By Patricia-Anne Tom
Trustee sales offer buyers the opportunity to purchase a foreclosed home at a discount.
However, before you take this route to purchase a home, be aware of five key points and potential pitfalls of buying a foreclosed home at a publicly-held auction.
1. Understand How Foreclosed Homes End Up in Auction
A trustee sale is a publicly-held auction where buyers can bid on real estate properties. Trustee sales are conducted when a homeowner is in default of his mortgage payment for more than 60 days.
Alternatively, a taxing authority can take over a property and put it up for trustee sale if the owner owes back property taxes.
Mortgage contracts stipulate if the terms of the contract are not met on a regular basis, the lending institution can initiate foreclosure procedures.
When a homeowner defaults on his loan payments, the owner receives several “notice of default” letters from the bank. If the owner fails to come up with the delinquent payments or does not work out a payment program with the mortgage lender, the bank will send a final letter informing the owner the property will be put up for sale in 21 days.
Once the lender takes possession of the property, it tries to recoup the outstanding loan balance. The lender then appoints a trustee to take care of the repossession of the property and to sell the property at auction.
Anyone buying at a trustee sale is legally entitled to take immediate possession of the property, so the delinquent homeowner—who might still occupy the property—does not have much time to take stock of the situation.
2. Loan Pre-Approval Is Paramount for a Foreclosed Home Purchase
To take advantage of a trustee sale, buyers should get pre-approved for a loan before the auction is scheduled.
After the lender reviews your income, assets, debts and credit history and approves you for a loan, you will receive a tentative approval letter stating your mortgage is approved for a certain amount for a certain period.
With this letter in hand, you have proof you have the funds to purchase a foreclosed home at an auction.
3. Come to the Foreclosed Home Auction With Cash
At the auction, the trustee will set the bidding at a certain price and determine a minimum bid for each property.
The price usually includes the loan balance, associated lawyers’ fees and any other costs connected with the foreclosure.
Bidders should come to the auction prepared with cash or a cashier’s check, in case their bid is accepted.
Often, trustees require a cash deposit before the bidding even begins, so they can be certain of a bidder’s ability to go ahead with the purchase.
4. Property Inspections May Follow Purchase
While some trustees allow the bidders to inspect the property before an auction, trustee sales are typically “as is”, and the buyer and contractors or inspectors may not be able to evaluate a home until after the bidding has ended.
Usually, the property title is not intact, and liens and structural issues will have to be taken care of after the sale is completed. Sometimes the winning bidder may have to evict people living in the home.
Homeowners with loans in default typically get into foreclosure, because they do not have enough funds to pay for the property, let alone improve it. Thus, most foreclosed properties are in need of repair and renovation.
The plumbing and electricity may need updating, and the appliances will probably need to be replaced.
A building inspector can provide more exact information on the condition of the structure of the house, but such professionals may not be able to inspect the home until after the bidding has ended and you take possession.
5. Do Your Homework
If you’re interested in purchasing a home at a trustee sale, take time upfront to evaluate the lists of homes up for auction and find the minimum bids.
You may want to research the home and comparable sales on the web. If you have time, driving by a property to inspect the neighborhood and evaluate the home from the outside—even if you aren’t allowed to enter the home—can provide insights into how much you should bid.
Some states allow sealed bids, while others do not. If the trustee does not receive its minimum bid, it can remove the property from the auction and use other means to sell the property. A trustee may later decide to list the property with a real estate agent.
Attend an auction only after you’ve prepared, and bid with caution. If you keep these caveats in mind, you may end up the proud owner of a wonderful piece of real estate.