With the recent housing crisis and rash of foreclosures, many people are interested in buying foreclosed homes for investment. There are several ways to capitalize on the foreclosure process. You can buy homes directly from the owner through a short sale process involving the lender. You can also buy a home directly from the bank after the home has been foreclosed, also known as an REO (Real Estate Owned). This article will focus on buying properties at trustee sale.
In California, a trustee sale is usually held on steps of the courthouse in the county where the foreclosure property is located. In the City and County of San Francisco, trustee sales occur every weekday afternoon at the Van Ness entrance to city hall. These sales are open to the public but very few people actually bid. The auction is called a trustee sale because it is technically the sale of a property under the “power of sale” clause included in a deed of trust that is created and recorded when a loan is made.
The reasons why few people bid are the relatively difficult barriers to entry. First, all bidders at a trustee sales must produce cash or cashier’s checks for the entire amount. Second, no warranty of title is given for any property. Third, bidders have no legal right to inspect a property prior to bidding.
The first requirement that buyers must produce cash is an obvious barrier since very few people have financial ability and guts to bid on a property, sight unseen, for cash. There are no refunds and no warranty is given for each property. While a bank or trustee can technically waive the cash requirement, as a matter of practice it is rarely done.
As mentioned before, no warranty of title is given for any property. When a normal purchase of real estate occurs in California, a title company issues a title policy to the new owner. This is usually an ALTA or CLTA (American Land Title Association or California Land Title Association) policy of title insurance which guarantee’s title to the property. In the context of a trustee sale, no such policy is offered by the trustee. This is important because the foreclosing deed of trust may not necessarily cover what a prospective buyer is purchasing. In essence, a prospective buyer must have the special knowledge and skill to conduct their own title search on each property.
Many first-time trustee sale buyers have been devastated to learn they have wasted their money on nothing more than a useless easement, a third or fourth priority lien or a property subject to tax liens more than the property value. This risk is compounded by the savvy regular trustee sale buyers that intentionally bid-up properties to keep newbies out of the game. Further, it is not uncommon for regular particpants at the trustee sale auction to employ shills and chandelier bidding practices. There is a saying on the courthouse steps: “If you don’t know who the sucker is, it’s probably you.”
The fact that buyers have no legal right to inspect a property prior to purchase is the greatest barrier to entry. Many foreclosed properties are vandalized, stripped or simply too dilapidated to be an economically feasible purchase. It is not uncommon for all the wiring and plumbing to be removed from a home by the previous owner for scrap metal. After all, there is little motivation for someone who is being foreclosed on to keep a property in pristine condition.
There are significant risks to buying trustee sales in California. Prospective buyers should do their homework and consider a less risky route such as the short-sale process or an REO purchase.
For more information on the California trustee sale process see:
Maura O’Connor’s Practical Counsel Blog.