Buying a foreclosure house in California

Foreclosure is probably one of the riskier ways of buying a house, and it requires more research, paperwork and legwork than any other real estate purchase. Foreclosures are potentially lucrative, but certainly can be like walking through a land mine field, ready to blow up your finances.

You can find a bargain house for 60 or 70 percent of its market value, but you can also waste a lot of time, and money, and end up with a rotten place that drags all your investment pot. Still, the profit margins are tempting….

Buying a foreclosure house

There are three stages at which you can buy a foreclosure:

• during pre-foreclosure
• at an auction sale
• as real estate owned (REO) property (bank owned)

Each stage requires a completely different process for buying the house, with different risks and factors to consider.

For a number personal reasons, me and my wife have decided to make our next significant real estate investment in California, US.  Ideally we are looking to buy a house somewhere between Los Angeles and San Francisco, preferably in a commuting town not too far from one of the big centres.

This will probably be a “flipping project”, in which we intend to buy a derelict house, refurbish/rehab it completely and sell for a profit.  And there is a big chance we will buy from a foreclosure!

Pre-Foreclosure

In the pre-foreclosure stage, homeowners have fallen behind on their mortgage payments and received a notice of default from the lender. At this point, they have three months to make up for the default on the mortgage before the lender schedules a foreclosure sale.

To buy in the pre-foreclosure stage, you need to come up with an offer that will tempt the owners to sell the house to you before they go through the distressing process of foreclosure and eviction. This can usually be done by offering a sum that will cover the owner’s mortgage debt and hopefully allow the person to reboot its financial life.

Find the house

Search for a house that foreclosure is imminent, but hasn’t taken place yet. There are several online foreclosure listing sites, that allow to filter the search by area, price, as any other property portal.

Talk to the owners

This is the trickiest bit. Contacting the owners of the house, probably knocking at their door and try to build a rapport with them. They are going through a tough time, and might not even know their home was featured in a public foreclosure listing.

Make an offer

If the owners cannot afford their mortgage, they might accept a low offer that covers their mortgage balance, in order to avoid a foreclosure. If your offer is for less than the mortgage balance the sale is considered a short sale. Lenders must approve a short sale before it can go ahead.

Foreclosure Auctions

The auction process can be different on each county, but I guess that overall is very similar. It is worthy checking with an experienced real estate agent or specialist lawyer, just in case.

In California foreclosure sales, you are not allowed to view the property before bidding and anyone can bid. Some counties require sealed-envelope bids, others require you to bring your bid amount in cash or in cashier’s checks.

Find the the house

Again, searching for houses on most popular portals specialised in foreclosures. It is quite common to find foreclosures in conventional property portal sites as well.

Attend the auction

The time and location will be on the foreclosure listing or on the advertisement about the sale. Certain auctions might be online as well, but to be honest, I would leave the online option only to people who are seasoned on buying foreclosures.

Make a bid

Obviously the highest bidder takes the property. The problem here, is that in many cases, the bank that owns the mortgage of the house will probably be bidding, to ensure that any bidder doesn’t buy the house without covering the entire mortgage debt.  This can reduce the possibility of getting a bargain….

Bank-Owned properties

In many cases, houses will be bought by their bank in the foreclosure auctions. But banks don’t want to own and manage houses. They will probably board up all windows and doors to ensure squatters stay away, and they will put the house back in the market as soon as possible.

Some of the risks

When buying a foreclosed home, it will be “As Is Where Is” condition– the emphasis here couldn’t be stronger. The way in which you saw the home (if you had the chance to see it) before you made the offer, is going to be the exact same when you close.

The seller (bank) or the real estate agent won’t take any responsibility about the condition of the house, any surprise on it or even legal issues that might be inherited by the buyer (you)!

Eviction required

There is a big chance that someone might be living in the property by the time you become the owner. That means you will probably need to hire an eviction specialist lawyer and all costs relating to the eviction itself.

At this point, might be worth knocking the door and trying to buying the occupants. They might be previous owners, tenants, squatters, etc. They might just accept some money to leave the house in short notice, in a win-win situation.

Or they might not accept anything, and kick you out of “their” house while holding a shotgun of the size of your arm. In that case, you will need to wait several weeks before you can get you foot inside the property again.

Owner redemption

In California there are two types of foreclosures: non-judicial and judicial. The non-judicial path is by far the most used. In non-judicial foreclosures the auction sale is final. However, with judicial foreclosure the previous owner has up to one year to redeem his property by paying the foreclosure sale plus interest and any additional expenses incurred by the lender.

Rehab costs

When buying a foreclosure you don’t know who lived in the house. Worse, whoever was living in it, might be so angry with the eviction process that it might decide to leave some surprises in the house for whoever owns next. This can include:

• destruction of fixture, appliances, walls, stairs, etc
• electric traps
• blocked pipes
• any sort of garbage

People can be creative. There a plenty of TV shows about flipping houses that film foreclosed homes with the most crazy stuff, from dog poo to extra-terrestrials hunting equipment.