Foreclosure procedure in California is an extremely logical and basically simple process. Once it is understood, it can be a highly profitable venture for you. Even properties that appear to be over encumbered with debt can become tremendous opportunities. The following explanation is not intended to be a review of the technicalities of foreclosure but rather a broad overview of the process. The process begins after several months of non-payment by the property owner. At some point the lenders (Beneficiary) get tired of waiting for their money and say, “enough, no more,” and they go down to the county recorder’s office where they record default. Scores of these notices of default are recorded daily in each county.
Once this default has finally been filed after several months of delinquency, the property owner has a three-month default period to either reinstate the loans or sell the property. They must take action. Many owners choose to sell during these three months. For most, it is their only option. After three months of default has elapsed without any action by the owner, the beneficiary (lender) now schedules the property for Trustees Sale (foreclosure auction). The owner now has a minimum of 21 final days to sell the property before the property goes to auction.
It is critical to understand that these owners are in total control of the property up until the very sale (auction) date that is shown. Many great deals have been made with these motivated owners during these final desperate days. If the owner does not sell or reinstate by the sale date, then Trustees Sale (foreclosure auction) will take place. In almost every case the owner then loses everything!! It is always in the owners interest to sell the property to you for whatever price you have to offer before the auction if he is unable to reinstate the loans.
At the Trustees Sales, up to 75% of these auctions have no outside bidders show up to bid. If that happens, the beneficiary (lender) becomes the owner. This is an excellent time to approach the beneficiary with an offer. Act immediately to approach that lender before s/he turns the property over to an agent for resale and incurs real estate sales commissions. As you can now see, our daily report can be used by you to buy these foreclosures at all three stages. You can buy before the auction from the owner during his default up until the very auction date, you can purchase at the auction itself, and you can buy after the auction from the beneficiaries who are getting these Repo’s back on a daily basis.
STAGE 1 BUYING BEFORE THE AUCTION, DURING DEFAULT
When your daily lists arrive, and you go out to view some of the properties, you will soon discover that some properties have “for sale” signs and others do not. We are now estimating that at least two to three out of every ten properties that are currently on the market for sale are in this three-month default period. But, for obvious reasons, the sellers would rarely volunteer this information to you as a buyer. You are at a tremendous bargaining advantage knowing the enormous pressure that the seller is under to sell out during these three months before the actual auction sale date. Some buyers prefer to make offers on the properties that are not on the market for sale so that the seller does not have to pay any commissions to real estate agents, which will allow the seller to accept a lower offer.
Even if there is a listing agreement on the property, and you are not a licensed agent, always approach the seller directly. Only call the agent if the seller directs you to his agent. Even then, you are at a great bargaining advantage knowing that foreclosure is pending and time is running out. Every day that elapses puts you as the buyer in a better position. Often the default section of your list is most valuable a month or two after its arrival as time runs out for the seller. When buying from the owner during his/her default, the most common arrangement is when the buyer simply takes over payments by taking title subject to existing loans (as opposed to assuming the loans) by reinstating the back payments that have been missed. Don’t worry about handling the transaction yourself. After making an agreement with the owner, simply go to any escrow company to open an escrow and an escrow officer will process the paperwork. After ownership has transferred to you as the buyer, many people choose to refinance a new loan to replace that existing loan to get today’s low interest rate.
If after the three-month default period the owner has not sold or reinstated, the beneficiary (lender) then proceeds to the final stage by scheduling the trustee’s sale (auction). But again, the desperate owner can still sell the property up until the sale date that is shown.
STAGE 2 BUYING AT THE TRUSTEES SALE
The main advantage of buying at a trustees sale (foreclosure auction) is that the moment a property reaches the actual sale date, all trust deeds (loans) junior to the foreclosing loan, below the loan with the asterisk (*) on our report, are wiped off the property. This can create instant equity. The winning bidder at this auction will pay off the loan with the asterisk with his/her winning bid amount and will then take title subject to (take over payments on) all trust deeds above the asterisk (*) if there are any. Since the passage of SB 1079, Owner occupant buyers of 1-4 Unit residential properties now have a distinct advantage at the Trustee sales. If an owner occupant is the successful bidder, the sale is final. If not, other “Eligible Bidders” have 15 days to submit a non-binding “letter of Intent to Bid” to the foreclosing Trustee. If a letter is received, eligible bidders have until 45 days after the initial sale to submit bids for the purchase of the property. If you are an eligible tenant, you only have to match the winning bid at the initial sale.
The approximate bid figure is only the current balance of the foreclosing loan (loan with the asterisk). This figure includes the loan principal itself plus back payments, penalties and foreclosure costs. At the Trustees Sales, all bids are in the form of cash or cashier’s check. You are only paying off the loan with the asterisk. You then take over payments on any loans above the asterisk (if any). Again, all loans below the asterisk are wiped off the property.
STAGE 3 REO, BUYING AFTER THE TRUSTEES SALE
This is a very important use of your daily reports. 65-75% of all properties progressing to the trustees sales have no bidders show up. The instant that no bids are made at the sale, the foreclosing beneficiary (lender) becomes the owner. He now must keep current any loans senior to his loan (above the loan with the asterisk) if there are any. The property is now a REPO or R.E.O. (real estate owned). Lenders are now getting these properties back regularly. It is very expensive for the lenders to be stuck with these properties! The whole key to buying at this stage is to act quickly by approaching the beneficiary (lender), the same day of the sale, before s/he turns the property over to a real estate agent for resale. Quick action at this point can save you tens of thousands of dollars. Simply call the trustee an hour after the posted sale time to determine the sale results. If the trustee confirms that the property did revert back to the beneficiary then call that lender immediately and express your desire to present an offer. Stress to this lender that with your offer they will incur no commission costs, no clean up and repair costs (if you choose to take the property “as is”), and no holding costs. These costs to the lender would be enormous in the event that they chose to list the property with a broker and many months elapse during the clean up, the marketing, and the escrow period. As stated above, if the property is a residential 1-4 Unit then eligible bidders have 15 days after the sale date to submit a non-binding letter of intent to bid, and after that have 45 days from the sale date to submit their final bid to the Trustee.
For all other properties, the best way to buy R.E.O.’s is to contact that beneficiary the same day of the Trustees Sale and present your written offer immediately!
JUNIOR LENDER BUYOUTS
When properties have no equity (as is often the case today) another option is to approach the junior lien holders and offer to buy their Notes at a discount. The key to profiting from this type of situation is to know exactly which lien is foreclosing, and to have knowledge of all the loans against the property. Let’s use the example of a home currently valued at $500,000, with the 1st T.D. holder foreclosing on the property (identified by the asterisk). From the example, it is evident that the property has no equity:
Market Value : $500,000 * 1st T.D. : $350,000 06/01/15 2nd T.D.: $150,000 10/15/18
The law requires that when the 1st lender records his notice of default (NOD), his trustee must send notice of the NOD to the 2nd T.D. holder and all other junior lien holders within 30 days. That notice by the senior lender strikes the fear of being wiped out into all junior lenders. This notification to junior lenders sets the stage for a drastic discount of his note. You, the investor, have several options: You can approach the property owner with a short sale proposal offering a price less than the total amount owed. This strategy requires the cooperation of the owner and his acceptance of little or nothing at close of escrow and the holder of the 2nd to accept a discount of his note.You, the investor could sit back, hope that the property does progress to trustees sale and eliminate the 2nd loan completely. Of course this plan requires at least $350,000 cash to bid at the sale.The 3rd option is the Jr. lender buyout. This plan requires only minimal investment and no contract with the property owner at all. If you choose this option, the first step is to identify the holder of the Jr. loan. In our example, the Jr. T.D. holder is the lender of the $150,000. Call any title company, ask for customer service, identify the property address and request a faxed copy of the $150,000 Trust Deed recorded on 10/15/05. At the same time, request any subsequent assignments of that Trust Deed just in case that loan had ever been sold since its origination on 10/15/05. The Trust Deed and any possible recorded assignments will contain the name and address of the Jr. lender.
Call information to see if the lender’s phone number is listed. If not, write him a note. Your approach should go something like this: I’m contacting you today regarding the Note & T.D. that you hold against the property located at “220 Elm St”. I may be able to help you with the problem there. First of all I would like to know if you have received your copy of the NOD filed by the senior lender. I want to make sure that you understand the problem that this creates. My business is buying distressed Notes and I may be interested in making an offer on your Note and T.D. before the foreclosure by the senior lender wipes your T.D. off this property. Have you considered selling your Note and T.D.? If so, how much do you have in mind?
Before reaching an agreement on price, remember to always review the note to understand all of the terms of the loan. When you do reach an agreement to buy the Note and T.D. an “Assignment of Deed of Trust” is prepared and recorded and the Note is transferred to you now making you the holder of the Jr. T.D. and Note. Now that You are the holder of the Jr. T.D., your first step is to bring current the delinquencies on the Sr. T.D. That advance to the Sr. T.D. stops their foreclosure and now gives you the right to start your own foreclosure. Even if your Jr. loan has been kept current, you have the right to foreclose to recover your advances.
Now, choose a trustee to process your foreclosure. (I suggest calling County Records Research at 800-664-2567; they are a full service trustee. Trustees costs are controlled by state law and are almost identical statewide) Fax or email your trustee a copy of your Note & Deed of Trust to start the process. So long as the Sr. lender is being kept current by you, the Jr. lender, the senior lender cannot foreclose. And, all of your advances to the Sr. lender will be added to your own loan payoff. Also, your advances will earn you interest until paid off. Now, one of three things will happen. The property owners will find the money to reinstate your advances and delinquencies. If this happens, the return on your investment will be phenomenal on this Note that you bought at a huge discount. This outcome is unlikely.The property will probably progress all the way to trustees sale. IF this happens and a bidder buys the property, you will be paid in full, interest and all, on a Note & T.D. that you bought at a huge discount. This outcome would mean a fantastic return on your investment.The most likely outcome however, is that the property will progress to trustees sale, no outside bidders will bid, and then the property will then revert to you, the foreclosing lender. You now own the property subject to the Sr. loan. So, if you purchased the 2nd T.D. and Note for say $10,000 from the original distressed Jr. T.D. holder and then advanced a total of $20,000 to keep the Sr. T.D. holder current, your investment is $30,000. On the day of your trustees sale, your total bid consists of your $150,000. T.D. plus the $20,000 in advances to the 1st for a total bid of $170,000 and because the bid is on your 2nd Trust Deed, it’s unlikely that anyone will bid. Again, this makes you the new owner of the property.
Now, how much did you just pay for the property? Well, your purchase of the Note for $10,000 and your advances to the Sr. lender in the amount of $20,000 makes your investment total to be $30,000. Then taking ownership of the property at the trustee sale, subject to the 1st T.D. in the amount of $350,000 means that you just bought a $500,000 house for $380,000. Again, even when properties have very little or no equity, and you have relatively little money to invest, “Junior Lender Buyouts” can be extremely lucrative!
GENERAL RULE
When a property has a lot of equity, the general rule is to approach the owner during the default (stage 1) with an offer. It is in his interest to accept an offer of a few thousand dollars to get out before losing everything at the foreclosure sale. When a property has little or no equity, you can proceed with a “Junior Lender Buyout” or simply step back, be patient and wait for the trustees sale. The trustees sale will wipe off all junior liens, creating equity. 65 to 75% of the time no outside bidder will show, and the property will revert to the foreclosing beneficiary. Now is the perfect time to low ball the lender with an offer substantially below the minimum bid at the trustees sale before s/he incurs any costs, such as commissions, clean up, repairs and holding costs.
SUMMARY
There are three key elements to buying cheap real estate. First you must know which properties are in trouble and know exactly at what stage of the foreclosure process the property is in. Second, it is critical to know how much time the owner has left. Third, you should always know all the trust deeds (loans) that are against the property so that you can establish the lowest possible price to offer. These three elements are researched as completely as possible on every property giving you the most important information that any buyer can have.
Once you understand the foreclosure process, profit potential is unlimited. The information provided does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. You should contact your attorney with respect to any legal matter Terry Jenkins – Realtor / Auctioneer CREA – Certified Real Estate Auctioneer® Jenkins Real Estate Auctions LLC Entity No. 202358616912 Formed In CALIFORNIA Registered: State of California Secretary of State Surety Bond Auctioneer/Auction Company Bond Number 387770D 916-588-0067
