Buying a House on the Courthouse Steps…Be Careful

Westcoe Realtors, Riverside California…With all of the frenzy that exists today in the bank repo world, and the inherent challenges in purchasing a bank owned property once the lender has completed the foreclosure process, some buyers have thought about trying to purchase the home at the courthouse steps BEFORE the lender takes it back.  This sounds, to the neophyte, like a wonderful idea…but beware…if you ever choose to go this route, you really better know what you are doing, because this process is not for the uneducated nor feint of heart.

What we will provide you here is a generalized outline of the process, but this is by no means a fully descriptive plan to success…only a basic idea of the process.  If there is any advice we could give those of you who may be considering this avenue it would be this…MAKE SURE YOU HAVE SOMEONE HELP YOU WHO KNOWS WHAT THEY ARE DOING.  This is definitely “buyer beware’ territory.

Before the sale.

So…you want to purchase on the courthouse steps.  Now what?

First, you need to find out what homes are in foreclosure, and when is the sale date.  There are two basic ways to find this out.  The first is to plow through the local newspapers to read the Trustees Notice of Sale information that must be published as part of the foreclosure process.  These are lengthy, time consuming, and all encompassing in their geographic area, but it is a place to start.  Somewhere in the very long “legalese” is both the address of the property being foreclosed, the date of the foreclosure, the minimum bid price,  and the Trustee handling the sale.  If the property interests you, you can call the Trustee and get much of the information you need from them.

The second way to get this information (and the quicker way) is to pay for the information from one of the many companies that aggregates this information as a business.  You can check with them, give them a list of the areas you are interested in, and they will give you the information on every property being foreclosed upon in your desired area.  A little web browsing will be necessary, but you will find them.  Just be prepared to pay for their services.

Once you have found a property you are interested in, now you need to do your homework.  How much is the property currently worth, what kind of shape is it in, is it vacant or occupied (this will make a big difference if you wind up buying it), does the lender foreclosing want too much for the home…and the really big one…are there any existing liens besides the existing loans attached to the property?

This last item in bold is important enough to discuss further.  When a lender forecloses on a property, many of the attached liens on the property are wiped out with the foreclosure.  But when an individual buys the property (like you on the courthouse steps) without the protection of title insurance, almost all the liens that may be recorded against the property are now inherited by you, the new owner.  What type of liens could we be talking about?  How about back property taxes, city abatement notices, water district liens, Home Owner Association issues, potentially any IRS liens on the former owner, and many more that are not listed here. 

The bottom line here is that you better be very sure of what comes with the house before you jump in and buy it.  Information can be obtained from a title company (or other companies on the web), but information obtained from a title company on this property is not the same as getting title insurance as in a “normal” sale…and you cannot obtain title insurance because you will not know if you are the buyer of the property until the day of the sale, and then it will be too late to get a policy.  In a normal sale, your title policy protects you from issues such as these…but information simply obtained without paying for a full-blown title policy does not offer you any protection in case the information is wrong.  In other words, a mistake by someone along the way will be your problem, not theirs.

Sale Day

Assuming you have found a property you wish to buy, you will need to show up at the appointed place (typically the steps of the local courthouse, but there are other locations as well) and register with the person who is conducting the auction.  When you register, you will need to show the auctioneer cashiers checks for both the minimum bid on the property you want, and also cashiers checks for additional funds in case you are bidding against someone else for the same property.  Once you have registered, now you wait…and wait…and wait until the property you are bidding on comes up for auction.  Our best suggestion here is to wear comfortable shoes and bring a lawn chair!  Really, we mean it…because there is much boredom to endure before you property comes up for bid.  It can be 3-4 hours until your property comes up for bid.

Also, many of the properties scheduled for auction are cancelled at the last minute, so be sure to check with the Trustee the night before…which still may not be good enough, but it may save you some time.

When the auctioneer is ready, he/she will simply identify the property, ask is there are any bidders, and proceed accordingly.  If there are no bidders, the property will revert to the lender, and the auctioneer will proceed to the next property.

At this point, a small interjection about why no one bids.  Understand that the foreclosing lender has established a minimum bid they will accept on the property…and in most cases, this minimum bid is the amount of the existing liens on the property, coupled with any costs the lender has incurred in getting to this point in the process…including any back payments, fees, etc.  Therefore, given our current real estate market, it is highly likely that the total amount of the liens etc. (the minimum bid) is much higher than the property is worth…and who needs that…so no one bids.  The lender now has yet another repossession, and they will do their thing (which takes forever), and usually the property winds up listed with a real estate broker at some future point in time.

Anyway, if there are bidders, they simply identify their interest in the property (by bidding) and off you go.  The first bidder will offer over the minimum bid (most of the time the increase bidding prices must be at least $100), and any subsequent bidders will continue to raise the price until there is only one left standing.  It is just like a regular action for anything, except you are bidding on a piece of real estate, not art, or furniture, etc.  If all the bidders are only raising their bids by $100 at a time, it can take 30+ minutes to get to the end.  Sometimes someone will simply raise the offer by a thousand or two, but the process will continue until there is only one bidder left standing…and when no one else tops their bid, the property is theirs.

Another interjection here.  If you attend one of these courthouse auctions, be prepared to “wage battle” with some really seasoned people.  Many of these bidders are investors who have done this many times before, and they are quite prepared with exactly the highest price they will pay…as should you be.  Also, there are some individuals on the phone the entire time, placing bids for their investors who are not there.  These people may be real estate agents, or simply people hired to search out “good deals” for an investor as well.  And finally, you will find some people who are purchasing the home to live in, but these are rare, as this procedure takes all cash, and few “regular” buyers have that much cash available to make this happen.  The good news for these “non-investors” is that they will generally be willing to pay more for the home than an investor since their motivation for buying is different.

If you are the successful bidder, the auctioneer will take your cashiers checks for the exact amount (this is why you need all possible denominations to bid in this process), and you will be issued a receipt for your money.  You will also fill out some additional paperwork (not much), and generally within 10-14 days, you will receive a Trustee’s Deed in the mail that identifies you as the new owner of the property in question.

At that point, it’s all up to you.  Whether you are planning on living in this home, fixing it up and selling it, or renting it, it’s all yours in all it’s glory…but a big “beware” here.  Remember when we said to do your due diligence on whether the property is occupied or not?  Well, here’s why.  If the property is still occupied by the now former owner, there are very picky rules on how long they have to vacate the property and what procedures you need to follow…and if the occupant is a tenant, the time frames are even longer.  Check the law in this area before you do something that will come back to haunt you.

In the end, as we said in the beginning, this path is certainly not for everyone.  It is not as easy as it looks, and there are potential pitfalls everywhere…but much like searching for gold in the old days, sometimes you can find some real nuggets if you are patient, do your homework, and most of all….get a little lucky.

Take care, and as always, let us know if there is any real estate issue you would like to see addressed in this blog.