How do I buy one?
The first challenge is finding out about these properties. There are Internet sites that you can access to find houses that have Notices of Default filed on them. Banks file these notices because the owners are not making their mortgage payments or have not paid a balloon payment due on the property. These notices are a matter of public record.
The sites on the web that give accurate information are the ones that you should subscribe to; subscriptions can run from a few hundred to a few thousand dollars a year. They provide numbers to call to check the status of the loan(s) and the amounts. A Notice of Default (NOD) is the first filing, where someone has defaulted on his monthly payments or on her balloon payment. Banks are obligated to publish these notices for a 90-day period.
This is the time to do some diligent reconnaissance on comparable properties and try to ascertain the condition of the property. You can drive by the house, though you cannot get in, as generally someone is living there.
Are there other deeds of trust/notes on the property? Past due property taxes? Does a family live there? This is the time to know a friendly Realtor and a title company representative. Going back to your Internet foreclosure site, the next notice you will see is a Notice of Trustee's Sale. You will see this about 90 days after the filing of the NOD. This gives the date that the property will be auctioned on the courthouse steps.
There are no actual steps at 400 County Road, Redwood City, where San Mateo County properties are auctioned, but it is done outside the building. This is actually a fascinating process — it is worth showing up at 1 p.m. (same time everyday) to watch the bidding. A man with a clipboard calls out the address of the first property to be auctioned and the minimum bid. Your Internet site should have given you the date and time of the auction and the minimum amount that the bank will accept to let you buy the property. If the amount owed to the bank is $786,456, you had better have that amount in your pocket — yes, in your pocket — in the form of cashier's checks made out to cash. If you don't have the exact amount, you will get a refund in the mail a few days later for your overpayment. They do not accept underpayments.
The opening bid stated by Mr. Clipboard is usually the amount of the loan. However, banks have gotten smart lately, and sometimes the opening bid is less than the loan. Banks have realized that the property may be so over-encumbered that the amount owed to them will never be realized in a regular sale. The higher priced the property, the more loathe the bank is to take it back. Banks generally figure that repossessing a house, with all the ensuing effort and cost of placing it on the market, will run them 15 to 30 percent over the cost of the loan.
The above primer is a rough draft of the complete process. Many, many hiccups can happen along the way. What are the biggest pitfalls? If you never get inside the house, what is the real condition? I have seen houses where rooms are nothing but Sheetrock — no plumbing, appliances or fixtures. Is there some loan or tax lien that was not cleared from title? Who is still living there? Do you want to be the one to evict a family? Are there permit issues? Zoning problems? Termites?
The list of potential issues is substantial. The rewards can also be substantial, but this process is definitely for those with large wallets and iron stomachs.
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