Questions abt a foreclosure auction in California

15 Replies

I'm interested in learning more about the foreclosure auction process for a specific property in California and had a few questions (well I have many, but I'll start with a few). Appreciate any responses.

Here's some basic info on the property:

Auction is Jan 2021

I estimate the property is worth ~$500k post-renovations

It is currently occupied

According to ServiceLink who is running the auction, there are two mortgages on the property - a negative amortization and a revolving credit line

The property was last sold for ~$400k in the early 2000s 


Here are a few of my questions:

According to RealtyTrac, the property has an estimated opening bid of ~$425K. In the description, it says that this is usually based on the remaining loan balanced owed to the lender. Where is RealtyTrac getting this number from? Is it accurate? And if it is, should I basically assume that the remaining loan balance is the floor on the auction price, because anything below that and the bank will simply purchase at that price? Assuming in this scenario that the bank thinks it can sell for ~$500k. 

There appear to be two liens on the property. How can I find out definitively which lien we are bidding on at the auction?

How can I determine the $ amount of unpaid property taxes?

The property is currently occupied. Is there any way to know if the property is tenant or owner occupied? 

@Dan A.

Few things.

1. New foreclosure laws in effect in California where non profits and others can buy property after auction so review this. For investors basically you will not get a good deal on an auction as many real estate companies team with non profits and others.

2. They typically get information fro public court records which state how much is owed on property by the foreclosing entity

3. Make sure you know which lien is being auctioned, first or second. Do not assume

4. Make sure you run title if you are bidding. Reason why is even a first position lien could have taxes and other superior liens on the property

Property tax information is available from the county tax collector.  You usually just need the APN number (eight digits xxx-xxx-xx) in California.  

You don't have a sale date yet. Sales dates don't get set out that far in advance on California properties. Maybe you have an estimated sale date.

If the "estimate" (that's all it is, a guess based on assumptions) of Realty trac is a $425 bid and you think its worth $500 after reno, unless your reno is less than $5 grand, you have one very thin margin of profit and that assumes you have no junior liens or other big ticket items to contend with.

Lender can't bid more than their total debt (The other lender can bid though).


Also, to clarify some of the other poster's comments.

1) The new law that goes into effect in January, may have an impact on some bids however, no one can "Team with non profits and others", as this teaming up is specifically prohibited. If you intend to owner occupy for a year, you may be eligible to bid so, you may have the same bidding power as others and, maybe even an edge considering if you are the successful high bidder, no one else gets to announce any intent to bid after the sale is held.

2) the NOD has the defaulted amount owed on the day the NOD (Notice of default) was filed. The NOTS or NOS (Notice of sale) has the total amount owed as of that date and the original loan amount (Excluding legal/foreclosure fees). You don't typically get to know to the penny what is/was owed on any given day. It's not typically relevant if you are a bidder unless you are bidding on a junior lien foreclosure.

3) read #2...don't bid on a junior lien unless you know you are and know the math.

4) While I agree running title is good. Senior lien is senior. Taxes always are superior no matter what and just follow the property. You don't need title for that. They are public information so, go find out what the taxes are at the assessors office. They do not have to be paid at time of sale if they are delinquent. IRS liens are superior but sunset after 120 days if not sooner. 

To your other questions, you won't know unless you knock on the door.

Thanks everyone for the thoughtful replies.

@Ron S.  I agree that there is little to no margin for error given the terms presented. That's why I am asking the question about the estimated opening bid. I guess my question is: if that $425k bid amount is what is owed to the bank ---> and the property is worth $500k ---> bank should have no problem purchasing at $425k to protect their own interest. So if I'm not willing to pay more than $425k, is this one DOA?

Another question for the group is how to conceptually think about the max purchase price that a flipper will pay on a property like this. Here's how I did the rough math:

Estimated ARV of $500k

Less: $50k for repairs / renovations / interest. Added layer of uncertainty given that the property is occupied so there is no way to do an inspection 

Less: $35k for closing costs + commissions. 5% on $500k = $25k + $10k for add'l closing costs

Less: $40k for profit. This is a total guess, but anything below that seems like a razor thin margin for error given the uncertainties involved

$500k - $125k = max flipper bid of $375k. Is something like that in the ballpark of how others will be looking at a transaction like this?

If the value is more than the debt then, the lender's opening bid will be their total debt. They won't bid a dime over their opening bid. That doesn't mean someone else won't. if they bid $425M, you have to bid a dollar over at least to win the bid.

A slight clarification; the lender is not "purchasing" it at any price, let alone $425M if they are the foreclosing entity. They are entering a credit bid where there is no exchange of monies. Lender already owns the note. The foreclosure extinguishes the note and transfers property to them (If no one bids) via trustee's deed.

Your math is scary (At least for me). No way would I put that cash out in this climate for that estimate of return. Others may, I wouldn't. 

Thanks @Ron S.  Can the lender bid a value below their debt? Say they decide that they only want to bid $375k even though their note is worth $425k, going through some of this same math that I walked through above (I understand it's a little different because they don't need the same profit margin). Are they able to do that? Or is the opening bid always the amount of their total debt? I guess what I'm trying to determine is whether this deal is DOA for me because the lender note is valued at more than I would pay for the property.

And I agree, that type of deal scares me as well. We would be buying as part of a buy + hold strategy, so I'm trying to see what type of pricing I would be up against and whether I can make the numbers work for me considering I don't have to take into account agent commissions, closing costs, or a quick profit on a sale.

Originally posted by @Dan A. :

Thanks @Ron S. Can the lender bid a value below their debt? Say they decide that they only want to bid $375k even though their note is worth $425k, going through some of this same math that I walked through above (I understand it's a little different because they don't need the same profit margin). Are they able to do that? Or is the opening bid always the amount of their total debt? I guess what I'm trying to determine is whether this deal is DOA for me because the lender note is valued at more than I would pay for the property.

And I agree, that type of deal scares me as well. We would be buying as part of a buy + hold strategy, so I'm trying to see what type of pricing I would be up against and whether I can make the numbers work for me considering I don't have to take into account agent commissions, closing costs, or a quick profit on a sale.

They can but won't. Not at those numbers. The only reason a lender would bid below the note is where the value is tight and they don't want to take the property back so, they will set their bid below the debt, slightly. You should be very leery of a lender leaving meat on the bone with a lower bid than their debt. That means they know something you don't, and are ok with taking a loss because taking the property would mean a bigger loss down the road for them. Better to take a small loss now, and dump the problem (AKA toxic landfill) on your unsuspecting lap.

If this deal only works for you with the lender letting it go below $425, you don't have a deal. It was dead to begin with.

 



Question for @Ron S. and any other experienced foreclosure auction investors:

Can you help me think through the worst case scenarios here? These are the things that I've come up with so far, in order from "this is an unmitigated disaster" to "not ideal but it's manageable." I know there are a lot of other potential outcomes, so I would love to fill this out with other potential risks.

- You bid on a lien that is not 1st priority

- There are major foundation issues that will require significant renovations

- The property is occupied by a tenant and we will need to honor the lease

- There are unpaid property taxes

- Owner decides to trash the property on their way out

What am I missing? I know there are a million different scenarios, but I'm interested in downside scenarios that are specific to the foreclosure auction process.