Caveat emptor
Buying directly at the
legal foreclosure sale is a risky and dangerous business. It is strictly "caveat
emptor, let the buyer beware."
Where & when?
Foreclosed
properties are sold at a public auction under the direction of the
court in the county where the property is located. In many states the
Sheriff's sale is literally held on the court house steps, usually
at 9am. In other states a court appointed trustee handles the sale.
Sales are often announced 4 to 6 weeks in advance. In some states,
information on the sale may be available 6 months to a year before
the event. This gives you ample time to research the property, the
particulars of the loan and any other factors that may effect the property's
value to you.
Buying property at the auction can be the
most financially rewarding way to buy investment properties.
However it can also be the most financially disastrous
for the uneducated or unwary investor. When a property is being publicly
auctioned to the highest bidder, the process is moving very quickly and it is
easy to get caught up in the competitive sprit or miss something. Too often properties
are purchased for much more than their value because of "auction fever," the
tendency to get caught up in the heat of the moment and over-bid. A "whoops" won't
cut it. You will pay up or lose your deposit.
Going to the
Auction
It
is prudent to prepare for the auction by phoning ahead to make certain that the
sale, or your target property, hasn't been postponed. Foreclosure
sales are commonly postponed for many valid reasons, some because owners are
trying to save the property, others because the lender needs more time for proper
processing.
You
will need to keep track of the properties you are interested in. They
are tracked using a Trustee Sale Number (TSN). The number is generated
when a property enters foreclosure and is used from then on by the
interested parties. Whenever you want information regarding a foreclosure
property you will need the TSN.
. Typically trustees who process a foreclosure
limit the information they will give out regarding a property to: the date, time
and location of a sale, and perhaps a bid if it is available, or a postponement
date and reason if the sale postpones.
Bids are usually available shortly before the
sale, this can range from the day before up to the actual time of sale. When
a bid is available, there is a good probability the property will be going to
sale instead of being postponed. Be aware that published bid amounts may differ
from the actual bid amount at the sale. Sometimes they will be slightly higher
to cover actual costs and sometimes the lender will reduce a bid making a property
an attractive purchase.
Make sure
you understand all the requirements for purchasing properties,
including: amount of deposit needed, when the balance is due and
what form of final payment is required.
Who's the boss?
Posting companies often
handle the publication and posting of foreclosure notices. The county
sheriff, a trustee or a posting company will act as the auctioneer at
the sale site, which in many states in on the county courthouse steps.
The day's agenda usually starts with the announcement of cancellations,
then postponements, followed by properties that will be sold. Again,
everything will be referenced by the TSN.
Arrive at the auction early. Register yourself
as a bidder if necessary, but do not announce your intentions to anyone there. The
auctioneer may ask if anyone wants to qualify, either before all properties are
announced or before individual properties are announced. To qualify, you will
need to show the auctioneer cash or cashier's checks sufficient to cover any
bids you will be making. The large cash outlay required
to buy at auction is the biggest deterrent for most buyers. Certified checks
and sometimes cash for at least 10% of the purchase price will likely be required
to bid on properties.
Some states allow a successful bidder 30 to 90
days to pay the balance of their purchase price. In some other states it's a
matter of a few days days or even, as in Florida, a few hours and in some others,
immediately. Remember, the bidder must must pay for the property in full by the
proscribed time or risk losing their cash deposit.
Some Trustees
require that checks be made out to them. However, you can usually have a cashier's
check made payable to yourself. If you are a successful bidder, you can endorse
them payable to the Trustee. Most auction investors have large checks to cover
most of the expected bid, with smaller checks to cover possible increases in
the bidding.
You really do not want to have one large check
to cover every possible contingency because once you sign your check over, you
will not have the surplus funds available for a while. When bidding and qualifying,
keep in mind that anyone around you is a prospective competitive bidder. If you
allow them to know the maximum amount you can bid to, you have weakened your
position. The same holds true for notes or numbers you have written down to refer
to during the bidding. Keep your cards covered and your plans to yourself.
In contrast to most
states, where the trustee is usually the hired gun of the lender,
Colorado has an impartial, accountable, "public trustee" appointed
by the Governor for each county, who handles power of sale foreclosures
on request. The public trustee may take only the compensation set
by law.
Bidding
The auctioneer will ask
if anyone would like to bid when they start auctioning a property. Really
pay attention because properties are sold very quickly, sometimes within
minutes. Listen carefully for your objective to be announced. If
it is a property you are interested in, your bid should be a dollar over
the opening bid; which will be the final judgment
amount.
The property will not sell until
the third call and some bidders like to wait and see if anyone else
is showing an interest. Wait to see if other bidders are going to jump
in, if no one does, put in your "dollar over" bid just before the third
call. If other bidders are interested in the same property, bids will
usually go up in hundred dollar increments.
The highest you should ever bid is your pre-determined
maximum that would still guarantee profitability. Do not exceed that number.
Who bids?
A
lawyer will usually attend to bid on the property for the lender. There
are also likely to be other investors, onlookers and even just curiosity
seekers observing the proceedings; perhaps for future participation.
Occasionally, a junior lien holder will appear trying to salvage what
they can from their claim. The property owner may also show up to bid
on their own property. However, that is pretty rare.
You too may, and perhaps should, go to the sales
and observe the process as often as you can before going to actually bid on a
property. It's certainly a good idea to know as much as you can about the property
and the auction process to help prevent mistakes at an important moment.
Do your homework.
Failure
to research a property correctly leads to all kinds of problems, not
the least of which is paying to much. However, other serious dangers
loom as well.
Important concerns must always include other liens
or judgments. If you are the successful bidder, you replace the property owner's
position in the property. Any problems clouding the title become your problems
the moment you are the successful bidder. Those will include other mortgages,
mechanics liens (unpaid building trades contractors) and taxes.
The first lien holder can nullify all other liens
if he's the successful bidder. Junior lien holders must buy out senior lien positions
and be high bidder to get clear title to the property.
The first mortgage holder may not be the only
one foreclosing on a property. If a third lien holder forecloses, the process
will not wipe out the first and second lien holders. Buying that position at
the auction means you will have to buy the other liens as well.
The only way to be sure which mortgage holder
is foreclosing, and what other liens affect the property, is with a full title
search. The cost of the search thorough a title insurance company is likely to
be a few hundred dollars. However, you may be able to do it yourself with help
from a friendly clerk at the county register's office. The potential loss from
buying a property without knowing about every lien that exists is staggering.
There
may be land use problems with a property. Issues like zoning or
environmental problems could seriously effect value; although such
problems are unlikely for residential property unless it is located
on or near commercial or industrial property.
Who wins?
About
80% of the time the successful bidder is the lender who holds the first
mortgage. Upon payment, the successful bidder receives a deed, the
type of which depends on who is conducting the sale and state law.
If you are attending a Sheriff's sale you will likely get a Sheriff's
Deed. The deed makes you the new owner of the property, subject
to unpaid taxes and superior liens, if any. Record it immediately and
buy liability and causality insurance even faster.
There usually isn't much competition for properties
sold at auction. In fact, there are occasions when no one shows up to bid, perhaps
due to a personal emergency or even incompetence. As you can imagine, that will
create wonderful opportunities for the diligent investor. However, when the lender's
representative fails to appear or bid on the property, it may be a clue that
there are some serious problems with the property that you may have missed. If
the lender doesn't want it, are you really sure that you do?
Why buy?
The
biggest advantage to buying properties at an auction sale is the chance
for a really great deal and the high profits that would result. If
there is a large difference between the market value of a property
and its final judgment amount at auction, you can really win big. That
happens often enough for us to devote this much effort to teaching
you how to participate.
However, as we have learned earlier, when
an owner has a significant amount of equity, someone like me or you should have,
and probably would have, bought the property prior to the foreclosure.
Ten steps to auction buying success:
-
Locate loans
in default by reading legal notices or
the use of other tools that can be learned on LandlordAmerica.
-
Research properties
prior to the sale date. Contact
the local assessor and ask for a copy of the assessor's work
sheet for preliminary information on each property. Check with
the municipal building inspection department for zoning issues,
any complaints or other records.
-
Do a title search to learn
about possible clouds on title that may be superior to that of
the foreclosing lender. Verify legal descriptions with the common
property description.
-
Check property tax amounts
and status.
-
Concentrate on
only realistic opportunities by
evaluating and narrowing down which selections
to pursue.
-
Determine the
market value of the property, fix-up costs, potential rent
and/or sales price and profits
-
Determine your
highest bid price and stick to
it
-
Attend the
auction and participate only if the price is right.
-
Record your deed, buy
insurance and file a legal action to quiet title
and perfect the deed, if necessary.
-
Repair and
resell or rent as quickly as possible.
When you win
If you are the successful
bidder, you will need to sign checks over to the Sheriff or Trustee.
After all sales are complete, the auctioneer will write you a receipt,
ask how title is to be held and you'll be done. The Trustee can record
the Sheriff or Trustee's Deed for you or they will send you the deed
along with any excess funds from your checks.
Sales are sometimes invalidated fpr legal reasons.
When that happens, you will receive all of your funds back. Don't expect to have
everything done until a couple of weeks after the sale.
Who's home?
If
the property is vacant when you buy it, you should change locks and
see to utilities immediately. If not, you will likely have to treat
the occupants as tenants under the state landlord tenant law, whether
or not they have a rental agreement or have ever paid rent.
If you are going to have your first experience
at being a landlord, you should take - or at east review - our CSU
Evictions e-course so that you understand and anticipate the time and costs
involved. Tenants will also interfere with plans to repair and quickly rent or
sell the property for a profit.
If you intend to keep the property as a rental,
it is our experience that it is always be best to send notice a to terminate
the tenancy of the existing occupants immediately, even if you might eventually
allow them to stay. If, after an application and screening process, you find
that they meet your requirements, create a new tenancy with a written lease laying
out all of your conditions and requirements for maintenance, repair and the access
you will need for upgrading the property and enhancing your investment.
The good: Investors can sometimes buy
well below market values. That leaves some
room for error and still produces an excellent return on investment.
The bad: There is no financing. You
will need access to lots of cash. Foreclosure auctions are
frequently postponed, wasting your time and effort. It is sometimes
impossiblee to inspect the property unless
it can be arranged with the occupant, if any, or the lender. You
should always have a title search performed; which
can be an unrecoverable expense if your purchase
is unsuccessful.. A Sheriff's deed must be
legally perfected to remove any clouds on the title so that the property
can be resold with the customary Warranty Deed..
The ugly: Foreclosure
will not eliminate property taxes or senior liens, and the purchaser
will be obligated to those debts. Additionally, an IRS lien can
remain on the property for up to 120 days after a foreclosure sale. The
property's physical condition is not well known, and generally an interior
inspection of the property is not possible before the auction. In addition,
foreclosure sales are exempt from state disclosure laws.
