Crapshoot on the Courthouse Steps

Monday through Friday, usually around two in the afternoon, a small group of people — mostly men in shorts, T-shirts and sneakers — assemble around the steps of the Orange County Courthouse in Santa Ana, Calif., for what has become a common side-effect of the nation’s ailing real estate market: public foreclosure sales.

Most at the sale are seasoned real estate investors — contractors, brokers and developers — who troll the icy foreclosure waters, seeking bargain prices. Some are novices testing the foreclosure landscape. All are looking for the same thing — a steal.

But if you’re considering buying property at a foreclosure auction, experts say there are a number of things to watch out for.

First, real estate investors need to be aware these foreclosure sales — called Trustee’s Sales or Sheriff’s Sales in most states — are a required part of the foreclosure process and are different from the public auctions run by auction houses on behalf of lenders, homebuilders or home sellers.

Larry Blachman, founder of Larry Blachman Realty and author of “Buying Foreclosures at a Trustee’s Sale,” said that buying foreclosures at the courthouse steps is one of the most dangerous ways of buying real estate. Before investors attend an auction, he said, they should learn how auctions are conducted, what special ground rules apply and what risks are involved. He urged potential foreclosure investors to do plenty of research on the property ahead of time. Moreover, he recommends that California buyers read the California Civil Code, section 2924, which covers the legal aspects of foreclosure procedure.

“Go to three or four sales with no money in your pocket,” suggested Blachman. “You’ll get a feel for how it works. Observe what’s happening when the regulars bid. You’ve got to have a game plan set — and stick to it.”

He also said that the winning bidder is essentially buying the position of the loan. Therefore, buyers need to determine if there are senior liens, unpaid property taxes, IRS income tax liens, mechanic’s liens, judgment liens, easements or zoning violations — and these are just some examples of potential problems facing auction investors.

Buying a home at auction is a complicated procedure and the rules often vary from state to state.

“There is a lot of homework and legwork that has to be done,” Blachman said.

The circumstances under which foreclosure sales are conducted are governed by state law or precedent. In New York, for example, it is customary to hold auctions in the lobby or on the steps of the courthouse of the judicial district in which the property is situated. In New Jersey, the auctions are at the county sheriff’s office. In Connecticut, they are on the premises of the house to be sold.

At the Santa Ana sale, James Vollaire and his investment partner Ed Bonilla found what they believed was an excellent bargain. For $1 over the opening bid of $472,124, they purchased a luxury three-bedroom, two-bathroom condominium in the exclusive Rancho San Joaquin section of Irvine. The 1,800 square foot home was bought for $495,000 in 2003. In August, a similar condominium in the area sold for $667,000, according to the Multiple Listing Service.

 “I think I got a very good price,” said Vollaire, a burly, plain-spoken man who has bought eight auction homes in the past three years. “It has some equity in it and we drove by the neighborhood and it was in a good location on a golf course.”

Vollaire said his strategy was simple: “Buy low, sell high.” It’s a strategy he said has paid off with other auction properties he has flipped.

As the number of home foreclosures has grown this year, so has the number of foreclosure sale opportunities, and many homebuyers are tempted to enter this narrow, specialized market.
Buying a house at the foreclosure sale is far different from buying a house through a broker. And though foreclosure sales offer a real opportunity to find a house at a below-market price, the risks, too, are real.

In California, for example, winning bidders pay the entire price in cash or cashier’s checks. Vollaire’s purchase was the only one by a bidder at the courthouse steps on October 16. On that day, Travis Toth, the auctioneer representing Fidelity National Agency Sales and Posting, processed 32 homes. Most homes didn’t sell and went back to the bank. About 10 units were postponed because homeowners had filed for bankruptcy. Still others were pulled because homeowners paid overdue mortgages at the last minute.

Toth said he auctions 30 to 40 homes every day.

“Most go back to the bank,” he said. “It’s getting worse. Every day nine out of 10 homes go back to the bank. Investors aren’t buying the properties because there’s no equity.”

Toth said that the number of foreclosures in Orange County and throughout the region is growing, especially in the Inland Empire and Riverside counties.

“With property taxes coming in November and February of next year, we’re going to see a lot more foreclosures auctioned at the courthouse steps.”

Foreclosed auction properties for sale usually represent prime buying opportunities for real estate investors, but given the oversupply of homes on the market and declining home prices, investors are reluctant to buy, said Gerald Lemoine, a real estate investor from Garden Grove, Calif. who attended the Santa Ana auction.

Lemoine said bargains are difficult to find as banks try to recover the total amount owed on homes, leaving a small margin of potential profit for people interested in capitalizing on an auction investment.

At the Oct. 16 trustee sale, eight investors huddle outside the Santa Ana Courthouse as auctioneer Toth rattled off several foreclosed properties.

Randy Siems, a real estate investor from Pensacola, Fla., showed up at the Santa Ana courthouse auction to purchase a California investment property.

“I’m living now in Huntington Beach for a month and looking to buy a courthouse foreclosure,” said Siems, who just sold two investment properties in Kansas City, Mo. “I want to buy something in Orange County near the beach and rent it to tourists.”

Properties that are about to be auctioned at foreclosure sales can also be found by scouring court records, legal notices in newspapers, the real estate classifieds or websites like RealtyTrac. While investors can find deals at foreclosure auctions, not all are bargains. Pitfalls vary. Some buyers bid too much in the auction frenzy. Most buyers cannot inspect the property beforehand and find out later that the property is missing items like toilets, light fixtures, cabinets and doors. Or, a property may be encumbered with several mortgages, which the new buyer will be responsible for paying.

“Buying property at the courthouse is like having a license to steal,” said Blachman. “If you know the rules, you can make a killing. However, if you don’t know the rules of the game you can get killed.”

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