Property Purchase at Foreclosure & Trustee Sales

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Some of the best real estate bargains and most risky transactions can be found at judicial foreclosures and trustee sales. In this lesson, you'll learn about these real estate transactions from a buyer's perspective. A short quiz follows the lesson.

Judicial vs. Nonjudicial Foreclosure Sales

Not all foreclosure sales are the same. Some states require a judicial foreclosure and some permit nonjudicial foreclosures. So what's the difference? A judicial foreclosure involves a judicial proceeding and court oversight of the foreclosure process. On the other hand, a trustee sale is a nonjudicial foreclosure of property and is based on a power of sale clause in a deed of trust or mortgage.

Requirements & Potential Pitfalls

There's a reason that property can often be bought at foreclosure for a bargain - there's a lot of obstacles and risks involved. Let's take a look at some of the most important ones.

Cash is usually required at purchase, or very soon after it. Banks don't usually give unsecured loans to purchase property at a foreclosure sale. You'll either have to offer some form of collateral acceptable to the bank to have money at the auction, use your personal wealth, or find an alternative form of financing, such as a wealthy business partner who'll invest with you.

Another potential pitfall is falling prey to auction frenzy. In other words, the excitement and competitive nature of bidding sometimes leads a bidder to pay more for a piece of property than it may have been worth. Remember, it's about getting a bargain, not about outbidding the guy next to you. You can find yourself losing by winning.

Inspections are difficult to pursue if not impossible. You seldom have a chance to inspect the inside of a property and often can only give the exterior a cursory examination. Keep in mind that if the owners couldn't afford the mortgage payments, they may not have had the money or desire to properly maintain the property. Likewise, some owners undergoing foreclosure are bitter and may actually intentionally damage the property.

You also need to be conscious of title defects and the priority of any other liens on the property. A foreclosure will wipe out most liens junior to the mortgage being foreclosed, but not senior liens. For example, if it's the second mortgage being foreclosed, you will end up buying the property subject to the first mortgage. Likewise, certain government tax liens will survive a foreclosure sale even if they are junior in time to the lien being foreclosed. Running a title report before the auction will help avoid this pitfall.

You'll never get warranty deeds at the auction. Instead, you'll get a sheriff's deed if the sheriff is selling the property that is being judicially foreclosed, or a trustee's deed if a trustee is selling during a nonjudicial foreclosure. Basically, both a sheriff's deed and a trustee's deed will convey the property to the winner of the auction. However, neither deed will provide any warranties against defects in title. In other words, the property is sold 'as-is' with any and all title defects or encumbrances.

You should also note that just because a property is being auctioned, doesn't mean nobody is living there. Sometimes the borrower, tenants or squatters are residing in the property and you'll have to pursue legal action, such as an eviction or ejection action, to remove them.

Risk of Statutory Redemption

Even if you do everything right and get a great bargain on a reasonably well-maintained property, you may still face losing the property through statutory redemption. Let's take a quick look at what this is.

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