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Remember 2006? When there were basically only two types of real estate to buy – resale or new construction? Most people, including real estate agents, hadn’t even heard of short sales, and bank-owned properties made up such a small percentage of the market that finding one was a little like hunting a rainbow.
It’s a different time, and our team has done our best to diversify. It started by educating ourselves on the short sale process, extended into representing local and national banks on marketing their foreclosures, and in the last six months we’ve developing an effective system of representing buyers purchasing properties at trustee’s sale in King and Snohomish Counties.
What is a Trustee’s Sale?
Sometimes generically referred to as auction, county auction, sheriff’s sale, or foreclosure auction, trustee’s sales are the natural process in our state for foreclosing on a home. There are two types of foreclosures in our country, either judicial or non-judicial. Judicial foreclosures require banks to go through the court system to foreclose on a property – non-judicial foreclosures, like those in Washington State – don’t go through the court system, but instead follow a set of established laws and notices that eventually lead to a public auction, usually on the courthouse steps of the county seat.
To understand the trustee’s sale, you need to understand the process that leads a home there. It starts with a missed payment by the homeowner. If the homeowner doesn’t cure even one missed payment than the bank can start the foreclosure process. That process starts by posting a notice of default on the home, alerting the homeowner that monies are owed, and if they aren’t paid then the bank will move forward with foreclosure. If the default on the loan isn’t paid, than no less than 30 days after the notice of default is posted the bank will post a Notice of Trustee’s Sale. This notice again states the amount of the default, and explains that if the default isn’t cured, that the home will sell at a trustee’s sale no less than 90 days from when the notice of trustee’s sale was posted.
Which brings us to the trustee’s sale. When the foreclosure process is started, the bank hires a trustee. The trustee is local to the area and is familiar with local laws and notices. The trustee is responsible for posting the notices and for managing the process that leads to the trustee’s sale. It’s called a trustee’s sale because the bank transfers the deed to the property to the trustee for the purposes of auctioning the property and handling the transfer of the deed – either to a purchaser at auction or, if there are no winning bids on the property, in the name of the bank. In either case the trustee’s sale effectively removes the homeowner’s name from the property and releases the property from many (but not necessarily all) liens that were encumbered on the property by the homeowner.
Why purchase a home at Trustee’s Sale?
Simply said – value. Let’s imagine that a home has two liens on the property, one for $300,000 and another for $150,000. In a typical real estate transaction this home would have to sell for about $495,000 in order to cover the closing costs and the liens on the property. In a short sale transaction the home will sell for less, but both lien holders have to agree to the terms of the sale – so let’s say that the property sells for $400,000, which would leave the second lienholder with $60,000 of their original loan of $150,000 (after closing costs). Usually it’s the senior lien holder that initiates foreclosure (our $300,000 loan). Because most subordinate liens are wiped out with foreclosure, a buyer could purchase this same home at trustee’s sale for as little as $300,000. After tracking properties purchased at auction purchased over the last six months, we’ve found that most properties purchased at auction sell for about 70-80% of market value.
The primary limitation to buying at auction is money. All properties at auction have to be purchased using cash (typically cashier’s checks), and most people don’t have the cash reserves to purchase a home worth several hundred thousand dollars. Traditional lending institutions don’t help because they don’t lend money without appraisals, credit checks, and a couple of weeks of review going over any potential risks to the bank. Still, trustee’s sales represent the next emerging market within the real estate industry, and there are people and companies looking to take the opportunity this market provides. The people and/or companies that realize this and are lending money to purchasers at auction are offering auction financing, otherwise known as hard-money lending. This type of financing is higher in fees and rate then conventional lending, but it allows people the opportunity to buy homes at a discount that they otherwise wouldn’t be able to consider.
How do I purchase a home at Trustee’s Sale?
While the reward is high with purchasing a home at trustee’s sale, so is the risk. While anyone with the cash and a little bit of knowledge can buy at trustee’s sale, a majority of investors and home-buyers use representatives to help them navigate the pitfalls and obstacles. The New York Times recently ran a piece about a couple that bought a home at auction in California for $137,000. What they didn’t know was that what they bought was a second note on the property, and that all they had purchased with their $137,000 was the obligation to service a much bigger, unpaid primary lien on the property. A representative helps buyers find out what liens survive the trustee’s sale and make sure that they are bidding on the primary lien, not on a subordinate lien. A representative should also be able to find out about the balance of tax, utility and HOA liens that may survive the trustee’s sale.
Even if a property is determined to be a good buy once the lien position is explored, there is a good chance you might not see the interior of the home that you’re purchasing at auction. Many of the homes are still occupied, which means that not only could you not get access, but you have to deal with evicting or negotiating with the homeowner to vacate the property. If you’re unable to get access and the home is vacant, there is a greater chance of deferred maintenance – mold from an unattended water leak, possible vandalism by the homeowner as they moved out, etc.
Most representatives have systems and experience that give their buyers the information necessary to calculate the risk before they bid on a property at trustee’s sale. This level of service isn’t free though. Fees for representation vary, but most groups charge 3% of the county assessed value, and it’s due on the same day of the purchase at auction. Again, because of the number of properties going to trustee’s sale, and because of the rising amount of people looking to buy at auction, there are many groups emerging to represent buyers at auction. It’s important to research each group, the level of experience of their representation, and to find examples of their purchasing history. Each group should offer a web-based resource for researching properties by their auction date and location, and depending on their level of service they should be providing the opening bid (as it becomes available), recent pictures of the properties, an occupancy status and title information.
Where do I go to learn more about buying at Trustee’s Sale?
In King and Snohomish Counties, trustee’s sale occur every Friday at 10am (excluding legal holidays). The Snohomish County trustee’s sale is in Everett on the courthouse steps at 3000 Rockefeller. In King County there are two sites for the trustee’s sales – one in Bellevue and one in Seattle. Most of the activity occurs in the first two hours, but it can go as long as 4pm. You can attend the sale at your leisure, but it’s best to have a guide that can explain what’s going on. Trustee’s sales are surprisingly low-tech, and feels a little bit like a poetry slam at a farmer’s market, with unassuming people standing in the rain reading without much consideration for their audience.
Our team has an “Introduction to Buying at Auction” class every Thursday night at 6pm. It’s taught by John McCants, a Pickett Street team member and Keller Williams REALTOR that has been a full-time real estate investor and purchaser at auction for the past 19 years. During the introductory class John goes over the foreclosure process, how to secure auction financing, and how his representation can help you avoid costly mistakes and build your wealth. Immediately following at 7pm, we go over what we consider to be the “hot” properties going to auction the next day. This meeting is primarily for our dedicated investors pre-approved for purchasing the next day, but it doesn’t hurt to sit in and see how it works. Then on Friday we usually have reps in Bellevue, Seattle and Everett that can guide you through the trustee sale process. Once class members are comfortable with our system and services they’ll be given a username and password to a website that allows them to research upcoming trustee’s sales.
If you are interested in learning more about buying real estate at wholesale prices at auction, please complete the form below and we’ll contact you within 24 hours to register you for one of our classes.