Ernest Kessler makes his living by blinking and nodding. That's how he places bids for houses sold at foreclosure auctions. If he is successful, he gets a house at a below-market price that he later sells for a profit.
At one recent auction, Kessler bought a detached single-family home with a swimming pool in Waldorf for $63,000. He sold it 11 days later for $80,000.
Kessler is not the only person earning a livelihood this way. He is part of a specialized group of Washington area real estate investors who work full-time at buying and selling foreclosed properties. Every day, these investors, who by some estimates do not number more than a few dozen in the Washington area, gather in front of local courthouses to bid on foreclosed properties, including some in even the region's poshest neighborhoods.
These investors spend hours driving to foreclosure auctions each day in the hope of buying a house at a bargain price that they can turn around and sell for substantially more. Some investors buy two or three houses a week in this manner. It's a lucrative business where the payoffs can be as high as 20 percent above what an investor pays for a property, even after expenses.
But it's also a risky business in which investors can lose tens of thousands of dollars in short order if they are unable to unload their purchases. Despite an increasing number of well-kept houses that have been put on the auction block, bidders on such properties always face the possibility that the house they buy -- often sight unseen and in "as is" condition during four minutes of hectic bidding -- needs major repairs.
Consequently, the fallout rate for foreclosure investors, who usually start out as part-time investors before going full-time, is high. Many quit after three months. But some, like Kessler, who has been bidding on foreclosed homes for six years and who teaches seminars on the subject, and Jeffery Sedgwick, who has been buying such properties for 2 1/2 years, said they have been able to make a living at it.
"It's not an easy living. It takes a lot of work. You have a lot of research to do to make sure you don't run into unforeseen events that can cost you money," said Sedgwick, who estimates that he spends 14 hours a day, seven days a week buying and selling foreclosed properties.
A significant portion of the time is spent looking for suitable foreclosure sales. Kessler said that investors typically look for houses in which the owners have built up at least 20 percent equity. "You need that margin to make a profit after carrying, resale and fix-up costs," he said.
Such properties, however, are not always easy to find, according to John Burson, an attorney who represents lenders. "It sounds like picking money off a tree. But as a practical matter, it almost never happens. The vast majority of foreclosures are VA and FHA loans originated within the last two years. People put little down when they bought the house and have no equity in the property," Burson said.
Consequently, Sedgwick said he must spend as many as 20 hours a week combing through newspaper legal notices and court records looking for older properties in which the owners most likely have built up equity. Kessler, who also heads a company called Foreclosure Research of America in Gaithersburg, has nine part-time helpers who sift through 45 newspapers and search court records for the same information, which he also compiles into a list he publishes weekly.
And when they do find foreclosure sales worth attending, investors still have no guarantee that they'll be able to buy -- or even bid on -- a property they have spent time searching for. Sedgwick, who spends four to six hours a day in his car driving to foreclosure auctions and past the houses listed for sale, said that many times auctions are canceled because owners file for bankruptcy at the last minute, which postpones the sale.
Byron Huffman, an attorney who holds 20 foreclosure sales a month, said that from half to three-fourths of the time, "people either declare bankruptcy or redeem their mortgage." Kessler said he recently drove for five hours to go to three auctions, only to find they had been canceled.
The competition for property also can be intense. Burson, whose law firm handles more than 100 foreclosure auctions a month, said he sees 50 people at a foreclosure auction in Virginia "no matter what the condition of the property," although many of them are part-time investors and home buyers seeking to get a good deal on a house. "There is so much interest in foreclosed properties that people show up just to bid. They drive the prices up," he said.
In Maryland and the District, where the paperwork involving foreclosure sales is more complex, auctions draw fewer bidders. "Anywhere from zero to five show up," Kessler said, noting that some people attend just to observe.
Even if they successfully bid for a property, foreclosure investors still can easily lose on a deal. Houses bought at foreclosure come with no guarantees as to their condition. Although bidders typically drive by a house to check the exterior for damage, they usually can't get access to inspect the inside before they bid at auction. Also, most people who are losing their homes "don't care for the property," said Bobby Rock, another investor who buys foreclosed houses. Many often require thousands of dollars for installation of new carpets, repainting and other cosmetic repairs.
But some bidders "get a surprise" after they buy, Kessler said. "Many times you can bid low on a property and walk in and discover it's in great condition. But other times, you bid low and find the house needs a great deal of work," he said.
Sedgwick said he once found out only 30 minutes before the start of an auction that a house he was planning to bid on had a first floor "that sagged when anybody of weight walked on it" and would have needed extensive structural work to repair the damage Sedgwick attributed to termites. "I had a friend who was able to get inside to check out the house while I was going to the auction. He managed to get to the courthouse right before the auction to warn me. I had $5,000 in a deposit riding on the deal and I would have had to take the property 'as is' if I had bought it," Sedgwick said.
"The high bidder who bought it paid $71,000. Fixed up, the house was worth around $100,000, but the floor would have cost at least $25,000 to fix. That would have eaten up the profits right there. Then he would have had carrying costs and investment costs. Everything he did from that point would have been to minimize his losses," Sedgwick said.
Often, successful bidders at foreclosure auctions must be ready to make a 10 percent down payment in cash or certified check, although sometimes they can put down as little as $500 to buy a property.
Also, foreclosure sales in Maryland and Virginia are not final until approved by a court. Until a judge ratifies the sale, an owner can sue to overturn a sale if he can prove the sale was not handled properly and he did not receive adequate legal notice. That process could take as long as 30 to 45 days after an auction in Maryland. But many insurance companies won't insure a property until a buyer has full ownership rights, Sedgwick said. As a result, investors take a chance that their property could be damaged or vandalized while they are waiting to settle.
That's why numerous foreclosure investors have partners to share the risks. Others, like Bill Chesley, president of W.F. Chesley Real Estate Inc. in Lanham, try to reduce their financial exposure by buying foreclosed property directly from the owners before it goes on the auction block. "You have time to make sure of what you're buying that way," Chesley said. He said that while he has generally been successful in his foreclosure purchases and resales, he nonetheless has lost $10,000 to $20,000 on individual deals that turned sour.
Whatever the pitfalls, successful investors believe the gains offset the risks. Kessler, for instance, was able to pocket $5,700 from the sale of the Waldorf house after splitting the $17,000 profit with two silent partners. Rock, a former house painter, said he has netted $30,000 in profit so far from two houses he bought at foreclosure auctions and resold since he began buying foreclosed properties six months ago.
Kessler said most investors net between $5,000 and $10,000 after paying to fix up a house and hiring a real estate broker to sell the property. Although he declined to disclose his overall income, he said he has earned a "substantial living" from buying and selling foreclosed houses.
"It's not particularly difficult to make money in this business," Kessler said. "It just takes a lot of persistence and doing your homework."