Pitfalls getting into buying at Trustee Sales

Foreclosure Investing
1

I an new at trustee auctions.? I have a house in mind to bid on.? It is a 1st.? If I win the bid, does the 2nd go away and what are the pitfalls I need to watch out for.? Any help would be most appreciated.

2

Yes, the second’s interest in the property is wiped out if the first forecloses. Couple of things to watch for:

  1. Property taxes - they are always senior, and you will be responsible for ALL past due property taxes.
  2. Other liens - you need to make sure there are no liens that would be senior to the first you are bidding on. They act just like loans and some people mistakenly think the loan is in “first position” when it is actually junior to a lien. Fairly rare, but you need to make sure you do a full title search and watch out for things like child support judgements.
  3. IRS Liens - even if an IRS lien is junior they are still entitled to 120 day right of redemption - essentially they can take the house back from you for the amount you paid. They rarely do this.
  4. Fraud - we’ve seen a couple of cases recently where there was what appeared to be a first, but it turned out the previous first that was refinanced never received funds and the reconveyance (the document that records that a loan is paid off) was a fake. Basically the mortgage broker stole the money that should have paid off the earlier first. Note that if you bought the new first after foreclosure, you’d likely still have to pay the fraudulently reconveyed first off as well as they never lost their security interest as they did not record the reconveyance. Very unlikely, but this is one of th reasons title insurance is a good idea, and you don’t get title insurance when you buy at foreclosure auction.
  5. No inspections - you need to be comfortable buying the house as-is with no inspections and be prepared to find some unexpected repairs.
  6. Having to evict the prior owner. I usually try to offer cash-for-keys. Two to five thousand to have them move quickly and leave the place clean. Last thing is you want is a battle - that usually results in bad stuff like the prior owner flushing bags of cement down the toilets (an expensive repair).
    Some of these things are very rare, but they can and do happen. If you go into it with eyes wide open, and you keep your bid low enough to make the risks worthwhile, you can do really well buying at auction.