One of the most common questions I am asked is "Can you really buy houses on the courthouse steps and how does it work?"  Especially now, with all of the news of home owners losing their homes to foreclosure in record numbers, investors and home owners alike want to buy homes and make huge profits or pick up instant equity.  If you go to the courthouse steps in Martinez any Monday through Friday at 10:00 am or 1:30 pm, you'll see that it is possible.  The trustee sales are held at the top of the steps, just across the street from McDonalds.

How it works is relatively simple.  The auctioneer opens up the bidding by placing an initial bid on behalf of the lender for the amount owed the lender plus penalties and fees.  If anyone else present wishes to buy the home, they may bid on it and the highest bid wins.  Well over 95% of the homes are purchased by the lenders at the initial bid price.  This is because there is very little or no equity in the homes, making it pointless for other potential buyers to bid on the properties.

I attended an auction in January where 20 homes were to be sold.  Eight of them were postponed or canceled for various reasons and of the remaining twelve, eleven were bought by the banks at the initial bid prices.  The one home that was bid up was the one that I was there to try to buy.  I estimated its value conservatively at $360,000.  The opening bid was around $150,000 and it was bid up by six bidders to $291,000 and was ultimately bought by a friend of mine who's a real estate agent as well.  This was more than I was willing to pay, but probably still a good deal. 

She ended up listing the home for $369,000 and selling it very quickly for $350,000.  The home was in good shape, which is unusual in foreclosed on homes, only needing a fresh coat of paint to be ready to sell.  After fix-up costs, selling expenses, and carrying costs, my friend had profits of around $45,000 before income taxes. 

There are many challenges and risks involved in purchasing homes at trustee sales.  The major challenge for most people is that you have to pay in full for the home at the time you purchase it.  This means bringing cashiers checks totaling as much or more than the purchase price.  Some people may have $200,000 to $500,000 sitting in a bank account, but for many investors, that means drawing equity out of other real estate to buy foreclosures.  Thus, they are shifting some of the risk onto their current home.

Another major risk includes unknowingly assuming other liabilities.  When a home is sold at foreclosure, junior liens to the lien initiating the foreclosure are wiped out.  So if a home has two mortgages, and the first mortgagor forecloses, the second loan is removed from the property.  (Junior lien holders will know of the foreclosure, and if they feel there's sufficient equity to recoup part or all of their loan, they can bid to buy the home as well)  However, if the second mortgagor initiates the foreclosure, the home is sold to the buyer subject to the first mortgage.  There can be other instances where the buyer will be responsible for other debts on the home as well, such as certain types of taxes the former owner may have owed.

A third significant risk is that unlike buying most resale homes, you typically do not get a chance to preview the home prior to buying it.  You are buying a home that sellers lost due to their financial inability to make the house payments, so their motivation (or ability) to maintain the home has understandably dropped as well.  Thus, quite often buyers end up with fixer-upper homes.  So foreclosure investors end up with unknown fix-up expenses and time for repairs. 

However, if you have the stomach to face the risks, and do enough investigating prior to making an offer, then there are definitely a few homes that will be sold on the court house steps to investors who'll make a tidy profit.