How to Invest in Foreclosures

Investing in foreclosures is a complicated process. The following brief article is a snapshot of the process involved. For a more detailed look at investing in foreclosures I recommend reading books such as “The Pre-Foreclosure Property Investor’s Kit” by Thomas Lucier or “The Complete Guide to Investing in Foreclosures” by Steve Berges, or scheduling an appointment with me to discuss any details or questions that you may have. It is a good idea to do as much research as possible before jumping into the foreclosure market. There is a lot of money that can be made, but there is a big risk of time and money that can be lost as well. Remember, a property that is in foreclosure is not always a good investment. There are good foreclosures out there, but you need to know how and where to look, and how to recognize a good deal when you see one.

There are a few terms that are important to know when investing in foreclosures in California: A Trust Deed is the instrument used to secure a loan on real property. It is used in place of a mortgage in California. A Trustee holds legal title to the property as a neutral third party between the lender and borrower, and can foreclose, sell and convey ownership to a purchaser if the borrower defaults on the loan.

Before Trustee’s Sale

Also referred to as “pre-foreclosure”, this is actually the period between the issuance of the Notice of Default and the trustee’s sale of the property.

After a Notice of Default is recorded in the office of the county recorder, the trustee has about four months before the Trustee’s Sale can take place. It is during this time period that the best opportunities exist for investing in foreclosures. Owners of properties in default have up until five business days prior to the sale to reinstate the loan, and may pay off the entire loan balance including all past due interest payments, costs, fees, and penalties attached to the loan up until the property is sold at auction. Investors interested in foreclosures must know how to locate and use Notices of Default to find the best deals available. Once a potential deal is found an investor must be able to successfully negotiate with the property owner, set up the conditions to take over the property, clear it of all outstanding liens, and coordinate any necessary repairs.  

At Trustee’s Sale

Usually held at the steps of the county courthouse, the Trustee’s Sale is where the trustee sells the property, by auction, to the highest bidder for cash. Usually a representative of the bank is present to start the bidding at the amount owed on the note. There are many risks associated with this type of investing, and the utmost precaution should be taken with this approach. Because of the high risk involved, only the most experienced investors should undertake this type of foreclosure investing. Winning bidders take the property subject to all liens senior to the trust deed being foreclosed and must arrange to take care of them after the sale. All liens junior to the trust deed being foreclosed are wiped out by the sale and are of no concern to the buyer. The Trustee’s Sale is final. A property purchased at a Trustee’s Sale comes in its condition at the time of the sale.

After Trustee’s Sale

Also known as REO or Real Estate Owned by the bank. These are properties that have gone back to the lender if they did not sell at the Trustee’s Sale. Retrieving the information from the bank on these properties can prove to be an arduous task, and many times REO’s are put on the market with a local real estate agent and sell within 5% of full market value. Occasionally a property becomes available that is in need of significant repairs and that may be purchased for a discount. The best way to keep track of these is to stay in contact with a local real estate agent that can send all of the REO leads that become available in your market.