feedback and meeting some new people.
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About Matt Kelley
Matthew is a full-time note and real estate investor acquiring nationwide delinquent loans and real property. As a certified foreclosure expert in the states of California, Arizona, Nevada, and Washington, Matthew has been called upon as an expert witness in the fields of foreclosure, default, loss mitigation, and advised some of the largest mortgage servicing companies, Credit Unions, Law Firms, and investors throughout the United States.
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