With that in mind, below is a guide to how trustee sales work. Keep reading to learn the pros and cons for using this method to buy a home. Armed with this knowledge, you can decide whether trying to buy a home at a trustee sale is right for you.
What is a trustee sale?
In real estate, a trustee sale means the sale of real property through public auction. A trustee sale usually occurs when the homeowner is in default on their mortgage, resulting in a foreclosure. However, it's possible for your home to be put up for trustee sale if you owe a significant amount of back property taxes. Notably, this is a "trustee sale" rather than a "trust sale," where the court is involved because an estate is going through probate.
A trustee sale is typically the second-to-last step in the foreclosure process in a nonjudicial foreclosure state. In this case, after the auction is over, ownership of the property will be transferred to the highest bidder. However, if no bidder is found for the property at the foreclosure auction, the lender will officially take over ownership and go through the process of trying to sell the property more traditionally.
How do trustee sales work?
Before you can learn about the benefits and disadvantages of buying a foreclosed property, it's important to understand how trustee sales work. Below is an explanation of the process from start to finish.
1. The homeowners miss payments
The first step toward a trustee sale occurs when the borrower starts missing their mortgage payments. Typically, before starting sale proceedings, the loan servicer will send a notice of default to the borrower. This informs the homeowners of the fact they have missed payments, of how much they owe, and how long they have to rectify the situation before more aggressive steps are taken. It also gives the borrower time to work with the loan servicer to become current with their payments.
2. The lender sends out a notice of trustee sale
Though the exact process varies by state, typically the loan servicer will give the borrower somewhere between 60 to 120 days to try to become current with their loan. If the homeowners continue missing payments and do not make an effort to get in contact, a notice of trustee sale is typically sent to the borrower and the county clerk's office. Once the notice has been sent, an advertisement is typically published in the local newspaper, indicating an auction will take place, as well as when and where.
Unlike in a judicial foreclosure state, the foreclosure process in a nonjudicial foreclosure state can take place without going through the circuit court. In this case, the deed to the home usually contains a power of sale clause, which states the homeowner agrees to this process when they accept the loan.
3. All parties prepare for the auction
Before the sale date arrives, both the lender and any interested investors must prepare for the event. In this step in the foreclosure process, a neutral third party known as the trustor -- usually an escrow or title company -- works with the loan servicer to set an opening bid that encompasses a fair price for the property, as well as any other necessary payments that may exist, like a lien or judgment.
On their end, interested investors are usually required to register for the auction in advance. Often, they must also prove they have sufficient funds to participate. Typically, loans can't be used to buy a property at auction. Instead, the highest bidder has an obligation to present a cashier's check for a percentage of their bid before leaving the auction. This amount is known as a forfeit deposit, and the balance is required to be paid shortly after the auction. However, in most cases, it is possible to work with a grantor to secure the funds.
4. The auction takes place
In most respects, a trustee sale is similar to any other type of public auction. On the sale date, qualified investors will gather, the trustor will start with the opening bid, and the price goes up from there. Once the bidding has been completed and necessary funds have been exchanged, the successful bidder will be given a trustee's deed, which will name them as the new owner of the property.
As mentioned above, if no one bids on the property at the trustee sale, it then becomes a real estate owned (REO) property, which means owned by the lender. The lender will then use more traditional methods, specifically advertising a foreclosure sale on the multiple listing service (MLS) and waiting for a qualified buyer to make an offer.
Pros and cons of buying a home through a trustee sale
As an investor, there can be major benefits to buying a home through a trustee sale, as well as some disadvantages you will need to be aware of. To that end, we have listed the most common ones below.
The biggest advantage of buying a home through a trustee sale is the opportunity to buy real property at a rock-bottom price. Typically, when the lender and their third-party trustor set the price for the opening bid, they choose a value that will cover what's owed on the property. This amount, effectively the purchase price, often can be significantly less than market value, meaning you have the potential to get the property at a steal.
Another benefit is that you may face less competition than if you were trying to buy the property through traditional means. Since typical financing is not allowed at this type of sale and a heavy forfeit deposit is usually required to participate, the pool of interested buyers is usually much smaller.
Buying a home at auction is a much different process than through a traditional sale. Typically, by participating in the auction, you've agreed to buy the home as is, which means you won't get to perform any inspections on the property or negotiate any repairs. In most cases, you also agree to accept any existing title issues, like liens or judgments.
Depending on the circumstances surrounding the foreclosure, you may also be responsible for following through with eviction proceedings. Often, the former owner or their tenant may still be living in the home at the time of the trustee sale, so it will be up to you to get them out.
The bottom line
While buying a house through a trustee sale can have big benefits, there are also some major caveats to consider. Make sure you have a thorough understanding of each of them before you make the decision of whether buying a home through a public auction is the right choice for you. However, you should also be sure to do your due diligence on any property you consider buying.
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