Can You Buy A Foreclosure in Louisville for $500?

Can a person buy a house in Louisville for $500? I did. It wasn't hard, just a matter of being in the right place at the right time. I show you both sides of it before you decide if I made a good deal.

I was invited to the courthouse steps by a dear investor friend of mine. He had been in a jam and lost a lot of money when he played banker while funding a rehab. He said he just didn't want to take ownership of the house and he wasn't putting a minimum bid on the property at auction.

I showed up with $3000 in my pocket. When they reached the property I was interested in, I hesitated, waiting for the opening bid. I thought this was a good strategy because if I went first, I would have to bid $1500 if anyone bid against me (increments of $500). After a pause, I realized NO ONE was bidding at all. I let the auctioneer get to "going twice" before I spoke up. I bid $500. I still expected some one to bid against me once I got the ball rolling. They didn't.

With a quick count and a slam of the gavel, I bought a 3 bedroom house for $500...Kind of.

There is a law in Kentucky that allows a person to buy back their property if the sold price is less than 2/3rds the appraised value as assessed by the court. In this case, the property was valued at $15,000. Any sale price less than $10,000 would give the owner 1 year to redeem the property. The law prevented the scam Boss Hogg always ran on Uncle Jessie where he missed the last payment so they took the farm. I don't think the Dukes were the inspiration for the law, just a side note. In fact, during the great depression, there were similar laws in the midwest. Good-hearted neighbors would often bid just a nickel for farms in foreclosure, allowing their former owners to purchase them back.

So, I have to acknowledge that however unlikely, the former owner could technically try to redeem this property.

Here's the other side of things: I did my due dilegence and found an unpaid tax bill from 2009. The total on that is nearly $900. The taxes are already due for this year for another $400. These have to be paid, so I'm in for another $1300, bringing the total for $1800.

I first entered the property to find out that it had never been touched by the "investor" who purchased it (funded by my friend). Apparently, an elderly woman lived there and all of her belongings were still in closets with the house in general disarray. I've estimated the trash-out to be $700 including labor and dumpsters. This brings the total to $2500.

If this were a bank foreclosure, the bank would have bid the minimum to circumvent the right of redemption. They don't have to actually pay money, but the debtor is credited with that amount against the total that they owe. The bank then pays an asset management company to come in and change the locks (I didn't get a set of keys and had to break in), clean out the house and dispose of all personal belongings. The place would have been winterized and any current roof leaks would have been tarped. They would have stuck a price on it that they would never get, I would have offered less, they would have countered, I would have waited and done it again 3 months later. That time, if no one else took it, I would have gotten the same house for $3000-$4000 but would not have the redemption period and would have been ahead of schedule in securing and cleaning the property. And I wouldn't have the back taxes.

After the auction, I did a full blown title search that revealed the city placed a lien on the property 3 days before the auction for work done 10 months before. If the bank had bought it, the foreclosure would have cleared it off the title. However, it was up to me to fight city hall (or at least the office of inspections, permits and licenses). One email challenging the lien and they agreed to remove it.

In all, I won't lose money. It was destined to be a good deal. My way took a lot more risks, residual risks, that will stay with me for the next 365 days. I'm never going to recommend the auction to a novice. There are too many variables and ways to get burned. If you are new to the investing game, hook up with a TRUSTED REALTOR that can provide references. You don't want to be someone else's test case.

You make money when you BUY real estate, not when you sell it.

Mark Atteberry, Louisville Real Estate Expert