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So, You Want to Buy a Home At Auction?

A 15-minute primer on what it takes to buy a home on "the courthouse steps"

Nearly every day in Sonoma County, a real estate investor buys a home for 15 to 25 percent below market value. Depending on your price range that’s $30,000 to $50,000 less than you’d expect to pay for a home by shopping on the Multiple Listing Service. 

This isn’t a get rich quick pitch or conspiracy theory.

The time and place of these sales are readily known, strictly regulated, and held on public property. I’m referring to what’s known as a trustee sale or “foreclosure auction”, and while covering each step of the process could fill a weekend seminar, if you’re a real estate investor who is wanting built-in equity on your next purchase, here’s a 15 minute tutorial on what you’ll need to buy something on “the courthouse steps.”

 Step 1: Get the Money

There’s only one cover charge for this rodeo: cash, so make sure you bring plenty of it. 

It sounds crazy, but five to ten people on the Santa Rosa courthouse on any given morning have north of half a million dollars worth of cashier’s checks in their back pocket. 

Why? 

Simple, you cannot finance a home at trustee sale; anyone who tells you otherwise simply doesn’t know what they’re talking about. You must pay in valid cashier’s checks.  You can’t bring a bank statement or call your teller to verify your balance, and for better or worse there isn’t yet an iForeclose app. 

It’s their rules and you’ll have to follow them if you want to play the game.  So if there’s a $240,000 opening bid on a property that may go to $270,000, bring one check for $240K and six more for $5,000. If it goes for $251,000, you’ll give them $255K and they’ll mail you a refund check of $4,000.    

Step 2: Do Your Homework

“Never interrupt your enemy when he is making a mistake,” or so a certain Corsican by the name of Napoleon once said. 

It’s anyone’s guess how a commercial bank feels about the average auction shopper, but if you’re bidding on property with $20,000 in deeply buried IRS liens, you can be certain that Chase bank won’t “interrupt” your bid on what’s likely to be a disastrous purchase. 

Do you own homework: perhaps this should be Step 1. The majority of properties at auction have been in default for 16 months or more, you can guarantee that a good amount of those homes have thousands in back taxes, IRS liens, judgements on title or HOA woes. Call a title company and beg, borrow or bribe your way into convincing them to run a title search. 

And no, you aren’t entitled to a pre-trustee sale inspection! Keep in mind that up until the moment that auctioneer says “sold,” there’s a private citizen who still owns that distressed property. So don’t go jumping fences or calling locksmiths unless you’d like to be rightfully charged for trespassing, but feel free to call PG&E to see if the power and gas are on.

Step 3: Go Shopping ... A Lot

Pop quiz involving trivia and arithmetic:

-  How many homes scheduled for trustee sale in Santa Rosa this September? 

-  Of those homes, how many are priced low enough to be a good investment?

Answers:

First, a whopping 373 homes are scheduled for sale this September in Santa Rosa alone. Second, using a four-month average, only 16 of those homes will be purchased by investors. Arithmetic: that’s a meager 4.2 percent. 

And no, it’s not that 95 percent of those homes are deals that fell through the cracks, it’s that the vast majority (89 percent) will be postponed or cancelled while the remaining 6 percent will be taken back by their respective bank and eventually come on the MLS as an “REO.” 

What this means is that you’ll be spending a lot of time at foreclosure auctions. There are ways to determine which properties are more like to sell than others, but as the stats show, it’s actually quite rare that you’ll even have the opportunity to bid on something. 

Again, most properties at auction will be post-phoned or cancelled, and the remaining will be priced too high to make any financial sense - only 4.2 percent are a good deal.  Solution: if necessary, make the time to do your drive-by investigation, title search, and market valuation the morning of an auction (you’ll likely know by 9am if an auction is cancelled or not).  If all that work sounds like a second job, guess what - it is.

The price of buying at auction is steep: steep in time by researching properties and showing up to bid, and steep in risk too. But for those with business savvy and an entrepreneurial drive it can also be very financially rewarding.

Inspired and hungry for more? Take a trip down to 860 5th Street in Santa Rosa on weekdays at 10am to see for yourself. And when you’re truly ready, find a Realtor with experience in auctions ... and whose advice will be more forgiving than an 18th century Corsican.          

Armand Ramirez is a realtor with Century 21 Bundesen in Petaluma. 
He has experience in short sales, auction properties, foreclosures, and traditional sales. Visit him online at www.ArmandRamirez.com.

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