What California Real Estate Investors Should Consider When Purchasing Real Property at Foreclosure Auctions

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Author: Staff

The possibility of foreclosure has been a persistent reality for real estate owners for some time. Foreclosures often occur when property owners default on their mortgages. County or state authorities may also foreclose on a property after the owner fails to pay property taxes. In some situations, a homeowner’s association may foreclose for failure to pay fees or assessments, or for other breaches of the applicable covenants, conditions, and restrictions. For California real estate investors, foreclosure auctions could present an opportunity to acquire property below market price. Investors should be aware of the significant risks that often come with properties sold at a foreclosure auction, and they should carefully research any property before the auction date.

Judicial vs. Nonjudicial Foreclosure

California allows two types of foreclosure: judicial and nonjudicial. In a judicial foreclosure, the creditor or its agent must file a lawsuit and obtain a court order before they may conduct an auction. Nonjudicial foreclosure, which does not require a court order, is possible when the deed of trust signed by the mortgage borrower includes a “power of sale” clause. This clause authorizes a designated trustee to conduct a foreclosure, and essentially waives the borrower’s right to a court proceeding. Creditors must still meet numerous requirements regarding notice and opportunity for the borrower to cure a default.

Right of Redemption

From a real estate investor’s point of view, the most important distinction between judicial and nonjudicial foreclosure involves the borrower’s right of redemption:
– In a judicial foreclosure, the defaulting borrower can get the property back by paying the full amount owed to the lender, plus additional costs. The deadline to exercise this right is either three months or one year after the auction date.
– In a nonjudicial foreclosure, the borrower has no right of redemption. All sales are final, so to speak.

What You See is What You Get

Perhaps the most important aspect of foreclosures sales that real estate investors should understand is this: All sales are “as is.”

Any repairs needed on the property are the buyer’s sole responsibility. The party conducting a foreclosure auction does not own the properties that they are selling. As a result, they are not in a position to warrant that the property is in anything resembling good condition. This includes both physical damage and defects in title. It is impossible to overstate how important it is for investors to research a property they are considering buying at a foreclosure auction. If you are buying the foreclosure property to flip it, you better make sure your budget is prepared for hidden surprises.

Financing a Foreclosure Purchase

At the beginning of this article, we mentioned that foreclosure auctions offer the opportunity to acquire properties at below market prices. That is possible, but by no means certain. Investors should research the likely value of a property up for auction, and compare that to the bids sought by the creditor. From a creditor’s point of view, the purpose of a foreclosure auction is to recover the amounts owed on the mortgage principle, property tax, interest, and legal costs, regardless of the property’s market value.

Investors who plan on bidding at a foreclosure auction must have their financing in order ahead of time. Creditors welcome investors who can pay cash for a property, but that is not an option for many investors. Regardless of how the winning bidder plans to pay, they must make payment at the end of the auction, or very shortly afterwards. It is common practice to have cashier’s checks available at the auctions.

More Blog Posts:

Due Diligence Tips for Commercial Property Purchases in California, Titles and Deeds, October 9, 2018

Foreclosure Sales and California Real Estate Investors, Titles and Deeds, July 31, 2017

California Court Rejects Wrongful Foreclosure Claim, Titles and Deeds, April 14, 2017