In the early days of real estate investing, you might think you can get a leg up over the competition and score an excellent sale if you buy a prime property at an auction. But a public real estate auction, also called a trustee sale, can be riskier than you may think. Furthermore, buying a home during a trustee sale is dramatically different from purchasing real estate through a traditional transaction.
Let’s break down trustee sales in a little more detail, plus go over the pros and cons of purchasing property in this matter. By the end, you’ll know whether you should use trustee sales to purchase properties for your investment goals.
What is a Trustee Sale?
A trustee sale is the sale of real estate property through a public auction. In most cases, trustee sales are only possible because homeowners are in some financial crisis, such as a homeowner defaulting on their mortgage payments and the property going into foreclosure. In other instances, homeowners may have their homes sold through a trustee sale if they owe a lot of back property taxes.
In the common foreclosure scenario, trustee sales are usually one of the last steps in the foreclosure process. Once the auction ends, the ownership of the trustee-sold property goes to the highest bidder. If the auction doesn’t find a high bidder for the property, the property’s lender takes over ownership and then has to go through different avenues to sell the property and recoup its costs.
Note, of course, that trustee sales are not the same things as “trust sales,” which involve courts and revolve around properties from estates going through the probate process.
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How To Perform A Trustee Sale In 4 Steps
You might be thinking that purchasing homes through trustee sales is a great idea. Let’s break down the actual trustee sale process step-by-step so you know what you’re getting into with these transactions.
1. Homeowners Default
For a home or another type of real estate to qualify for a trustee sale in the first place, the borrower or homeowner has to enter financial jeopardy. In most cases, this occurs when a homeowner defaults on their mortgage payments. Of course, a loan servicer usually gives the homeowner at least one notice of default before beginning the trustee sale proceedings. Homeowners are then given a chance to rectify the problem or work with their lender to resolve the situation without necessarily losing ownership of their house. If the homeowner cannot resolve the financial jeopardy, the lender will begin the trustee sale process.
2. Notice of Trustee Sale
A loan servicer will next give the homeowner or borrower between 60 and 120 days on average to become current with their mortgage. The exact timeframe varies by state. If a homeowner keeps missing their mortgage payments and doesn’t show any effort to stay in contact with the lender, the lender or banking institution will then send a “notice of trustee sale” to both the homeowner and the County Clerk’s office. This notice informs the homeowner that their home will be put up for auction sometime soon. Lenders typically publish advertisements in local newspapers or online to indicate that an auction will take place, with relevant information like the date and time of the auction.
3. Presale Period
Any potentially interested parties, including the lender and possible investors, get ready for the auction during the presale period. A neutral third-party of the trustor, who usually works for a title company or escrow organization, is hired by the loan servicer for the home and sets an opening bid. The bid is set at a reasonable or fair price for the property while including any other necessary payments, such as judgment fees or liens.
If investors are interested in the trustee sale, they must register in advance and prove that they have enough funds to participate. Investors can’t usually use loans to buy properties at auction. In contrast, the highest bidder has to present a cashier’s check for a certain percentage of the bid total before leaving the auction premises. Called a “forfeit deposit,” the balance must be paid shortly after the auction ends.
4. Auction
Once the auction’s ducks are in a row, the trustee sale can take place. Qualified investors gather on the sale date, the trustor begins with an opening bid, and the price will increase depending on the interest in the property in question.
The bidding ends when the highest bidder is identified in the successful bidder gets the trustee’s deed. They are then named as the new owner of the property. If no one bids at the trustee sale, the home up for sale becomes an REO or real estate-owned property, and ownership transfers to the lender. The lender can then use other methods, such as advertising on the MLS or multiple listing service, to eventually sell the home.
Trustee Sales: Pros and Cons
Determining whether trustee sales are a good idea can be tricky for new investors. There are certainly benefits to keep in mind, but there are also some downsides investors should be aware of before sitting down for auction.
Pros:
Most homes listed at trustee sales are offered at meager prices. In most cases, lenders and third-party trustors set opening bid prices at values that cover what they are owed for the property, not market value. So investors at these auctions may pick up excellent properties at less than market value if they are quick. This can lead to high profit margins, especially for fix-and-flip investors.
Real estate auctions take place all across the country, providing investors with a steady stream of leads if they know where to look. Furthermore, many real estate investors face less than average competition compared to buying properties through regular channels. Remember, traditional financing isn’t allowed at trustee sales, so you have to have enough money to make the forfeit deposit. This excludes some investors right off the bat.
Cons:
The reverse of the last benefit – since you need enough money for a forfeit deposit, new investors may have difficulty actively participating in trustee sales. With that being said, if you are able to purchase the property in cash you will be loosing a large portion of your funds at one time. It is important to account for this if you plan on flipping the property.
Additionally, if you buy a home at auction, you agree to purchase the real estate as it is currently. You don’t get to negotiate for repairs, inspect the property, and so on, which means you also accept any title issues, tax liens, or other burdens that may exist and minimize your potential profits.
In the worst-case scenario, the buyer of a home at auction could be responsible for following through with any eviction proceedings if the home’s tenant or previous borrower is still living in the property at the time of the sale.
Summary
As you can see, trustee sales are intriguing and potentially advantageous ways to pick up real estate at excellent prices, and through a more unique method than usual. However, you must also be aware that trustee sales carry their own baggage, requirements, and potential downsides depending on the circumstances of the home and the mortgage’s previous borrower.
For the best results, consider whether a particular home at a trustee sale is worth your time and money rather than using auctions as your sole means of acquiring new real estate investments. As you acquire more wealth and experience, you can more reliably use trustee sales to scoop up low-priced properties and add them to your portfolio.
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