Many people have asked (especially students from my Stanford Continuing Studies class), how to take advantage of great deals by buying properties that are being foreclosed upon by banks.  These brief notes are meant to provide some guidance for those hearty enough to brave the perils of such an adventure.  But be forewarned: the process is cumbersome, the opportunities for financial loss are numerous and large and the pitfalls are many.

In California the foreclosure process is expedited compared to other states.  The lender forecloses using a trust sale process which, basically, requires notices culminating in a sale which takes place in San Mateo and Santa Clara County literally on the county court house steps.  At the lenders discretions, after the homeowner defaults on a loan, the lender notices the homeowner (a Notice of Default – “NOD” - is filed with the county recorder) beginning a 90 day period for redemption.  Subsequently, step 2, the lender files a Notice of Trustee Sale which can be 21 days or more after the 90 day period has run. 

Partial payments, bankruptcy filings, mistakes and many other events often delay the trustee sale.

The tricks for someone who wants to take advantage of the opportunity that might be available are:

1. How do you find properties that will be sold at trustee sale?  There are many sources of information.  Generally, you get what you pay for.  Free sources have less information and often wrong.  No source is perfect.  See below for a list of possible specific sources for local properties.  Otherwise, the internet has a great number of resources.
2. What will you have to pay for the property?:  No one knows the answer to this because it will depend on the bidding by other possible buyers.  However, if you identify a property that is scheduled for sale, you will need to know the trustee administrator, their telephone number and the case number all of which should be available if you find a good source for item (1) above.   The trustee administrator information source often publishes a judgement amount which incorporates the mortgage amount plus unpaid interest, fees, penalties, etc.  Ultimately, at the time the property is sold, the administrator is directed by the investor to indicate an opening bid which acts as a minimum price below which the trustee will retain the property for subsequent sale usually as REO.  This opening bid MAY be (and according to sources who are in this business, these days, usually is) less than the judgement amount.  Sometimes this is not done until a couple of hours or less before the scheduled sale.  Often, a scheduled sale is delayed because not all the details have been resolved in the Trustee’s offices (i.e., how much they are willing to part with it for).
3. What is the property worth?  Of course the answer to this question depends on issues related to the property’s location but also the property’s condition.  Location and comparables would have to be researched.  However, it is very difficult to assess condition.  For one thing, the property may be occupied and the occupant may be the current homeowner or a tenant or, possibly, a squatter if the property had been abandoned.  Furthermore, the condition of the property before and at the moment of the courthouse sale could be different from when the occupant vacates it.  Stories of unhappy tenants or former owners taking fixtures, appliances and even cabinets with them when they move have now become common.  Furthermore, when the successful bidder on a property becomes the owner they may have to deal with evicting a tenant who does not want to move.

On the day of the sale, you will need to check in with the trustee administrator again and find out if the property is still scheduled for sale and any late updates on required redemption value.  If it is, and if you are prepared to buy, you will need to prepare cashier checks to purchase the property.  For example, if the minimum bid for a property is $500,000, you will need a cashier check for, say $500,000 and then bring additional cashier checks in $10,000 increments up to the maximum that you would be willing to pay.  At the courthouse steps, there will be a representative an administrative service who manages the sale.  One of the largest companies that manages these sales is Lender Processing Services (LPS).  The representative will ask for bids and if you are the winning bidder, you will turn over your cashier checks in exchange for a handwritten document that you can take to a title company for recordation.  The representative is required to see your cashier checks before accepting your bid. 

Additional concerns to research are:

1. How to obtain title insurance.
2. Whether there are any other tax or other liens that might run with the property.  For example, if there is an IRS lien on the property that is junior to the mortgage that is being foreclosed, the IRS tax amount will be wiped out BUT the IRS has 120 days to redeem the property so you cannot obtain clear title until after that period has expired.
3. What is the title status of the property in terms of CC&Rs and easements and other matters that could impact value.
4. All the other factors that normally impact value for real estate.

Please be aware that this brief note should not be relied upon but is merely provided as an indication of some of the sources of information for those who wish to pursue trustee sales.  Generally, the process is extremely time consuming and while it may represent a business opportunity it is definitely not something that should be relied upon for a quick benefit.

Additional Resources:

1. I recently spoke with Dick Goodell who can be found most days at the courthouse steps in San Mateo County (400 Counter Center Drive, Redwood City).  The LPS representative indicated that Dick is a wealth of information.  Dick publishes a newsletter every week which has information on new notices of trustee sale and updates on those that were published earlier.  The newsletter attempts to provide much of the documentary information that you would need in order to make an investment of this nature including which loan is being foreclosed upon and the amount of debt outstanding.  Dick indicated that he sells subscriptions to his newsletter and he has an occasional seminar that he teaches for people interested in foreclosures as a form of investment.  See the picture below for information about his class but please realize that I cannot attest to the quality, accuracy or validity of the information from the class.  For Dick’s newsletter, email TheGreenSheet@aol.com.  Subscription rates as of 8/14/09 are: Trial subscription free, Renew for one month $100, Renew for 6 months $550, Renew for 12 months $1,000.  He says to mail checks to Charles Gordon Enterprises, 555 Bryant St. #484, Palo Alto, CA 94301.
2. For information for Santa Clara County you can try www.TheBlueSheet.com
3. For information for generally SF Bay Area you can try www.bluesheetsf.com.
4. As additional sources try “Foreclosure Investing for Dummies” or a How To seminar. 

Please drop me a line with your experiences, I’d love to them.

************************************************************

Don Diltz

Real Estate Broker, Stanford M.B.A.

Coldwell Banker

Top 1%

Check out my new BLOG site: www.MidPenRE.com

Direct: (650) 464 5555

Fax: (877) 225 6859

don@DonDILTZ.com

www.DonDILTZ.com

DRE# 01204965