Moses Kagan on Real Estate

Buying from foreclosure auctions

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Is it worth getting involved in buying properties through county foreclosure auctions? The short answer is “maybe”.

First, some background: When a borrower defaults on a loan in CA (usually by failing to pay), the trustee who holds title to the property in question is directed by the lender to hold a trustee’s auction. At the auction, anyone can bid on the property, so long as he/she is prepared to pay cash on the spot with no possibility of backing out.

The twist is that the bank which is owed the money can bid the unpaid loan balance in lieu of cash. So, for example: If a borrower borrows $400k as a mortgage against a property, pays back $25k and then defaults, the bank could bid $375k at the auction without coming up with any more cash.

If you wanted to buy the property at the auction, your bid would most likely have to exceed $375k. If you bid $376k and you’re the highest bidder, the bank gets $375k of your money (re-paying the loan), the former home owner receives $1,000 of your money, and you get the property.

If the highest bid is $374k, the bank has two choices. It can bid the full $375k, take the property and then sell it through a broker in a regular REO sale (this is where REO properties on the MLS come from). Or it can opt to accept the $374k, taking a loss but getting rid of the property instantly (and thereby avoiding dealing with the hassels of owning and managing the asset, paying broker commissions to sell it, etc.).

Depending on the specific asset, the bank in question, and the other bidders at the auction, it is definitely possible to “steal” properties at auction. This usually happens when a bidder has more information about a specific property than the bank or the other bidders do (for example, the smart guy may know the property is actually in good shape, unlike 99% of other REOs).

Having been to the auctions a few times but never succeeded in actually buying anything, here’s are some thoughts / advice for anyone considering doing so:

  1. You need to bring cashier’s checks for the whole amount you want to bid. So you need to get a bunch of $25,000 checks, some $5,000 checks, etc. all the way to $100 – basically, what you need to be able to bid, for example $236,600 and pay on the spot;
  2. You need to research in advance. There’s no contingency period, so you need to be damn sure you actually want the property. You want to make sure you’ve looked at a preliminary title report (to see if there are easements or other problems with title which will not be wiped away when you buy). You also want to climb all over the property in advance so that you have a sense for its physical condition.
  3. The winning bidder gets a trustee’s deed, which doesn’t give you some of the protections you normally get when you buy. Caveat emptor.
  4. Making things even more annoying, the auctions tend to get postponed, pulled, etc. So you might do a lot of research on a property, show up to the auction, and find that the bank has pulled it
You can waste a lot of time trying to buy at these things. And you can over-pay for screwed up properties. On the other hand, if you are willing to spend a few weeks observing and also getting comfortable with values for properties in specific areas, I have no doubt you can make money doing this. It’s just a risky, time-consuming, pain-in-the-ass way to make money.

Written by mjkagan

05/21/2012 at 4:51 am

Posted in Buying, How to

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