How to Buy at Trustee Auctions

Sean O'Toole has purchased upward of 150 investment homes at courthouse auctions, or trustee auctions. They aren't for the fainthearted, he says.

"These take a more sophisticated effort (than the larger auctions)," says O'Toole, founder and chief executive of ForeclosureRadar.com, a foreclosure service for real-estate professionals. "They are a different animal. Five guys standing around a courthouse with a million dollars in checks in their pockets -- that can be bizarre and a little intimidating."

The "notice of trustee sale," sometimes called a "sheriff's sale," will be published in a newspaper of record once a week for at least three weeks prior to the sale date. You need to do your homework before attending, O'Toole says.
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Individual buyers, though, may need to act on trustee auctions if California foreclosures portend future price trends. According to data from ForeclosureRadar, in March, foreclosure sales in California increased 92.3% from March 2009 and were up 24.2% from February. However, of those sales, prices investors paid were discounted an average of 15.8%, half of what the discount average was a year earlier.

1. A title search is your best chance for success. Many buyers have left the courthouse steps after unwittingly buying only one of two mortgages when they thought they were getting a clear title. "If you listen carefully, you'll hear something to the effect that, 'This property is sold subject to all liens and encumbrances,'" O'Toole says. First-time buyers won't always know what liens and encumbrances are, he says. Some buyers will also find themselves obligated for past-due taxes, IRS liens or liens imposed by unpaid contractors. They may even be responsible for evicting the occupant. "The title search is a must," O'Toole says.

2. No open house? Trustee auction homes seldom have open houses because the previous owner still occupies the place, O'Toole says. So how do you know what's inside? You can always look in windows when no one is around or talk with neighbors. "But there is also a rule of thumb that the inside will look like the outside," he says. "If there are weeds and trash in the yard, the inside will usually be a mess. If the outside is neat and tidy, so will be the inside."

3. Bring your life savings. No fooling, you'll need the full sum. "The fact that you've got to pay in full at trustee auctions excludes most people from the process," O'Toole says. Bring checks filled out in the trustee's name or cashier's checks that you can sign over. Some states, including Arizona, require only a small earnest-money deposit but with a relatively short follow-up period to pay in full.

4. Research the neighborhood. If you're buying an auction home to resell, shy away from one in an area with an overabundance of foreclosures. The values are likely still dropping there.
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5. Know local laws. When a trustee-sale property is bought, there is only a short period -- usually 10 to 15 days -- for any lien holders to claim their stakes before the house officially changes hands. So cross your fingers. Fortunately, most claim action by lien holders happens before a trustee sale. However, some holders have filed suits for damages against the old lender and even the new buyer after those 10 to 15 days, alleging proper notice of the sale was not given.

6. Consider 'munis.' Auctions held by municipalities can be a less complicated option than trustee auctions. Typically, such homes are sold only to cover back taxes and have fewer encumbrances. smclindon