How to tell if buying real estate in a foreclosure auction is right for you
With relentless headlines of home foreclosures, hungry investors are looking for an opportunity.
However, unless you understand the risks and are willing to put in some serious unpaid investigation time, foreclosure auctions can trap casual investors.
Buying real estate in foreclosure is nothing like a traditional escrow purchase. Buyers get no time for contingencies or inspections, and there are no warranties or insurance for clean title to the property. Also, investors don't have time to get a normal loan because the bid price is due in cash or certified check. If those terms don't scare you away, consider the following dos and don'ts.
Do:
• Go watch regular auctions. Don't be late, as they can go very quickly (and sometimes all that happens are extension announcements). All non-judicial foreclosure sales are on Fridays in Washington at "any designated public place." In Clark County, most trustee auctions are at the gazebo near the County Services Building.
• Ask questions if you can, but don't be surprised if others aren't very friendly. The regular buyers tend to stick together and don't like competition.
• Find a reliable source of tracking foreclosure notices. The web is full of sources but many are not well maintained or reliable. In Washington, the notice of trustee's sale must be recorded with details of the sale and notices are republished in a local paper.
• Try to drive by and inspect property before setting a bid target. You may not be allowed inside, so stick to areas where you know the market.
Don't:
• Don't bid on subordinate liens – this may be the single biggest trap. It's not always the first lien holder foreclosing on a given property. If a second or third lien holder forecloses, the process will not wipe out higher priority liens. A buyer who purchases a subordinate lien will get a deed, but the property is still subject to the priority liens, leaving negative equity.
• If no one else is bidding and the price is unbelievably low, be suspicious. As they say in poker, if you can't pick out the sucker at the table, it's probably you. The only way to be sure you are bidding on a first deed of trust is through a full title search. You can read all public records, but most people elect to pay for the service of a title report or litigation guaranty report. The cost of the search is minimal compared to the potential loss from a defective title.
• Don't start with a rented or occupied house. Occupied homes usually mean a delay in possession and sometimes damage during move-out. New laws give renters extra protection even after a foreclosure sale and can really add to costs.
After weighing these dos and don'ts, investors should consider purchasing a foreclosed property from a bank that finished the foreclosure process, or from a professional foreclosure buyer. Lenders do want to sell foreclosed property, but they don't want to give it away. Many professional buyers are also looking to sell, so check the sale records or deed. If you're willing to pay a reasonable margin, call the new owner before they put much work into the property. You can make a conventional purchase with title insurance in an escrow closing with much less risk.
Dustin Klinger is a partner in the Vancouver office of Miller Nash, LLP. His practice focuses on real estate, business transactions and finance. Dustin can be reached at (360) 699-4771 ordustin.klinger@millernash.com
