Home ownership is a very integral
part of the American dream. However, not everyone is in a position to buy a
home cash. In fact, most homeowners in American often borrow money to buy a
home. Banks are in the business of lending money and mortgages are just one way
they do so. When you borrow money to buy a home, you give a promise to the
lender to pay back the money under certain terms and conditions. The terms
include the loan amount, your down payment, interest rate and the length of
time to pay back the loan. The terms will often include clauses such as due on
sale. For example, if you decide to sell or refinance the home before the loan
is paid off, what you must do to pay off the loan you owe on the property.
The lender expects you to make
payments on time. If you fail to make a payment within 30 days, you will start
to receive calls from the lender wondering why the payment has not been made.
If you continue to default, you most likely will be taken to collections. If 90
days pass and you still have not cured the debt, you will be issued a notice of
default. In fact, such a notice may come your way just after 60 days of being
delinquent. If you still have not cured your debt, you will be issued a notice
of trustee sale. You will have 21 days to cure your delinquency. Failure to do
so will result in your home being auctioned off at the court steps.
Trustee sales offer the savvy
investor a great way to make money in real estate.
The Process. Know Your Tuff
The first thing you need to do is identify the property
or properties you want to buy. Setting your target consists of
1) title research
2) field research
3) Internet research
4) Profit analysis
Trustee sales are not for novices. You make one mistake
and it could be very costly.
A title search allows you to see all the liens on the
property. These consist of mortgages, government liens such as property tax
liens, income tax (IRS) liens, HOA liens, mechanics liens, garbage liens, etc.
You want to make sure you are buying the first liens.
To avoid costly mistakes, you should make sure you align
yourself with a good title company who will help research title for the
properties you are interested in. When you buy the first deed of trust this
wipes out all the secondary deeds of trust and most judgments and liens.
Here are the liens you are responsible for paying after
you consummate the purchase: property taxes, IRS and Federal liens, city and
state liens. You must also take into account that you are responsible for
future taxes and HOA fees, if any, until you sell the subject property.
The second action item you must undertake in the trustee
sale process is field research. You must check the occupancy status. If the
property is occupied then you may have an eviction on your hands. This can be
costly and may involve giving the occupant cash in exchange for keys. If the
property is vacant then make an effort to assess its interior to determine its
Whether or not the property is occupied you need
pictures, the more detailed the better and if you can take interior pictures,
The third most important task you should perform in your
field research is an assessment of the neighborhood for resale strengths and
weaknesses. If possible, talk to neighbors. They know the history of the
subject property and the neighborhood more than anyone else.
If at all possible, forming an alliance with a seasoned
BPO agent can also be helpful.
Use the MlLS - if you have access to it or know an agent
who does to do a CMA to determine the value of the subject property, check
its listing history, as well as pictures posted in the past.
Use google maps to tour the property virtually, in case
you are unable to tour the neighborhood personally. Study aerial views to
ascertain the strengths and weaknesses of the area. Use street views to look at
the streets and neighborhood.
Last but not least, use the county assessor's office
online/offline to verify permits for additions and accurate square footage.
Also use the site to verify tax delinquencies if your title searches do not do
this for you.
This is perhaps the most critical aspect of the whole
process and consists of six key steps:
A) Review the opening bid
B) Compare it to the resale value
C) If you determine there's enough meat, then go ahead
and order a title search
D) If the title is clean then drive the target property
E) Estimate refurbishment and eviction costs
F) If your analysis ends up with your profit threshold,
go ahead and establish a maximum bid (i.e. your cap)
Now you are ready to join the fray. Here is what you need
1) Qualifying to Bid
Make cashier checks payable to the account holder. If you
are the account holder, make the check out to yourself. Show your cashier check
to the caller/auctioneer before the trustee sale. If you are bidding on behalf
of someone else then you must have a power of attorney with vesting
You may have worked very hard and carried out all the
steps outlined above only to show up at a trustee sale auction and be told that
the subject property is not on the list for that day. This could happen because
the homeowner has filed bankruptcy. There may be a mutual agreement between the
lender and the delinquent borrower. The
postponement may happen at the beneficiary's request or at the trustee's
3) Estimated Bid, Opening Bid, Drop Bid
The estimated bid is derived from the total debt owed to
the foreclosing lender. The opening bid is a final indicator that the property
is slated for auction. An opening bid may be higher or lower than the estimated
bid, but it is more common for the opening bid to be lower than the estimated
bid. Lenders do this in order to encourage a bidding war. Look for the opening
bid on the trustee's website or some other popular posting websites like
foreclosureradar.com within 424 hours of the sale. A drop bid happens when an
opening bid is released within an hour of the property going to auction and the
opening bid is substantially lower than the estimated bid. With banks inundated
with foreclosures, the last thing the they want is take back even more
properties. Drop bids offer them the opportunity to offload the properties at
the auction to investors and free up capital for immediate use.
If you are the winning bidder, you sign the cashier
check, submit vesting instructions, get a trustee sale receipt and a trustee
deed. You are now the official owner of the foreclosed property.
With Little of Your Money
Most people have the misconception
that you need a lot of money to buy real estate, especially at the trustee
sale. Though you need to buy these properties cash, if you happen to be in a
state like California, all the money does not need to be your money. You have
people who will lend you money on the spot for properties you identify. They
may be able to lend you a larger portion of the money, even as high as 65% of
the purchase price. You come up with 35%.
Depending on the skills of the
person you work with, you may eventually be able to buy properties at a great
discount. A few of these purchases will then enable you to build up your vault
and eventually have no need to borrow money. I know of people who have been in
the trade for over 30 years. Day in day out you can find them at the county
court steps with their assistants and next of kin. Some of these people have
become millionaires over the years, and so can you.
Once you become very good at the
trade, you may become a lender on the spot and have others do the work for you.
The beauty about trustee sales is
that there are fewer players and in some cases, you may be the only player for
that one particular property. You may be able to pick it up at a great discount
and therefore be able to sell it and net a substantial profit.
Watch out for the pitfalls, too.