Looks like a great deal .....should I bid ?

[Gaurav S.]

I found this property on Auction.com which has a stated starting bid of $367k. The unpaid balance on the loan to the lender is the same 367k. But the going price for a SFH in this neighborhood is around $600k.Since this is a trustee sale I will have to go to courthouse with cashiers check.

I asked my realtor to do a title search and it came out clean with no second mortgage,no lis pendens,no tax liens,no hoa liens.The loan holder is Bank of America.

The realtor said that its illegal for the bank to ask for more that what is owed and any bid higher than 367k would go to seller.

My question is,
1) is this worth pursuing ? I am first time homebuyer with no prior experience. I don't have that amount in cash but I can borrow to just make it there. Is it worth the hassle ?
2) How do I see the property ? What tactics do you use to judge the condition of property without seeing insides of it ? Can I go to the owner and offer him some money to let me see the property ?
3) Do I have to pay all cash on the same day or do I get sometime to pay cash if I win the bid ? Do I have to carry cashiers check for the full amount I am willing to bid to the court house ?

Thanks.

[Eric M.]

The "going price" for the area is irrelevant. You need to actually get good comps and get as much info about that exact property as you can.
It could be gutted, have mold, or be partially burned down for all you know. If could be a vacant lot.

My number one rule when buying at auction is I don't buy it if I haven't seen it in person myself. Lots of times I can't see the inside, but I at least drive by.

[Scott W.]

i have notice a lot of the properties on auction.com have people still living in it. i agree - offer them $ (or ask if you can look at it, if they balk - offer them cash - they'll take it).

if they're living there, you will have to get them out- cash for keys should work - they're hurting for $ as it is.

i believe you put 10% down & the rest 24 hours later but not sure.

[Gaurav S.]

Yes there is someone living inside it. The property looks in ok shape from outside. Will definitely need some work but can't really tell until seen from inside.

I will try offering cash to the owner to let me see the insides.

[Steve Babiak]

Originally posted by Eric Michaels:

...
It could be gutted, have mold, or be partially burned down for all you know. If could be a vacant lot.

My number one rule when buying at auction is I don't buy it if I haven't seen it in person myself. Lots of times I can't see the inside, but I at least drive by.

Eric Michaels - good stuff you posted there.

One veteran investor related a story to me about how another investor was willing to sell him a property for less than what had just been paid for it at sheriff sale by that other investor. Turns out that the back side of the house had lost its facing (similar to what the news is showing on video with a place in NYC after the storm named Sandy). And this investor did drive by and looked at it first - but didn't see the back of it!

[Wayne Brooks]

I'm confused, or someone is. Auction.com is NOT a foreclosure/trustee sale. Auction.com auctions off house for banks, after they have gotten them back at foreclosure. Some auction.com auctions give you clear title, some offer QC deeds only. I'm a realtor and fairly adept at searching title, since I personally bid at foreclosure auctions-but a title search needs to come from a title search co., not your realtor. There may or may not be an opportunity to obtain financing after the auction, 30-45 days. In my area auction.com is usually a waste of time. The "starting bid" has no relation to the reserve, which is not disclosed. Sometimes on their "first look" auctions you will see properties that are still in foreclosure, and have a scheduled foreclosure sale/auction date. If the property goes to a third party, the auction.com sale is off. If the bank takes it back, then the auction.com auction proceeds.

[Gaurav S.]

Sorry if I wasn't very clear. On auction.com this property is listed as trustee sale. It also states that the only way to bid on it is to go to the courthouse where someone will verify my cashiers check and I will then get a chance to bid on it. Also my realtor got the title searched by a title search company only.

If the total bids are less than the amount owed to the bank it could go to the bank.

Currently the starting bid is set to the total amount of debt the bank is owed(= 360k). Since the recent comps on the same block have recently sold for around 600k I am wondering why the owner just didnt sell the home outright and pay the bank instead of going through foreclosure.

There has to be something wrong here. It doesn't add up. But the title search came out clean.

[Wayne Brooks]

Okay, I've never seen auction.com be involved in a trustee/courthouse foreclosure process. Are you sure it is THE "auction.com", or some similar site? Also you're right, it makes no sense if the owner has $200k equity-something is amiss.

[Gaurav S.]

Yes it is auction.com. If you go to auction.com and filter results by " Foreclosure/Trustee Sale Homes" you will get results which are trustee sale homes. For example

http://www.auction.com/California/residential-auction-asset/1371717-3067-4804-MASCOT-ST-LOS-ANGELES-CA-90019-E5019

Has anyone ever seen auctioning of a home with owner having large equity in the property ? If yes, what was the catch ?

[Account Closed]

That house has been in foreclosure for 4 years, with previously scheduled and cancelled trustee's sale dates. It probably won't go to sale on the scheduled date. They could be working the bank in a court case, it could be they filed BK.....lots of ways to stay in a house these days.

As for equity, you may want to look again. There are 11 comp (sold) since July, 3 of which were in October, for houses within 1/2 mile of that house. They ranged from $215K to $415K. Some were finished rehabs. I'd say there is no equity.

[Brian Burke]

Yes, THE auction.com is now doing trustee's sales. Allow me to share over 20 years and over 500 purchases at trustee's sales to help you decide whether or not there is "a catch".

Just because auction.com shows an opening bid does not mean that it will actually be auctioned off on the date you think it will be. about 2/3 of the houses with opening bids at auction.com trustee's sales postpone. I think they use this as a tactic to attract more bidders to the party so that once the list is whittled down to the few that actually go to sale, there will be more bidders to fight over the scraps.

It is not unusual for properties that actually have equity to be sold at foreclosure auctions. Up until 2006 this was the case about 90% of the time. Since then, it happens only about 2% of the time, but it still happens.

For me as a professional investor this deal is probably worth pursuing. For you as a first time home buyer, I would advise you to run the other way. There are many reasons for this, allow me to explain.

1. Trustee's sales are not a PURCHASE transaction. They are a LEGAL transaction where the high bidder assumes whatever ownership rights possessed by the beneficiary of the loan being sold. That means that if the loan is in second position, you own the house with the first mortgage still remaining. Yes, I hear you when you say there was a title search, but do you want to bet $367K that that there were no errors in that search?

2. This is an as-is, where-is transaction. There are no legal protections to the buyer as you would see in a purchase transaction.

3. The trustee will not even warrant that the address they put on the notice of trustee's sale is the correct address. Yes, I've seen it happen more times than I can count where the address was wrong, and if you don't know how to figure out if it is right or not you could buy a different house than you think.

4. You can't afford to take the loss. If the house burns down 5 minutes before the auction and you don't find out until after you've signed over your checks, you have a big problem. If you have bad title, owners throughly destroy the house, the house has hidden major defects, has had all of the copper wiring and plumbing stolen by thieves...the list goes on and on. I'm not making this stuff up to scare you, each of those things has happened to me.

5. Buying a house as an investment is a numbers transaction. This deal makes sense on the numbers. Buying your first home (or any home you intend to live in) is an emotional decision. If you hate the way the kitchen is layed out, you won't know that until it's too late.

And finally...the biggest reason that this is probably a waste of your time: If the house is really worth $600K, professional investors will be there and bid it up to somewhere in the high $400s or low $500s. If they don't, then it either isn't worth what you think it is, or there is something that I described above affecting this house. Since you'll barely be able to scrape up the opening bid, you'll be outbid (yes, you have to pay up immediately after winning the bid, in full, you get no time to come up with the rest of the price in California).

As a professional investor, I can afford to take a loss, feel the sting, learn from it, shrug my shoulders, and move on to the next one. You'd be wiped out. If you are OK with that gamble, go for it, and I hope that everything works out (which it does more often than it does not). Good luck!

[Gaurav S.]

Wow Brian ....that is the best reply I have ever received on any forum. Thanks a lot.

I actually went to the home today and was able to openly talk with the seller. As expected and predicted by you guys......there is a catch. The catch is that there is no way the owner is going to let the bank sell a 600k home for 360k in foreclosure. He had applied for loan modification and meanwhile has stopped paying. But now he has his loan modified and he will be sending the paperwork to the trustee tomorrow to cancel the auction.

So I guess when its too good to be truly it usually is. But I learnt a lot from this experience. Thanks to everyone here on biggerpockets for your time and great advice.

[Brian Burke]

I've lost count of the number of homes I've bought at trustees sales where the owners told me the same thing. I guess I forgot a couple of items in my previous post: you will never get a straight answer out of the owner or the trustee, and the bank isn't talking. Time will tell.

[Gaurav S.]

Ok. So lets assume the home does get auctioned off.

What is the way for me to get financing on this property ? Lets say I wish to bid maximum 420k and have a downpayment of 270k. So I will need a loan of 150k. This is 35% of loan to value ratio.

What will be my best bet for this loan ? Mike I see that Paraxis also provides capital for auction purchase. Is that is correct ?

[Brian Wall]

Hi Guarav,
I am in agreement with Marie, I do not see the comps coming up with the value you estimate. Are you sure you are you looking at similar size houses, within a half mile? How did you come up with that value?

Regarding financing, you do have to pay 100% cash for the property at the trustee sale auction. However, you can get financing after the fact. Also, sometimes there are hard money lenders that MAY help you buy a property at the auction, provided you put 30-35% down payment.

Are you looking for a place to live for yourself, or as an investment?

Thanks,
Brian

[Steve Babiak]

Originally posted by Brian Burke:

I've lost count of the number of homes I've bought at trustees sales where the owners told me the same thing. I guess I forgot a couple of items in my previous post: you will never get a straight answer out of the owner or the trustee, and the bank isn't talking. Time will tell.

I'll second this one. I bought one where the previous owner said "it was taken care of", and it had a good chunk of equity (I paid less than 1/3 of ARV). So just because the previous owner says something does not mean it is so.

[Gaurav S.]

Hi Brian,

The auction.com example link I posted earlier was just to show that auction.com shows trustee sales. It was not the property I am considering to buy. The property I am interested in is this

http://www.auction.com/California/residential-auction-asset/1307226-2910-1000-VIA-REGINA-SANTA-BARBARA-CA-93111-E329

Regarding your question I do have around 50-60% of the purchase price available in cash. I can also arrange for the rest by but I don't want to pull those strings unless I am sure I have purchased the home. So what i need is a short term loan to finance the purchase of the home and then I will pay it back in full in a short period.

This is to buy a home to live in and not to flip.

[Brian Burke]

Hi Gaurav,

To answer your question to me, I'm a buyer not a lender so I can't help you there. I know of a couple groups that loan for TS purchases, but their products are designed for professional buyers with a track record, I highly doubt it would be an option in your case.

Your best bet would be to borrow the money using a brokerage account or 401(k) as collateral if that is an option, or borrow from friends or family, etc. After you own the property, your financing options obviously multiply.

[Gaurav S.]

Hi Brian,

Yes that seems to be the only option. Only problem with that is that I will have to liquidate my stock portfolio with significant tax liabilities because of gains. Also if I withdraw funds from my Roth IRA I won't be able to put them back in for tax free growth. Borrowing from 401k is ok since I can pay it back anytime without penalty.

Problem with all this is that there is no guarantee that I will get the house or if the house will even come up for sale.

Since you have been doing this for a while what do you think is the discount to market value that one can expect to get in trustee sales ? I am asking because I would like to get a reasonable estimate of the price at which home could be sold. If its too high then I might as well give up on it and not go through the hassle.

Thanks a lot for your time and help.
Gaurav

[Brian Burke]

Notwithstanding my previous outline of the risks of the trustees sale, it seems that there may be more reasons why this might not be a good idea for you. The reasons you just outlined tell me that you would have to make costly sacrifices to gather the money to bid. I buy a lot of property at trustees sales, but my hit rate is somewhere around 1 to 3 percent. That might sound low, but it sounds even lower when you realize that I'm prepared to bid on all 100 or so houses that go to auction every week where I operate and only get a few.

It's a lot to expect to target a specific property and make those kind of sacrifices for those odds. Can it happen for you? Sure. Just be prepared to buy something else (on the retail market!) if this doesn't work out for you.

Discounts I'm seeing lately are 10 to 20 percent, minus needed repairs. Significant, but perhaps not enough to justify the risks and sacrifices you face as a first time home buyer in a process dominated by bidders with very deep pockets.

[Gaurav S.]

Brian,

Yes you are right. With such small odds combined with all the hassle of putting the money together plus all the risks involved its just not worth it.

Gaurav

[Brian Burke]

Sorry to be a downer, but I've just seen too many people try to buy a personal home at the trustees sale, all for naught. Just trying to keep it real.

If you really want this house, follow the auction and watch what happens. If it eventually goes to sale, you will see if the bank buys it back (then watch for it to come up on MLS and you can buy it REO) or if an investor buys it, approach them after the auction and see if you can work a deal, if you'd still want it once you see where the bidding goes.