The inventory of homes is still very tight in desirable metropolitan areas. Hopeful buyers who have not been able to find homes may be wondering:
Could I succeed in buying a house at an auction?
An auction, also called a trustee sale, will widen your pool of potential homes.
It also offers a way to buy at an affordable price. After all, the point of a trustee sale is to recoup money owed on the house, not to make a profit. A bidder may get a deal, then, on an auctioned home.
But are the risks and potential pitfalls just too great to dabble in the auction arena?
Usually, you are up against professional investors and home flippers at auctions. There are reasons to leave these sales to the pros. Let’s walk through the reasons, so you can decide for yourself.
You Might Have to Buy the Auctioned Home As-Is, Without Getting a Look Inside
If you’re buying a primary residence, you definitely want to look inside before you buy. With auctions, also known as trustee sales, looking is usually not an option. A house held by a trustee might still be occupied by an owner facing foreclosure. As you can imagine, this person will not be holding house tours! The occupant(s) may even have to be evicted by the successful buyer in a trustee sale.
If the owner has already left the house, you might be able to scope out the place — so you know more about what you might be bidding on — but you probably cannot do this with the trustee’s legal permission. In the typical trustee sale, inspections wait until the sale is done. Of course, driving by to see the exterior condition, and checking out the surroundings, can help a potential bidder know how much may be reasonable to pay for the house.
Pro tip: Homes in poor condition will need permitted work. Buyers who cannot take the financial risk of buying a home in poor condition should look exclusively at trustee sales allowing for inspections before the bidding.
Trustee Sale Homes Often Come With Defects
This is not an ordinary home sale. The winning bidder does not receive a warranty deed with its promise of an unclouded title. A trustee deed conveys the home as-is.
The winning bidder at the auction should be prepared to satisfy the liens — that is, pay off any debts recorded against the title. The prior owner might have left without paying repair and construction workers, the IRS, or the local property tax assessor. There might even be another mortgage loan attached to the house.
And it’s not just the title that will need work. The new owner can also expect to spend time and money on the major systems of the house, carry out significant home repairs and improvements, buy new appliances… In most cases, you can expect a fixer-upper.
Bidders Should Prepare to Pay With Cash
Bidders need to qualify in advance to participate in the sale. The lender will expect a buyer to come up with a hefty forfeit deposit and show readiness to pay for the purchase soon after the sale.
The party holding the auction is called a trustee. So, a successful bidder takes ownership by way of a trustee’s deed. Because a trustee deed may be conveyed with a clouded title, buyers should not expect to obtain normal financing. Read: You’ll need to have plenty of liquid assets before even thinking about jumping into auctions.
Oh, and trustee sale buyers miss out on the benefit of the all the pesky vetting that the underwriters and title companies do when they facilitate a purchase with a mortgage!
Bidders Need to Study the Process and Do Their Research
A potential buyer at a trustee sale needs to carefully assess the homes to be auctioned and their values. Bidders also must understand the state’s rules for the auction. It’s important to know how these sales play out from start to finish. Let’s review this now…
It all starts when a homeowner goes into default on the mortgage payments. An owner who stops paying the mortgage loan back (or fails to pay taxes) will get a series of default notices, stating the past-due balance and a date by which it has to be paid back.
State law explains the procedure to notify a homeowner of a future foreclosure. The state also sets for the timeline for paying off the debt where possible. A homeowner is supposed to have a fair chance to iron out a plan with the lender to pay off the debt and save the home.
If the borrower fails to straighten out the debt with the lender, a notice of the trustee’s sale is issued and filed with the county recorder of deeds. The homeowner gets the notice of sale and date (and can bid on the house, if qualified). Details of the auction must be advertised in the local paper that publishes legal notices for the county.
Typically, it takes six months from the default to the auction. Check state law for details.
What if nobody at the auction makes the trustee’s minimum bid? Then the bank takes back the house, which gets a “real estate owned” (REO) title. REO properties also include homes accepted by banks in return for deeds in lieu of foreclosure.
☛ If you buy a bank-owned or trustee’s sale home, and your title is challenged later, what would you do? Know the rules, and come up with you plan. Start with Solving Title Problems for a Home with a Previous Foreclosure.
Know If the Auction Is Enabled By a Deed of Trust
Taking over a home in the standard case of mortgage default involves a court order. It’s called judicial foreclosure in states that use the court process.
In other states, a nonjudicial foreclosure process is the norm. This simply means a court does not need to oversee the auction process. Should the homeowner fail to repay the home loan, the lender has direct to a trustee who takes and auctions off the home.
It’s the deed of trust that places the title in a trust rather than with the home buyer. The instrument contains the power-of-sale clause that enables the trustee to auction a home without court intervention.
California uses the deed of trust. So, when a California home buyer finances the home purchase, a trustee (the title company or escrow firm) holds the home’s title on behalf of the lender until the borrower pays off the loan. A home buyer has to agree to this to obtain the loan.
In fact, most states across the country do allow for the use of a deed of trust rather than a regular mortgage, and some states only use deeds of trust. It’s a faster, cheaper way to get to the same result as foreclosure. As explained by Stimmel Law in California:
A mortgage is a document that allows the creditor, who is unpaid, to proceed to court to force the sale of the property to pay off the debt.
A Deed of Trust allows a similar relief, but without requiring the court process.
A deed of trust, therefore, is better for the lender.
But which is better for the buyer? As a general rule, court supervision draws out the process — and that can be less appealing to bidders. But again, each state has a different timeline.
Pro tip: State law sets forth a timeline of possible redemption of the debt by the defaulting homeowner. This means it can take months to transfer the title into the new owner’s name after a judicial foreclosure. In deed of trust scenarios, the transfer happens more quickly.
Follow the Scout’s Motto
No matter what type of auction is selling the homes in your area, be prepared. Some auctioned homes are great deals. Others are money pits with tangled titles. Due diligence, clearly, is a must for trustee sale buyers.
Investors work with mortgage pools that offer assistance from investment managers well versed in assessing risks. For the ordinary home buyer looking for a primary residence, finding guidance is harder. The best practice, when buying in a high-risk arena, is to hire a local real estate attorney to advise you.
Supporting References
Stimmel-Law.com: (Law Offices of Stimmel, Stimmel & Roeser, California): The Basics of Foreclosure on a Deed of Trust in California.
MillionAcres.com: How Does a Trustee Sale Work? A Guide for Potential Investors.
Deeds.com: What Is a Deed of Trust? (Jun. 17, 2019).
Deeds.com: What to Know Before You Buy a Foreclosed Home (Nov. 18, 2020).
Photo credits: Quince Creative, via Pixabay; and the U.S. Library of Congress, via Picryl (public domain).