Tuesday, December 2, 2008

Purchasing Properties at an Auction

Purchasing Foreclosed properties at a Trustee Auction, while it seems like you will make tons of money, you have to be very careful and do your due diligence.

Typical due diligence might be to run a title report to see how many trust deeds are on the property, which trust deed is foreclosing, and what it's current market value is for the property in Average Condition.

The reason for running a title report is that a property could have many many trust deeds or loans against the property. Typically, there are two (1st Trust Deed, and 2nd Trust Deed). The 2nd Trust Deed is usually in the form of a Home Equity Loan or Home Equity Line of Credit (HELOC). HOWEVER, we have seen many homes with more loans on it than that. I have seen up to 8 Trust Deeds on a property. So you really need to find out exactly how many people are entitled to this property.

You would also need to find out which Trust Deed is foreclosing. This is significant and realted to the first item above. So with the above example, with 8 Trust Deeds on a property, if the 8th lien holder forecloses on the property, it is junior to the first 7 Trust Deeds that comes before it. WOW... Imagine if you bought a property that you thought was a steal at $20,000 just to find out you have to pay the first 7 trust deeds worth $500,000. It is not a steal anymore is it?

Generally, the 1st Trust Deed forecloses due to the payment being significantly higher than the others. There are lot of cases though, where if the 1st Trust Deed forecloses, the bank that owns the 2nd Trust Deed buys that mortgage to be the 1st TD holder. This way, they are not left out after the sale.

The third item: Determining the current market value of the property in AVERAGE condition is crucial because you have to factor in the final cost of this property in addition to the fixing it will most likely require. Once you take in all of the cost, determine if you are still purchasing it below the market value. Otherwise, it will not even be worth considering.

Since we are talking about repairs, I have seen properties that are in condition where it should be condemned. Tiles, carpet, flooring, sinks, toilets, showers, etc.. pretty much everything can be taken by the previous owner. At these auctions, it is sold AS-IS WHERE-IS so be careful and assume the worst possible condition.


Anonymous said...

Very interesting post! I loved it, keep up the good work going this year as well!

Anonymous said...

This uh.. Actually isn't true at all. Do your homework everybody

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