Extreme Deal Hunting, Part 2: Buying at Foreclosure Sales


Henry Chuang

by Henry Chuang on August 15, 2011

in Foreclosure

Last month, I wrote about buying property from bankruptcy estates as a potential way to get a discount on your purchase.  Another way investors are getting large discounts is by buying property at foreclosure sales.  However, while properties can be sold at a huge discount, there are correspondingly high risks associated with foreclosure purchases.  As the saying goes, caveat emptor.

A foreclosure sale (or more accurately, a trustee’s sale) is conducted after a borrower has defaulted on a loan and received a Notice of Default and Notice of Trustee’s Sale.  The Notice of Trustee’s Sale will set the initial date for the auction.  However, more than 80% of scheduled sales are postponed to a later date.  In order to determine the actual date of sale once postponed, you must either have been at the trustee’s sale when the new date was announced or you must contact the trustee for the new date.  Many trustees have phone numbers or websites that provide the new sale dates

If the trustee’s sale is not postponed, then the auctioneer will hold a sale for the property.  In order to bid at the auction you must qualify to bid by demonstrating that you have sufficient cash or cashier’s checks on hand.  If you qualify for the bid and are the successful bidder for the property, congratulations, you are now the proud new owner of the home.

However, buying the property is not the only area of difficulty.  The real problems lie ahead.  As trustee’s sales are usually conducted on properties where the homeowners want to stay in their home, very few homeowners are willing to let investors inspect the home prior to the foreclosure.  In addition, there are numerous problems with the previous owner that can arise.  For example, some homeowners will not move out of their homes unless evicted by the sheriff.  Although unlawful detainer actions proceed much faster than many other types of law suits, usually completed within a month, they can be prolonged by an appeal or by the borrower filing for bankruptcy protection.  Other times, the ex-homeowners may actively destroy the home or merely stop maintaining the property months or even years before the foreclosure sale occurs.  Because trustee’s sales are completed “as-is” with no refunds, you are stuck with the property, even if the home burned down the day before.

If you happen to be lucky enough to purchase a home where the homeowner moved out or is not contesting the foreclosure, there are still risks to assess.  One big problem is that the trustee’s sale only deals with the foreclosing loan and any junior liens.  Any encumbrances that were recorded prior to the foreclosing lender’s loan will remain on the property.  This means, while you thought you bought a property free and clear of any liens, there may actually be a large loan that is still secured against the property.

All that being said, there are many people who make a living buying foreclosed homes and reselling them at a large profit.  If you have nerves of steel and a high tolerance for risk, there are definitely bargains to be had at foreclosure sales.  However, if you do encounter a contentious homeowner or other problems with the property, please contact us so that we can help you manage those problems.

Henry Chuang is an attorney with The Law Office of Peter N. Brewer.  The firm serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California. You can contact us at: 350 Cambridge Avenue, Palo Alto, CA 94306, Ph: 650/327-2900, Fax: 650/327-5959, or on the web at: http://www.brewerfirm.com

 

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{ 4 comments… read them below or add one }

avatar penny auction strategy August 18, 2011 at 12:40 pm

I was talking to a realtor about this once. The properties are definitely sold “as is”. You can’t go back after the sale and complain about drainage, termites, or anything. So do your inspection first.

avatar Kenneth V. August 23, 2011 at 1:05 am

As a home owner it is hard for you to let your things got into the other hands specially if it has sentimental value, but for cases that you loaned your house,then it is our responsibility to pay our debt.

avatar hannamay August 26, 2011 at 1:41 pm

Hmm just inspection first before you make a move like playing chess ..The important rule is “touch move”..try to open your mind first.,,.however its their? responsibility to repay it!..

avatar Henry Chuang August 26, 2011 at 3:50 pm

The problem with inspection first is that it is almost impossible to perform an inspection prior to the foreclosure. Most of the time, the previous owner is still living in the property or there is no one around to give access to the property.

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