"Trustees Deed", What are my risks?

Seasoned realtors often contact me with questions about the trustee sale process in Arizona. It's certainly no surprise that we are working in a real estate environment inundated with distressed properties. Most are either in pre-foreclosure or post-foreclosure (REO) status. If we aren't waiting for a short sale approval response we might be competing with multiple contracts on that choice REO property. The prospect of purchasing a home as a buyer in the current real estate climate can be frustrating, nonetheless. An alternative, especially attractive for cash buyers, will be purchasing a property at trustee sale. Even the most experienced realtors may not be aware of the nuances associated with this type of purchase. While discounts on property are plentiful, it's important to understand the risks associated with trustee sale purchases.

Most people will associate this risk with the physical condition of the property. While this is certainly a valid concern, the first thing that should be examined is the condition of title. This is the most important aspect of due diligence to consider. Most of us are used to receiving a warranty or general warranty deed when we purchase a home. When buying a property at trustee sale, the trustee will convey what's called a "Trustees Deed Upon Sale", sometimes called a "Trustees Deed". This is a very different conveyance instrument but can be safe as long as proper due diligence is obtained. A "trustees deed" transfers ownership without covenant or warranty as to the condition of title. 95 percent of all property financing is secured by deed of trust in the State of Arizona. This gives lenders a non-judicial remedy when a borrower is in default. Not only are original or 1st mortgages secured by deed of trust, but most junior or subordinate mortgages are as well. That means that all the 2nd mortgages and home equity lines of credit that were prevalent in the lending boom will foreclose by trustee sale along side the liens that are senior in position. The trustee is not required to disclose to the general public whether the property being sold under the deed of trust is in 1st position.

Other title defects may exist as well. The IRS may file a tax lien against the property giving the federal government a 120 day right of redemption. Subordination agreements making one lien subject to another can be hidden in the public records. Lis Pendens may also affect marketable title. 

Lien theory can be very complex and without experienced trustee sale professionals to help, a seemingly good deal can turn sour very quickly.