Pasley Realty Inc.
	Property Sales & Management (562) 421-3094 pasley@pasleyrealty.com Lakewood, California

In Southern California there are three basic types of foreclosures, Conventional, FHA/HUD, VA & CAL VET Foreclosures, each with vastly different rules and procedures. The VA and HUD/FHA foreclosures offer opportunities for purchase with a low down payment even for non-veterans, and the opportunity to inspect the property before you buy. Conventional foreclosures are CASH transactions and you are bidding sight unseen on property being sold AS IS with no warranty or escrow, and which may have additional loans or liens remaining against the property.

Conventional Lender and Private Party Foreclosures.

The following is a brief overview of what is involved in a Conventional Foreclosure and is not intended to be all inclusive. Before bidding one a property you should make a through study of the subject. These procedures do not apply to FHA/HUD or VA foreclosures.

First, a brief definition of foreclosure.  Foreclosure is the process where, after a buyer has failed to make the payments as agreed, and has been served with a notice of default, the property is sold at auction.  This auction process is the foreclosure. The borrower still owns the property until the auctioneer says sold, and may stop the sale by paying what is owed plus applicable cost. Obviously, the defaulting borrower, is not going to let you in to see the property before the foreclosure auction.   After the auction, if no one bids successfully on the property, the foreclosing lender (usually a bank), becomes the new owner.  Property owned by the lender/bank after a foreclosure is called Real Estate Owned or REO. 

The Conventional Foreclosure Sale:  When a conventional lender (banks, thrifts etc.) or private party forecloses on a loan (1st, 2nd or 3rd or higher Trust Deed) the property is sold at public auction. These auctions are  held in a public place and must be advertised in a paper of general circulation. The sale announcement will include the place of the auction and the amount of the default. Auctions are often held on the steps to the courthouse or public library but may be held at any public location.

On the date of the sale, all bidders gather at the designated location and time with a cashiers check or cash in the TOTAL AMOUNT they intend to pay for the property. These are ALL CASH ONLY sales payable in either cash or Cashiers check in full at the time of the auction. There is no loan allowed, property inspection, termite report or any other contingency.

The auctioneer will announce the auction, usually by calling "Hear Yea, Hear Yea, all parties interested in Case # 1234567 draw near" or something similar. You will approach the auctioneer one at a time and give your name and discreetly show him the amount of your cashiers check or cash. The auctioneer will note your name and the LIMIT of your bidding ability as evidenced by the CASH or CASHIERS check you showed him. Bids over this recorded amount will not be accepted from you unless you show an additional check or cash during the bidding. Note, the amount of the funds you show the auctioneer is equal to at least the maximum you are willing to pay for the property. The foreclosing party automatically has an opening bid equal to the amount of the foreclosure. The opening minimum bid may be higher than the advertised foreclosure amount due to foreclosure cost or the foreclosing lender bringing senior loans current.

Then the bidding will start. Remember you are bidding on property sight unseen and sold AS IS with no escrow. You have never been inside of the property and have no idea of the condition. The auctioneer will take bids from each person, verifying the bid against his list of your bid limit. Once there is no further bidding, the auctioneer closes the bidding. The winning bidder then hands over the CASH or CASHIERS check and the auctioneer hands over the deed. That is it, no escrow, no termite, no delay, you own the property warts and all. You really need to know what you are bidding on or you could really get burnt. Now all you have to do is remove the former owner if they have not yet moved out, (normally they have not) and go see the what's left of property for the very first time. All sales are AS IS and FINAL. 

It is important to know what you are bidding on. Do NOT assume the loan in foreclosure is the first trust deed, do your research!  You might be bidding on the 2d or higher Trust Deed and not the First! This means there are more senior loans  to you and they may be in foreclosure too! All trust deeds are subordinate to a lower number trust deed (1st is senior to a 2nd, which is senior to a 3rd etc).  That means that if you bid on the 2d Trust Deed Foreclosure and win, and the first Trust Deed then forecloses, you are wiped out, and loose your investment.  You want to bid on the 1st Trust Deed or be prepared to pay off any senior loans.

Some (many) former owners are very angry about loosing their property and will damage it prior to moving out or strip it of anything they can sell for cash. Things I have seen are: water hose running inside the house on the hard wood floor, bag of cement in the toilet, removing everything from toilets to cabinets and more.   With copper selling at a good price, copper wiring and plumbing may not still be in the house when you get it through foreclosure.

The bottom line is, if you have lots of money in the bank and are not afraid to take risk, you might get a bargain and make a good profit, or you could get caught up in the bidding and overpay, or buy a property with lots of expensive problems. These are definitely buyer beware investments and there are risk. 

I would recommend you do a few dry runs, by selecting a  property or two, doing your homework on them, and then attending their auctions strictly as an observer, before you try to actually bid on a property. After the auction follow up on the property and see what happens, ask the new owner if you can see inside etc.  This will give you a better feel for the process before you place you capital at risk.

Real Estate Owned (REO)

Once the lender has completed the foreclosure process and gone to auction, if no one bids on the property, or the lender has the highest bid, then the property becomes Real Estate Owned or REO.  These properties are usually available for purchase and will usually be listed for sale with a real estate agent or the lenders in house company. Once listed, this property becomes a fairly normal transaction just like any other home for sale with one notable exception. That exception is that banks typically take a longer to approve any offer, so patience is a must. But unlike the foreclosure process, you can inspect the property prior to making your offer, the bank may make some repairs and you can obtain financing for the property. The lender may include terms of sale requiring you to obtaining your loan from them, or to obtain the loan from anyone but them. You can contact the REO department of the lender to determine how they are handling the property or contact Pasley Realty Inc, we would be happy to represent you in this transaction.

The above is not intended to be all inclusive and is intended to only give a general idea of the risk and complexities of the process. Before bidding on a property, you should do additional research and thoroughly educate yourself on the process. The above information is believe correct, but is not guaranteed. Pasley Realty Inc., assumes no liability for the use of or reliance on any information contained herein. 
Pasley Realty Inc., is licensed to conduct real estate business in California.

Copyright^© 1995-2008 Pasley Realty Inc., Melvin K. Pasley President/Broker All rights reserved, updated 08 May, 2008.