Trustee Sales

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

Title Search

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.

Field Research

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 condition.

Whether or not the property is occupied you need pictures, the more detailed the better and if you can take interior pictures, do so.

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.

Internet Research

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.

Profit Analysis

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 to know:

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 instructions.

2) Postponements

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 discretion.

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.

Buy 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.