Practical Advice for Buying Distressed Property in New Jersey
Presenter: Bill Askin & Dan Benkendorf
Note: Askin & Hooker Law produced and recorded this webinar for the ear and it was designed to be watched and heard. If you are able to, we strongly recommend watching the webinar which will include emotion and emphasis that isn’t obvious when reading a transcript. Our transcripts are generated using a combination of speech recognition software and humans and may contain errors. Please check the corresponding audio before quoting in print. This is not meant to be legal advice.
William Askin:
Hello, everyone. My name is William Askin. I’m an attorney with the law firm of Askin & Hooker here in Sparta. And here tonight, presenting a live webinar on practical advice for buying distressed properties in New Jersey. With me tonight is one of our associate attorneys, Daniel Benkendorf. And Dan, is also going to be presenting this evening. And this is one in a series of sevens [inaudible 00:00:35] that we have been presenting for several years now. This is the second year, I guess, that we’re doing them virtual as, obviously, in response to the COVID pandemic that we’ve been all living through and it looks like we’re coming out of it now, finally. We did a presentation or a seminar on real property tax appeals a couple months ago. That was their first one this year.
If you’re interested in learning about property tax appeals, that seminar is now able to be viewed on our website at askinlaw.com. And just an FYI, I assume everybody on the conference seminar tonight is interested in real estate. If you’re interested in tax appeals the information is there, but again, it’s too late this year to file tax appeals. There is a deadline to appeal your property taxes of April 1st every year. You can start thinking about doing that potentially for next year. In any event, our firm is based in Sparta. Our practice includes a multitude of disciplines in the legal field. We do a lot of civil litigation. We do a significant amount of estate planning and estate administration work and we do a good deal of environmental work and represent a lot of local business owners from business planning to business startups to business transitions and acquisitions and sales.
Tonight our topic is distressed property in New Jersey and opportunities and risks involved in buying or thinking or considering investing in real property. And a couple of just thoughts or maybe a quick disclaimer before we get started. I guess lawyers are often common to give disclaimers. Here’s our legal disclaimer for tonight. If you’re thinking of buying a property in foreclosure or a foreclosed or distressed property, just know that it’s not for everyone, it’s not for the average homeowner or a family that’s growing or expanding and looking to sell and buy up or buy down, unless you have some experience in this type of a real estate acquisition, it is very risky. It carries significantly more risk than buying a private family owned property.
And it really is not for the faint of heart, you have to have and a strong willpower and some staytuitiveness. And there’s a lot of hoops that need to be jumped through and hurdles that need to be crossed. The process can be, and oftentimes is very, very difficult and very complex. Remember in a foreclosure generally, you’re not dealing with a family on the other end of the transaction, you’re dealing with the government, you’re dealing with the sheriff, you’re dealing with a bank. In any event, the seller’s looking at it as maximizing their investment. And that’s about it.
When you talk about a regular arms length transaction with another private homeowner or family, there’s often a lot of emotion involved in real estate sales and purchases. And most often, the seller on the other end is looking to close so they can get their money and buy another property. But in foreclosed properties, that’s not the case. You’re dealing with a bank or a board of directors or a committee at the bank that all they’re looking at is the numbers. Just a disclaimer. If you do get involved in negotiating or making offers or trying to acquire a property, that’s in some stage of foreclosure there’re a lot of risks. And we’re going to talk about those risks tonight on this webinar.
With that said, I mentioned the term or the phrase, and maybe most of you have heard of distressed sales. And what does distressed mean? In general, In most cases, distressed is referring to the financial situation of the homeowner. People don’t buy houses with the intent of becoming distressed and losing the house or not being able to afford the house, whether it’s a year or five or 10 or 20 or 30 years after they buy it. Circumstances change, the economy changes, there’re job changes. There are health and medical issues that may come into play. And in certain cases, homeowners get into a tough financial situation where they can no longer afford to pay their mortgage or potentially pay their property taxes. And for that reason, they’re going into foreclosure or pay other liens that may be placed on the property by a mechanic, a contractor, the IRS, the state of New Jersey, all those are potential liens that can be placed on a property. And if the homeowner can’t afford to manage the payments to pay off those liens, the property becomes distressed.
In addition to that, when property owners face those types of financial situations where they can no longer afford the monthly mortgage or tax payments on a property, perhaps, and we’ve seen a lot of cases they can also no longer to afford to pay for the upkeep and the maintenance and the capital improvements that need to be done to that property. Distress doesn’t always mean just the persons or the personal distress involved, but it can be the distress to the property itself. And for those reasons, there is a significant amount of risk, obviously, associated with potentially acquiring a distressed property. On the other side of the coin, what is the benefit of looking at distressed properties or considering the acquisition of a distressed property? Well, the bargain for exchange is that ideally, you’re going to get a deal. You’re going to get the property potentially below market value and be able to make an investment that has a more rapid return on the investment for you as maybe a long term homeowner or in a lot of cases, an investor, a flipper, or maybe somebody that wants to buy and hold the property and rent it out, eventually. We’ll talk about that.
Finally, and this is more a personal thought from 30 years experience, over 30 years now practicing real estate law, distress can refer to the stress that it places on buyers and other professionals, including the attorneys that are involved in the transactions, because there are a lot of unknowns or a lot of things that come up that are unique in every particular situation. And no two transactions are alike. And my word of advice to our clients, especially, our first time potential clients that are looking to buy a home and even to repeat buyers, our investors and property owners is to expect the unexpected because that’s what we see. Again, no two transactions are alike and a lot of unexpected things come up in distressed property sales.
These are the different types. Generally, when you think of a distressed property, you think of the catch-all phrase of, I’m interested in foreclosures, I want to buy a foreclosure. Well, a foreclosure can mean several different things, generally four different things, but before we get to foreclosure, there’s the first kind of distressed property sale that we see quite often is an estate sale. An estate sale is a distressed sale because the owners passed away. Just because the owner has passed away, doesn’t mean that the bills stop coming. You have an estate now that owns a property and maybe there’s sufficient other assets or income in the estate to continue to pay the bills, maybe not.
In a lot of cases, we see that there are not. People that live paycheck to paycheck, they need that paycheck to pay the monthly mortgage and the quarterly property taxes and the annual maintenance and occasional capital improvements to the property. And when that income stream goes away, when somebody passes away, then a state sale can quickly turn into a distressed sale. And there’s an urgency on behalf of the heirs at law or the beneficiaries of that estate to move the property as quickly as possible. Estate sales, generally, as long as they’re not in foreclosure, also estate sales, my opinion represented a very good opportunity for acquisition for potential purchasers.
The other types of distressed sales. Again, the catch-all is foreclosure. A foreclosed property can mean many different things, and Dan’s going to cover these here in a few minutes. We’ve got the pre-foreclosure or short sale, in those cases, you’re still dealing with the property owner him or her or themselves. They still own the property, but they’ve maybe missed some mortgage payments or haven’t paid their taxes and they’re in pre-foreclosure. There are sheriff sales, that’s when you’re buying the property potentially at a Sheriff’s auction, that’s at the end of a foreclosure legal process, a court process. And the final step in a foreclosure is a Sheriff’s sale.
There are real estate owned properties that refers to properties that have gone through a share of sale and have been purchased back by the lienholder or by the bank. If you may hear the phrase, REO or real estate owned, that’s a property the bank owns. The bank took it back. You’re not dealing with a private homeowner, you’re dealing again with a committee or an asset manager that either is an employee of the bank or a lot of banks send all their real estate owned properties out to an asset management company, and you’re dealing with that company. And then finally, you have government owned. Those are properties where the government was involved in the loan, commonly known as an FHA or a VA loan. And at the end of the foreclosure process of an FHA or a VA loan and the Sheriff’s sale, the government actually, in most cases, ends up owning those properties and you’re dealing with the government. Again very, very different from dealing with a private homeowner and much more complex, generally, in terms of trying to acquire those properties.
First estate sales, I’m going to cover here real quickly. An estate sale is any sale by the legal representative of the estate. An estate can’t list a property for sale, and certainly, can’t sign a deed or close on that sale without having the documents to confirm that they have been appointed as the quote unquote legal representative of the estate. There are basically two ways for that to happen. The deed owner or the person whose name is on the deed has passed away. And if that person whose name is on the deed left a last will and testament, that will would appoint executor or executrix of his or her estate.
And that person, the named executor would go to the county Surrogate here in Sussex County, that’s in Newton and the Surrogate’s Gary Chiusano, and they would be appointed as the executor of the estate. If there is no will, if the decedent passed away inter-state state, or without a will, then there is a statutory hierarchy of who is the preferred legal representative to become the administrator of that estate. It starts with a surviving spouse, after surviving spouse it goes to children. And one of those surviving spouse or one of the adult children would apply to the surrogate for letters of administration to be appointed the administrator of the estate. And again, not until that process is done can anybody do anything with respect to the potentially selling the property.
Nobody can be appointed as the legal representative or executor or administrator of the estate until at least 10 days after somebody has passed away. After 10 days application for that appointment can be made with the surrogate and from application to appointment. When we were doing it in person, can be done the same day. Now there are very few, if any, in-person applications, they’re all done through the mail, again, due to COVID. But that whole process from application to appointment now, instead of getting done in a matter of hours, can get done in a matter of days or certainly within a week or so. And once that is done and a buyer can confirm that somebody is the legal representative of the estate, there can be a real estate transaction.
Some of the risks much like foreclosure properties, there may be some deferred property maintenance depending upon whether or not the property is vacant, how long it’s been vacant and the financial condition of the estate. We deal a very, often, with estates where there are no other assets other than the house. That may be a word of caution. There may be some deferred maintenance involved. We do have estates where there are no other assets other than the house. And the house may have a large debt on it, a large mortgage on it. And we even have estates that are actually or technically, insolvent, meaning that the debts of the estate exceed the assets of the estate. In those cases, it’s still possible to sell that property. But there would have to be an application to the court to have the estate declared insolvent and approve a transfer of the property and a release of the lien or mortgage on the property.
Also, a word of caution, if you’re interested in pursuing estate sales, or does need to be a release from the state of New Jersey, a release of any death taxes that maybe due upon the sale of the property. A word of caution, make sure you’re working with an attorney, these transactions that is aware of that. If you buy a property from an estate and the estate has not applied for and received either a real property tax waiver or a real property tax clearance letter, the buyer of that property acquires a property subject to whatever death taxes are owed by the estate, which can become a lien the property. Again, big risk, you want to make sure you cover your basis. And if there are no death taxes owed, estate taxes or inheritance taxes, if they’re none owed by the estate itself, it’s a rather simple waiver to get. You file a form called an L-9 which is a request for a real property tax waiver.
You sign that under oath. The seller signs it under oath as an affidavit that the errors of the estate and the estate itself is exempt from the state and inheritance taxes. And the New Jersey treasury will issue a Real Property Tax waiver. If you’re dealing with an estate where there are potentially death or estate or inheritance taxes, the estate or inheritance tax return must be filed, and the taxes must be paid prior to the transfer of the deed to the property. The tax return is completed. The death tax is paid to the state of New Jersey upon receipt and review of the tax return and the tax payment. In that case, it’s not a Real Property Tax waiver that is issued, but it’s a Real Property Tax clearance letter.
And in either event, whether it’s a real property tax waiver or tax clearance letter, that letter actually needs to be recorded with the county recorder’s office, along with the deed, and then you’ve perfected or insured you are titled to the property upon a closing. If all that work cannot be done ahead of time, a buyer, if you’re looking at buying one of these properties, once the research has been done and the calculations of the estate tax or the tax waiver have been completed, oftentimes, the buyer through their title company, can get the seller or the seller’s attorney, the estate attorney to complete an estate questionnaire. And then with an appropriate escrow of the proceeds from the sale, the title company may, in fact, be able to insure title to the buyer pending receipt of the tax waiver or the tax clearance letter from the State of New Jersey. But those are additional risks.
We work with a lot of investors and a lot of people that do express or have interest in being landlords. We have clients with portfolios of 10, 20, 30, 40, one guy has, I think, over 75 properties now as investment properties. And one of the top targets that several of these investors tell me that they’re always looking for are actually estate sales and they’re estates what they look for in addition to being an estate sale, we’ve come across in our experience in many cases, hoarders, and if anybody’s ever seen the show, Hoarders, on HGTV, but it’s interesting. I’ll just leave it at that. It’s interesting.
But estate sales or homes that were occupied by hoarders are a preferred and potentially very good investment because in a lot of cases is the work required is pretty simple. It’s like manual labor, to clean the house out. Put a good fresh coat of paint on the property in any required deferred maintenance. And it’s a pretty quick return on an investment. I’m told that a lot of the times the hoarders are type A personalities and they take care of their everything. And we find often that the bills are paid. The mortgage may be paid off, but there are no other liens on the properties. And it’s just one thing that I’ve had clients express an interest in. Just something to think about. In general estate sales can be a very good investment property.
Next up, we’re going to go to considerations about foreclosed properties and the different types of foreclosed properties. And I’m going to turn it over to, Dan, for a few minutes.
Daniel Benkendorf:
Evening ladies and gentlemen, my name is, Dan Benkendorf. Born and raised in Sussex County and currently, I live up in Branchville but I’m here at Askin & Hooker. Started here about five weeks ago. Prior to that, I was at a law firm, Morris county. I’m now here, primarily practicing residential commercial real estate, land use zoning, and I’m taking care of estate matters. If you’re looking for any of those things feel free to give me a ring. All right. To kick off our presentation tonight, I’m going to be talking about foreclosure related purchases from distressed properties. What I want you to understand is there are a couple quick things, first of all, as Bill’s explained in depth, there are complex transactions and they’re not for the faint of heart. You have to be ready to not get what you want because you’re going to.
That’s the first thing. The second thing is every state has its own foreclosure loss, New Jersey is one of those states. It’s a judicial foreclosure state. What does that mean? It means that there are strict requirements for banks in order to foreclose on properties. They have to meet those requirements if they want to foreclose and if they want the Sheriff to sell the home and if they want to take ownership of the property. And if they don’t comply, it could jeopardize your ability to purchase that property if that’s what you’re interested in. But for somebody who’s being foreclosed on, they have to follow those rules and if they don’t, you might be entitled to some more time in that house, whether you’re paying the mortgage or not. That’s something to consider.
Finally, and this is the most important one, buying foreclosed properties they’re as-is sales. In the next slide, Bill, if you want to go to the next slide. All right. In this slide, this is pre-foreclosure or short sale. I have, Bill, on this slide. I’m not going to talk about it just yet, but I’ll get to it in a second. What I want you to enter understand is that in most cases, when you buy and/or sell a property, the purchaser of the property is getting a mortgage on the property and the seller is paying off their mortgage on that property. Well, and in most cases, in regular real estate transactions, the bank for the seller has almost no say other than when they send that payoff. What do they have to pay in order to pay off that mortgage?
But in these foreclosure transactions, the bank is ready and able to make demands and you have to be ready to deal with that. In most transactions where it’s not a foreclosure, again, you don’t even hear from the seller’s bank, but in these transactions they have a voice. Get ready for that. What does it mean as-is? As-is means when you go to purchase that property, you’re not going to be able to say, “Hey, listen, the septic doesn’t function properly.” Or when you inspect the property you find that the roof needs to be replaced. It’s an as-is sale. That’s the risk. That is the risk that, Bill and I are going to go over and over and over again tonight.
Normally, when you’re purchasing a property, you can talk to the seller, they may have to fix the roof. They may have to fix the septic. They might need to replace the furnace. You do a water test. It turns out the water’s not portable. You have them put in a filtration system, water softener. Again, a lot of this is based on the contract that you have. But in this case, that contract is not the same. That’s something that you really need to consider.
Going into pre-foreclosure. I want to touch on some points from these sellers perspective, from the person who is in foreclosures perspective. When you purchase a home, you fill out a bunch of documents. You sign all these documents. You sit at the table, they just put them in front of you. You sign them. You put it in front of you, you sign them. A lot of times there are two primary documents when there’s a mortgage on the property. There is what’s called the note and the mortgage. And the note is your agreement to pay back the money. Here’s a $100,000, I’m agreeing to pay back this $100,000. But there’s also a mortgage. The mortgage is the bank’s right to take the property from you if you don’t pay back the note. In these foreclosure cases, that’s essentially what’s happening here. The seller has signed a document saying that you can take the home as collateral if they don’t pay back the note. What does that mean for the seller? Well, if the bank forecloses on the property, and let’s say, they agree to a short sale, then what happens is that debt release is then looked at as income for the seller and it needs to be filed in your taxes. I’m just touching on these points. In case somebody here is interested about maybe short selling their property. It’s something really you to consider.
Now, in pre-foreclosure or short sales, what happens is the seller will likely go to a realtor. Sometimes they will post it online themselves. And their goal will be to come out of this clean, to come out of this without any debt. The short sale, the short part of the sale is it’s shorting the loan. The bank is agreeing to accept a little less so that they don’t have to go through the foreclosure process. It’s actually pretty common in New Jersey because the banks know that the foreclosure process is a pain. Again, it’s an as-is sale. You have to remember that. If somebody can’t pay their mortgage, it’s likely that they can’t afford to put a roof on a house. It’s likely that they can’t afford to put a new furnace in the house. It’s likely that they can’t pay to pump their septic. It’s likely that they’re not taking care of the house.
Another big thing to think about is that you have a lot of people that are doing this. And so they’re right now, especially so there’s competition. Okay. And if a house is being shorted, there are people willing to give a little bit more and a little bit more and a little bit more. Why is that? Bill, can you go to the next slide? Because they don’t want to be dealing with the auction process at the Sheriff’s sale. Guys, this is the last step of the foreclosure process. The bank has been unable to find anybody to purchase the property. The seller has been unable to find anybody to purchase the property, and the bank’s done everything that they need to do in order to short sale the property.
Guys, I just want you to understand, there are a significant amount of notice requirements for the Sheriff’s sale. Okay. And we could get into that but what’s very important is that if you’re looking to purchase a home at a Sheriff’s sale, it’s likely that whatever date you first see that home coming up, it’s going to change. It’s going to change for a lot of different reasons. One of the reason is because the homeowner has a right to ask for an extension. It could change because the bank hasn’t met all of their notice requirements prior to the share of sale. It could change because the bank doesn’t have somebody to go to the auction to buy back the property if it’s not bid what they’re looking for. The sheriff sales are usually, they’re changed. I believe, Bill, is it Thursday before the Sheriff’s sale? That it’s…
William Askin:
That it’s advertised.
Daniel Benkendorf:
Yeah.
William Askin:
It’s got to be advertised for at least 30 days before the Sheriff’s sale. And sheriff sales are Wednesday at two o’clock at the Courthouse. Yeah.
Daniel Benkendorf:
Yeah. The sheriff sales are held at the historic Courthouse in Newton. You guys have to understand that if you do purchase the property, the homeowner has 10 days to redeem that. You have to understand that if you go to the Sheriff’s sale, you’re going to have to put 20% of the bid in trust immediately on the day you go to purchase that property. Also, you’re going to have only 30 days to pay off the winning bid on the property. These are all things to consider and you could be liable for failing to pay that amount of money or canceling the sale, and then them not getting what you bid. They could bring you back to court for that. It’s all things that you need to consider when you’re purchasing homes at the Sheriff’s sale.
Another big thing with the Sheriff’s sale, as opposed to the pre-foreclosure that you really need to consider is that in a pre foreclosure, the homeowner still has access to the property. They can still let you do an inspection. They can still walk you around the house or the realtor can walk around the house. They can say, listen, I haven’t gotten this serviced or yeah, it was something I just couldn’t afford. But in Sheriff’s sale, you are not getting that. You are literally, maybe you’re going to drive past the house a couple times to look at it, to see if it’s painted, if the roof looks good. You’re not going to be able to do that. You are not going to be able to go into the house and determine whether or not the pipes have maybe broken.
You’re not going to be able to see if maybe the copper’s been stripped out of the house. You’re not going to be able to see if there’s been any damage by buy hoarders, like Bill, was talking about or anything like that. Unfortunately, you’re really taking a risk, buying a house at a Sheriff’s sale, but what does that mean? Well, it means that as long as you bid what’s owed to the bank, you could potentially buy that property. And sometimes it’s much less than what the house is worth, but a lot of times it’s less than what the house is worth until you do whatever renovations you are going to do to the house. A lot of times when people are deciding whether or not they want to purchase a home at a Sheriff’s sale, they’re already factoring in all of the costs they see necessary to bring that house to what they want to make.
Bill and I are talking about all these risks and stuff, but you have to understand there is a possibility that you can upgrade from whatever house you’re in currently, you buy this at a ridiculously low price. You may get an nice property and then you just slowly work on the house. That’s one way to do it. Or you could have contractors in mind that are ready to rock and roll, and you want to resell the house. Or like Bill was saying, you might want to rent the house. You have to factor all of these things in before you step foot in that Sheriff’s sale. And I personally haven’t ever been to a Sheriff’s sale, but Bill, was telling me it’s something I should do. And so I suggest it’s probably something we all should do if it’s something we’re interested in before we actually go to purchase a property at a Sheriff’s sale. [crosstalk 00:35:00] Bill, do you want to add anything to that?
William Askin:
Yeah. Sheriff’s sales are closed to the public at this time, since COVID. The only people allowed into the Courthouse Sheriff’s sale are people that are actual bidders, and you actually have to show that you have a cashiers or certified check for a down payment made payable to the sheriff’s to get in. Also in my experience, a lot of times the buyers for Sheriff’s sales are partnerships or limited liability companies or corporations. And they bring their team with them. Only one person from every business entity, only one person is allowed in the Sheriff’s sale. You can’t bring your partners or your financial advisor or anything. And then in addition to that, through all the other COVID type precautions. When Dan mentioned the Thursdays for the notice, the advertisement, they are published, I think that’s what, Dan, was referring to.
Daniel Benkendorf:
Yeah.
William Askin:
In the New Jersey held on Thursdays and Sundays. And they’re always published on the county Sheriff’s website. You can get an update, a much more reliable on the county website because I’ve had clients that intend to go to the Sheriff’s sale on Wednesday. They’ve see it in the paper, the Thursday and Sunday beforehand. And then they go to the sheriff’s sale on Wednesday to bid, and it’s been postponed or adjourned. Again, it’s best to check on the county Sheriff’s website for the most up to date, reliable information about the Sheriff’s sales that are going to actually be auctioned off on that particular day.
Daniel Benkendorf:
Good. All right. And one more thing, guys. I want you to know that the bank can’t actually profit on a Sheriff’s sale. They can’t sell it for more than what they are asking for. What happens is, if there’s any profit on the sheriff’s sale, it goes to the homeowner. That’s something, if you do go and you’re in a good mood, the money’s not going to the bank, it’s going to go to the person who’s been foreclosed on. That’s something you should consider. All right, next slide, Bill.
All right. The real estate owned properties. All right. If at the Sheriff’s sale, there’s no bid high enough to compensate the bank for their debt that they own, then the bank will take back the property. If they take back the property, a lot of times what they do is they send somebody into the house to clean out the pipes make sure that the house is clean, make sure that all the garbage is gone. And then they basically winterize the home, no matter what time of year it is and that’s that, they lock the doors. It is likely that when the bank owns the property, you’re not going to be able to go into the property to inspect the property. There’s no question what’s happened to the property at that time.
I had a client, the bank had owned the property. She wasn’t permitted to enter the property. She purchased the property from the bank, thinking that it was in good shape. It was a beautiful home. The last time it sold, it sold for $800,000. And she had got a contract for 600,000 and she was in heaven. She went through the process. We had no issues or anything. Ultimately, turned out that the foundation was completely deteriorated under the home. And after she purchased the property, she went to the house and sure enough, she went down into the basement and the foundation, the walls were caving in. The dirt, the rocks, the stones, everything, water. It didn’t matter. I was luckily able to overturn it, but it’s something you have to consider when you’re dealing with the banks, because they don’t always go in and look at the properties. Don’t always inspect the properties. It’s something that just it’s by luck, it’s by chance.
Another thing is the emotion is completely out of the deal at this point. The pre-foreclosure sale, you’re still dealing with someone who’s trying to make it work. They really want you to purchase this property because they really want to get out of this debt. But in this case, it’s not the same. The bank doesn’t care. The bank owns the property. Of course, they don’t want to pay taxes on the property. They don’t want to pay insurance on the property. But the truth of the matter is they think that house is worth more than you do. And as a result, they’re not going to do anything to it. You’re going to have to pay what they want for that house, because they think they’re going to find somebody else.
It’s their investment. There’s no more emotion in it. It’s just a committee or an asset manager as, Bill, was talking about, especially with the… You’re in a position where you have to talk to this committee, you have to talk to this asset manager and it’s not just one person making a decision to replace the furnace, it’s a bunch of people and they’re not all going to agree. And if they don’t all agree, it’s not going to happen. It’s definitely something to think about. Let’s see here. There was one other thing. That’s pretty much it. We can go to the next slide Bill, unless you have anything you want to add.
William Askin:
No, keep going. That’s good.
Daniel Benkendorf:
Okay. All right. And the last one is the government owned. Very similar to the bank owned. Again, they’re going to have requirements that they need to comply with. I would actually argue that there’s actually less emotion in the government owned than there is in the bank owned. It’s just one of those things. There’s more red tape and you have to meet more requirements and they’re going to give you less. Why? Because it’s not a bank that’s paying for it. It’s the government and who pays the government, but we do. They have to be very careful about what they agree to do and what they agree not to do. Let’s see here, just want to take a look. It’s basically the same things that I had talked about with respect prior to the foreclosure and after the foreclosure. If the government owns it, very similar, it’s just one of those things you’re going to have to go through that red tape. Bill, I don’t know if you want to add anything else about this again? I still feel like it’s very similar to the last slide.
William Askin:
It is. It’s just a property owned by the government instead of by a bank. The process is very similar. Finding government owned properties, I think most people find them on a website, they’re not as often or not very often listed with a realtor. You can search auction.com is one place to find a governmental owned property, is probably the most popular place. All right. You’ll do this one, Dan, or do you want me to take over here?
Daniel Benkendorf:
Yeah, it’s fine. I can take care of it. Guys, normally when you purchase a property that’s not in foreclosure, let’s take a step back again to just buying a property. There’s two sides to the deal and you have maybe two realtors to the deal and hopefully you have two attorneys to the deal. And then you have the mortgage company of the buyer. And like I said, you don’t really have the mortgage company of the seller, so you’re not really thinking about them. But normally, what happens is, the realtors will bring together the purchaser and the seller. And then they will execute a contract. Right after the contract, there’ll be attorney review that’s where me, and Bill get involved. After attorney review, there will likely be inspections for the property.
The inspectors will prepare the reports and then the attorneys will take those reports and we’ll make specific requests based on what our client, the purchaser’s looking for. And then the seller will have his attorney respond to that. And then immediately after that, you usually order title once you’ve concluded the inspection contingency. Title is really important. It’s something I didn’t touch on in the other slides, but I really should have. If you’re looking into doing this, into buying properties that are being foreclosed on, you need to have a very, very good title company that you can call and at the drop of a hat, they can be there to help you look at the title on that property so they can determine what types of liens might be associated with that property. If the title you’re getting is clear, and once you buy it, whether or not they might even insure the title to the property, you’ve got to have a good title company. There’s a lot of them out there. And just because they’re the cheapest doesn’t mean that they’re the best.
Bill, might want to make some suggestions. He’s got a couple of title companies he works with up in Sussex County. Again, I worked a lot in Morris County, so I have a couple in Morris County, if that’s what you’re looking for, feel free to give me a call on another time. Yeah, there’s attorney review. Again, you have to remember the seller is a corporation in these types of transactions, these foreclosures, it’s not an individual lack of emotion. They’re not going to relate to you. Just be ready for that. This is a big one, the better the deal the more the risk, it’s absolutely true. There’s no question in my mind, don’t be surprised if that happens.
Again, I talked about the inspection contingencies, the repairs, and going back to, after you get that inspection report back and you submit the repairs and the contingencies, there’s still an opportunity to inspect the property, again, after that, to make sure that everything’s been done properly. And then you may even get to walk through it again, right before you purchased the property just to make sure that everything is still in good order. In these particular cases, you don’t get that opportunity. This is another big one, underground fuel and storage tanks. Guys, this is a huge problem in the State of New Jersey right now. And if, Todd Hooker, were here, another one of the partners at this firm, he could talk to you about it for hours because he is big into environmental law.
But there are companies out there that can do a tank sweep. It only takes about an hour, maybe. They have very powerful metal detectors. They walk around on the property, they determine what they find under the ground, whether it may be a pipe, a tank or anything like that. It’s certainly something you want to do, whether you’re buying a foreclose or a pre-foreclosed property, or you’re buying a property in general, it’s something that you really should consider. But in these cases, for example, the Sheriff’s sale, you’re not able to walk that property. You can’t go on that property. It’s the same thing with the bank. It’s likely that you’re not permitted to enter that property. You wouldn’t be able to do that. And if you don’t see a tank outside, above ground, there’s only two other places it could be, it’s either under the ground or in the basement, somewhere in the house, maybe in the garage. You have to be worried about that.
A lot of people that I know that do this type of work that invest in these properties, they look for properties that have natural gas. They look for properties that have either the sewer lines for the town, water lines for the town because then they don’t have to worry about wells. They don’t have to worry about the septic systems. They don’t have to worry about the oil tanks in the ground. These are things you might want to consider if you want to start getting involved in this. Also, it’s a really good idea to have contractors that you can call on, contractors for removing oil tanks, contractors for replacing septic systems, contractors for roofs, so that you can call and say, listen, here’s the deal, here’s what this house has. This is the only information I have on it. What do you think? These are all things that are important.
Also, there’s a lot of opportunity to do your due diligence prior to making a bid at a sheriff’s sale or purchasing a foreclosed property owned by the bank or by the government. And that’s going to the county to see what information they have. That’s going to the municipality to see what information they may have. Making these requests, most of them are all open public records, especially the septic systems. It’s very easy to get those records. Certainly, something you want to consider doing before you go buying one of these properties. Bill.
William Askin:
All right. We’ve talked a lot about the risks involved, I’ll just touch on the opportunities real quick, because I assume everybody here is interested in the opportunities for buying distressed properties. The quick one is instant equity. The goal is after a long search to find a property that you’ll be able to acquire for a very good price at less than fair market value. And with very limited investment be able to turn a profit, whether it’s as a flip or as investment property where you want to buy and hold and become a landlord. Maybe that’s your business model. Some of our clients business model is to buy, fix up and sell. Others just to buy, fix up and hold and rent. If you buy a property at a sheriff’s sale, for instance, for $200,000, you put $20,000 in improvements to it, and you can get 2,500 or $3,000 in rent every month out of it, you’ve made one heck of an investment.
Other opportunities aside from investors and instant equity, a lot of our clients are looking for different ways to improve or upgrade their home these days. Market right now is a very, very, very heavy sellers market. There are many, many, many buyers for each property out there. And the properties that are in good shape and that are well-maintained are selling for top dollar. And sometimes people need to look at other options for distressed properties that with a little tender love and care can become a nice upgrade for them. And again, hopefully, at a bargain. Like I said, they can be great deals for investors, financial gains for flippers. And hopefully, all of us on this call this evening, have the ultimate goal in mind to improve the neighborhoods in and around the county and the towns in which we all live and work. Great goal there.
But there are risks. And Dan covered a lot of the risks already. I mean, you’re thinking about sheriff’s sales, the risks involved in the process is so very, very cumbersome and complex. It’s not for a first time home buyer to go buy a Sheriff’s sale. It’s not for a normal family looking to upgrade or change. You’re risking your 20% down. You’ve got to have that check at the Sheriff’s sale and that’s not easy. I guess you figure out what your max bid is, and you bring 20% of your max bid on a property in the form of a cashier’s check. Then Dan mentioned the balance of the payment. If you’re the winning bid, that balance is due within 30 days. You’ve got to make sure you’ve got your house in order and can do that. If by the way, you don’t close and pay off the balance within 30 days, the sheriff can and will relist it for sheriff’s sale.
And if they sell it for less at the next sale, guess who’s responsible for the difference? The winning bid owner from the first sale. You bid $200,000, you can’t come up with the money and pay it off within 30 days, it goes back to Sheriff’s sale. And perhaps the lienholder, the bank picks up the property for 200 bucks, certainly a possibility. The first winning bid could be liable for the difference. Very, very, very, very risky. Other risks they’re involved their access to the property. Dan mentioned, you can’t get into the property. There could be other liens on the property. I don’t think we’ve covered this, but it’s so important to get a title, a full title search on the property to make sure that there are no other liens on the property, or if there are that you’re willing to absorb them.
Because when you buy a property at a sheriff’s sale, you buy it subject to all the liens, all of them, and that’s can be just a real eye-opener and it can be the end of a successful business. And then finally, with these properties, especially the Sheriff’s sales, you also buy them subject to the tendencies. If there are people living in the property, the sheriff doesn’t kick the people out, you buy them subject to those tendencies, and it becomes your responsibility to get rid of the people. Now, if the tenants are the people that are occupying the property, where the former owners of the property, it’s a pretty simple process to get a rid of removal from a judge, but it takes a few weeks. If the people occupying the property were tenants, they were not the homeowners. Then you have to go to landlord tenant court and have them evicted.
It’s a process that’ll take you at least 60 days. And in this day and age in this market, there is no judge in the State of New Jersey that has the legal authority to evict anyone. It’s been that way for a year now. And there are over 40,000 eviction complaints pending in the Superior court of the State of New Jersey still. Be wary of buying any property with a tenant, whether it’s a Sheriff’s sale, a bank owned property, or even an arm’s length transaction from somebody with a tenant in there, or the process of getting that tenant out is going to be longer than ever. It could take a year or more. Dan, some other risks you want to cover? I don’t know if we’ve covered everything there.
Daniel Benkendorf:
No. Yeah. I think the most important one for me was always the tenant. If someone’s selling a house or a property with tenants in it, in most cases, they wouldn’t be doing that if they weren’t having problems. If they had good tenants in there that were paying them good money, it’s rare that they sell those houses. You have got to think about it. Also you want to check all the appropriate zoning laws. So often, we have people that come to us to purchase properties and we look at the zoning and we look at the permits and they don’t have them. There shouldn’t be two tenants in that property. They have to go through the process of getting that fixed beforehand. But when you buy these properties, you don’t really have that choice.
William Askin:
And we’re going to wrap it up here in a few minutes. If anybody has any questions, you can put them in the chat feature. And we’ll look at some questions here in a few minutes and I’ll wrap it up. Distressed property, hidden hazards. I think we covered most of these deferred maintenance and even destruction of property. It means some clients or closings we’ve dealt with, the sellers get so mad and frustrated with the bank. They intentionally destroy the property. That’s the worst case scenario. Best cases, there’s almost always some deferred maintenance on the property. We covered this, the greater the opportunity, the greater the risk. With the greatest opportunity in my mind is a Sheriff’s sale. That’s where you see, you may see sales, the Sheriff’s sales for 200 bucks. Generally, that’s the bank or the lienholder buying the property back subject to their own lien.
They held the money to themselves. They’re protecting their lien. Short sales, generally, you can’t get in divorces. There’s obviously some distress involved there. It could be good or bad. Estate sales, generally the best target for distressed property acquisitions. Do your homework ahead of time, preparing to buy a distressed property, make sure you get all your finances in order, make sure it’s a good investment and that you have the stomach for this type of an investment. Lineup a team of professionals, a home inspector, a title company, an attorney. If you want to work with a realtor, have a team that does this type of work. I’ve been on the other side of transactions, it’s been clear to me that the attorney on the other side of the transaction does not do this type of work very often.
And we’ve seen a lot of things that get missed. Have a flexible timeline. If you’re selling a house and trying to move your family into a house you’re going to buy. If it’s a distressed property, don’t count on closing on the date in the contract, you have to have flexibility. You have to have an alternative living arrangement in most cases for some interim time between the two closings. And finally, be prepared for a rollercoaster process. I said at the beginning, expect the unexpected. It is a rollercoaster process. Do your due diligence ahead of time with your professionals, get a title history, a title report, inspect the property, if at all possible, research the neighborhood, maybe a neighborhood that’s very stable, very few foreclosures, very few distressed sales. That’s generally a sign of a good investment opportunity. A neighborhood where there are a lot of foreclosures or a lot of distressed properties. Again, generally, is a sign that maybe you ought to think twice about investing in that neighborhood.
Examine recent neighborhood sales, and it’s easier now than ever on websites like realtor.com or Zillow, very easy to examine neighborhood sales. Know how many homes in the area that are in foreclosure and then researched as, Dan, just mentioned the zoning requirements. Ultimately, it is a very complex process, can result in a true bargain. And in most cases, if you work with professionals that do this type of work, it very well likely will be a bargain and a great investment, but can also be a terrible decision when approached carelessly. Even professional investors, if you talk to enough of them and they’ve bought enough houses, they’ll tell you they’ve gotten burned, but they’re willing to take that risk.
They know every once in a while, they’re going to hit a home run and every once in a while, they’re going to strike out. That’s just the reality of these types of transactions. If you’re ready to take the plunge, do your research, speak with a good set of professionals, set a budget, be prepared for the worst and take it one step at a time. Look at that. There’s the highlight. I didn’t know that was there. There’s the attorneys in our firm right now. We all do real estate in different fashion. You can feel free to reach out to any one of us any time. And I don’t know if we have any questions.
Daniel Benkendorf:
We have one from, Debra Willie.
William Askin:
Yeah.
Daniel Benkendorf:
Can you get a loan? And if so, from who or do you have to pay cash? Well, Deb, I think it depends what part of the process you’re in. As far as sheriff’s sales are concerned no, you’re not going to be able to get a mortgage for that. But for pre-foreclosure, you probably can. Additionally, after the bank owns the property, you might be able to get a 203(k) loan for construction purposes and be able to renovate the home. That’s something that a lot of people I know are doing my age. They can’t afford a home, so what they’re doing is they’re waiting till the bank owns the property, and then they’re getting a 203(k) loan. They’re getting into the property and then they’re making the renovations. Certainly, something to consider. But as far as the Sheriff’s sales concerned, you need cash.
William Askin:
Yeah. Another consideration is with deferred maintenance on these properties. Any lender’s going to require an appraisal of the property. There’s a lot of scrutiny with FHA or VA loans where they actually visit the property inside and out. And if there is deferred maintenance, that’s going to impact or affect the amount of loan that the bank would be willing to make. They probably require a much more significant down payment. All right. Anything else?
Daniel Benkendorf:
That’s the last one I see.
William Askin:
Yeah. All right. Well, thanks everyone. We have another seminar that will be coming up in June. I think it’s about business entities and we do recommend to all of our investors that they set up a business before they get into this type of real estate investing. Information about that webinar will be circulated to our mailing list. If you wanted to get on our mailing list, just drop us your email and we’ll get you the information about the seminar series. It does go on year round, and we generally do one of these seminars every other month. The next one is, what is it? April. It’ll be towards the middle or end of June in a couple of months. Thanks everyone. I appreciate your attendance and we’ll hopefully be in touch soon. Good night everyone.