With $95k liquid the capital math picks my entry point, not my preference

Question

I've spent about four months comparing the three entry points and I keep going in circles, so let me put the actual constraint down. I have roughly $95k liquid and a hard money relationship that will do 80 percent of purchase and 100 percent of rehab on a rehab file, funded in about 10 days.

Auction in my state is cash at the sale, wire same day or next morning. That means my whole $95k covers one purchase at maybe $85k plus fees and I have nothing left for rehab until I refinance out, which the hard money guy says he can do but only after I hold title and he can inspect. So realistically the auction path locks up all my capital for something like 6 weeks minimum.

Pre-foreclosure lets me use financing because I'm buying from the owner in a normal closing, so my $95k could be down payment on two or three deals at once. But my hit rate on outreach is unknown and the data I'd need costs money before I make a dollar.

What I can't figure out is whether the auction discount is actually large enough to justify the capital lockup versus doing more volume at a shallower discount pre-foreclosure. Has anyone framed this in terms of return on capital deployed rather than discount per deal?

Rena Expert · Accepted Answer

Frame it as dollars of margin per dollar of capital per month and the comparison stops being about discount depth.

Auction: your $95k buys one $85k property. Say the discount to as-is value is 25 percent, so you've got maybe $28k of built-in equity on a $113k as-is. Capital is 100 percent tied up for six weeks before the refinance frees any of it, and the total cycle to sale is probably four to five months. Call it $28k gross margin on $95k over five months, before rehab overrun, holding, and selling costs. Take those out honestly and you're often at half that.

Pre-foreclosure: same $95k as three 20 percent down payments plus closing costs on three purchases around $130k each. Discount is shallower, maybe 12 to 15 percent, so $16k to $20k of margin per deal. Three of those running concurrently is $50k of gross margin on the same capital over a similar window, if all three close.

That last clause is where the whole thing lives. Your auction hit rate is knowable, you show up and either win or don't. Your pre-foreclosure hit rate is unknown, and outreach conversion for a solo operator with no track record is usually low enough that the first several months produce marketing spend and no closings. So the volume path has better math and worse variance, and you're comparing a certain small number to an uncertain larger one.

The thing that would actually break your auction plan isn't the lockup. It's the refinance. Your lender said he can refinance you out after inspection. Get that in writing with the specific conditions, because a seasoning requirement or a condition floor on the appraisal will strand your entire $95k in one house for months. Auction buyers who blow up almost always blow up on the exit financing, not the entry price.

Run both models at a zero hit rate for the first 90 days and see which one you can survive.

joe_delgado5 · Answer

The six weeks is optimistic. My last two refinances out of a cash purchase took 38 and 52 days from application, and one of those had an appraiser who wouldn't sign off until the electrical panel was permitted and inspected, which added another three weeks I hadn't planned for. If your model needs the money back at week six, build it at week ten and see if it still works.

luis_carrera · Answer

@kestrel the thing that pushed me toward pre-foreclosure when I was running the same comparison is that you can walk away from a pre-foreclosure deal after you've seen the inside of the house. Auction you're buying blind or near blind. That optionality isn't in either of your margin numbers but it's worth real money, because the deals you don't do are where most of the losses are avoided.

bmoreno23 · Answer

Starting from nothing myself so take it lightly, but the list cost is smaller than I expected when I priced it, somewhere around $80 to $200 a month for the county filing data plus skip tracing per record. That's not the barrier. The barrier is that mailing 500 people and calling the ones who respond is a job, and I don't think most of us count our own hours in these comparisons.

With $95k liquid the capital math picks my entry point, not my preference

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