auction sales

[Leila Moose]

Hi guys

I live in North Cal, been buying properties for a year, recently got interested in auction sales. I am hoping some of you could share some advice on how to buy from auction, (Trustee vs REO, tenant occupied vs vacant, etc)

what research should I do ? whats the best and most economic way to get prelim title report? Is getting the prelim title report going to help me clear out all the concerns regarding liens and second loans? any resources/books/classes that I should sign up for? Million thxs!

L

[Brian Burke]

@Leila Moose welcome to BP! Good to see another Bay Area investor on the site.

Buying at auction is an advanced game. There are all sorts of things that can trip you up, many of which are discussed in the Trustee Sales FAQ.

Your biggest risk is title. Buying on the courthouse steps isn't a purchase transaction as much as it is a legal transaction. You are only buying the legal position that was held by the lender that is foreclosing. In other words, if the foreclosing loan is a line of credit that was recorded after a first mortgage, you still have to pay off the first mortgage if you buy this property at the foreclosure sale. I've lost count of the number of times I've seen someone buy a second lien thinking that they were purchasing clear title. There are other title "gotchas" besides senior liens.

The second largest risk is property condition. Many of the properties are occupied, and you don't get to see the inside, nor obtain inspections, get a pest report, etc. The occupants might have destroyed the inside of the property, or might destroy it after you buy it, before they leave. Just a month ago I got outbid on a house by an inexperienced competitor. A few days after the auction, the occupant filled the house with natural gas, lit a cigarette in an attempt to commit suicide, and blew the house to smithereens! Somehow she survived, the house didn't, and I suspect this may be an end to the buyer's auction buying business.

Title risk can be overcome if you are an expert at interpreting the condition of title and doing a title search. You can pay someone to do it but if they miss something it will be your money lost, not theirs, so be careful about trusting others with title. The practical challenge with paying for this service is that your time frame to obtain the title report is very short, and the list of properties can be long, and to make matters worse most of the properties that you pay to title search don't actually go to auction, they postpone or cancel.

I don't mean to sound like a downer on this business--I've made my living in this business for over 20 years--but I've seen too many people who are unprepared for the risks lose their life savings. And countless others approach the task casually and fail because they don't have the sophisticated systems needed to succeed in a chaotic and risk-laden process. Just be careful, if you aren't buying in significant volume you can't afford to make a mistake that wipes you out.