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So You Want to Buy a Home at Auction?

A 15-minute primer on what it takes to buy a home on "the courthouse steps."

Nearly every day in Sonoma County, a real estate investor buys a home for 15 to 25 percent below market value. Depending on your price range that’s $30,000 to $50,000 less than you’d expect to pay for a home by shopping on the Multiple Listing Service. 

This isn’t a get rich quick pitch or conspiracy theory.

The time and place of these sales are readily known, strictly regulated, and held on public property. I’m referring to what’s known as a trustee sale or “foreclosure auction”, and while covering each step of the process could fill a weekend seminar, if you’re a real estate investor who is wanting built-in equity on your next purchase, here’s a 15 minute tutorial on what you’ll need to buy something on “the courthouse steps.”

 Step 1: Get the Money

There’s only one cover charge for this rodeo: cash, so make sure you bring plenty of it. 

It sounds crazy, but five to ten people on the Santa Rosa courthouse on any given morning have north of half a million dollars worth of cashier’s checks in their back pocket. 

Why? 

Simple, you cannot finance a home at trustee sale; anyone who tells you otherwise simply doesn’t know what they’re talking about. You must pay in valid cashier’s checks.  You can’t bring a bank statement or call your teller to verify your balance, and for better or worse there isn’t yet an iForeclose app. 

It’s their rules and you’ll have to follow them if you want to play the game.  So if there’s a $240,000 opening bid on a property that may go to $270,000, bring one check for $240K and six more for $5,000. If it goes for $251,000, you’ll give them $255K and they’ll mail you a refund check of $4,000.    

Step 2: Do Your Homework

“Never interrupt your enemy when he is making a mistake,” or so a certain Corsican by the name of Napoleon once said. 

It’s anyone’s guess how a commercial bank feels about the average auction shopper, but if you’re bidding on property with $20,000 in deeply buried IRS liens, you can be certain that Chase bank won’t “interrupt” your bid on what’s likely to be a disastrous purchase. 

Do your own homework: perhaps this should be Step 1. The majority of properties at auction have been in default for 16 months or more, you can guarantee that a good amount of those homes have thousands in back taxes, IRS liens, judgements on title or HOA woes. Call a title company and beg, borrow or bribe your way into convincing them to run a title search. 

And no, you aren’t entitled to a pre-trustee sale inspection! Keep in mind that up until the moment that auctioneer says “sold,” there’s a private citizen who still owns that distressed property. So don’t go jumping fences or calling locksmiths unless you’d like to be rightfully charged for trespassing, but feel free to call PG&E to see if the power and gas are on.

Step 3: Go Shopping ... A Lot

Pop quiz involving trivia and arithmetic:

-  How many homes scheduled for trustee sale in Santa Rosa this September? 

-  Of those homes, how many are priced low enough to be a good investment?

Answers:

First, a whopping 373 homes are scheduled for sale this September in Santa Rosa alone. Second, using a four-month average, only 16 of those homes will be purchased by investors. Arithmetic: that’s a meager 4.2 percent. 

And no, it’s not that 95 percent of those homes are deals that fell through the cracks, it’s that the vast majority (89 percent) will be postponed or cancelled while the remaining 6 percent will be taken back by their respective bank and eventually come on the MLS as an “REO.” 

What this means is that you’ll be spending a lot of time at foreclosure auctions. There are ways to determine which properties are more like to sell than others, but as the stats show, it’s actually quite rare that you’ll even have the opportunity to bid on something. 

Again, most properties at auction will be postponed or cancelled, and the remaining will be priced too high to make any financial sense - only 4.2 percent are a good deal.  Solution: if necessary, make the time to do your drive-by investigation, title search, and market valuation the morning of an auction (you will likely know by 9am if an auction is cancelled or not).  If all that work sounds like a second job, guess what - it is.

The price of buying at auction is steep: steep in time by researching properties and showing up to bid, and steep in risk too. But for those with business savvy and an entrepreneurial drive it can also be very financially rewarding.

Inspired and hungry for more? Take a trip down to 860 5th Street in Santa Rosa on weekdays at 10am to see for yourself. And when you’re truly ready, find a Realtor with experience in auctions ... and whose advice will be more forgiving than an 18th century Corsican.          

Armand Ramirez is a realtor with Century 21 Bundesen in Petaluma. 
He has experience in short sales, auction properties, foreclosures, and traditional sales. Visit him online at www.ArmandRamirez.com.

Julie Pendray (Editor) September 09, 2012 at 04:38 AM
Is there a qualified, experienced realtor in Sonoma who would like to blog about these type of issues for Sonoma Patch? You can start a blog by clicking on "Start a Blog" under the top 4 stories on our site. We (and our readers) would appreciate it. Thanks.
Michael Morrongiello September 09, 2012 at 06:24 PM
Good info for those wanting to attend Trustee Sale Auctions. To learn more cutting edge techniques about Creative Real Estate check out BAWB- The Bay Area Wealthbuilders Association www.BAWB.info
BG September 29, 2012 at 03:50 AM
Recon Trust (Bank of America) holds the titles to 27 homes in my town under $500k. It is also worth noting that there are only 2 homes for sale on the MLS under 500K and they are in 55+ communities. Trustee sales are only available to cash strapped bidders at auction which are usually held daily at the Plaza at Fremont Park located at 860 Fifth Street, Santa Rosa, CA 95401. Surprisingly I am currently not in a position to buy a home in my town for 100% cash. I have a credit score of 820 and could possibly put down 50% on a home at $500k (I would prefer a 20% down payment).
BG September 29, 2012 at 03:51 AM
I ask, why are the financial institutions limiting the accessibility of the inventory to the average public? The bank affiliated trustee paper on these homes are limiting the available supply and increasing the values of the traditional re-sales. Ingenious as the bank is in the business of making money through charging us more interest from debt than they return to us from savings. If they can turn an additional 15% on the traditional re-sale of the home to average Joe through manipulating the supply they in turn can reap the benefits of a life time of front loaded interest averaging a return of 1-5-2 times the value of the home. Furthermore, once the lucky cash strap buyer has possession of the home they invest a small amount of money (usually $3-7K) into updating the condition of the property ultimately selling it slightly above the bank artificially inflated market value. This is a great deal for the investor as most paper sold in auction is procured 20-30% less than fair market value. Once again average Joe sets out to buy this home (once owned by the bank). The investor contracts out the realtor to sell the home at the highest possible price, there’s another 6% added to the bill of sale. If we are taking about a $500k home that is $30k (which is happily financed by the bank).
BG September 29, 2012 at 03:52 AM
Average Joe submits a blind offer to the seller. Due to the high demand as a result of limited supply average Joe follows up with a blind counter offer. Blind offers were institutionalized by the banks. Average Joe and family are happy that they have an accepted offer. Unknowing, average Joe may have paid 3-5% more than the other bidder (why not $1.00 more). Happily, the bank jumps back in to sell you a mortgage that will be front loaded with interest 1.5-2 times the value of the home. Average Joe, don’t think that you can sell your home any time soon without taking a loss because with the 6% realtor fee to sell your home this will set you back (of course this can be avoided if your home appreciates, highly doubted) and your personalized modifications will seldom give you an ROI.
BG September 29, 2012 at 03:52 AM
If existing home sales in the US average 20 trillion dollars per year (10 year average), banks are manipulating the re-sale market by +15-20%, the realtor adds another 6%, your blind offer extrapolates another +3-5% and your interest on the home is front loaded? Net result, nationally, too many financed inflationary zeros to blog. Although, the $500k home is made from gold bricks and not 2”x6” sticks right (your lucky if your house was built with 2”x6”)? There is something fishy about this free market process. To top it all of our government is allowing this all to happen by gifting you the home owner the privilege to write of your mortgage interest. Thank you for returning .25 cents to every dollar I pay in fees (upfront) to the bank. Your local town will not complain either as your property is taxed at the recent transaction price. No worries your property tax dollars are being spent on great investments such as police stations and fire houses. Great examples of appreciation, town expenditures are the most costly investments of all time. One dollar spent today will result in ten dollars needing to be spent tomorrow, hence the increase in your property taxes. It is my opinion that this is just another shameful practice of the banks supervised by our politics.
BG September 29, 2012 at 03:53 AM
Today, the financial institutions are taking advantage of the new first time home buyer after they have already stripped the pride of home ownership from the existing seasoned home owner. Consolidation of the housing market is creating a commodity and commodities are controlled. Nice!
Trammell Realty Group October 11, 2012 at 05:42 PM
I tried foreclosures back in the early 2000's and this article hits on about every reason why I preferred to shop around for properties listed on the market, mainly to get the opportunity to do inspections and title work. I never realized that so little properties moved at foreclosure auctions. I found that really surprising. If your in the market to buy an REO, contact us at www.trgcommercialrealestate.com. It's a great place to learn more about investing in real estate and find an agent. We also have a residential division that offers services to homeowners and buyers at www.realestatetrg.com. Really enjoyed the article and if you are interested in starting an affiliation please let me know. Thanks.

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