Real Estate

Auctioned Off

This foreclosed home at 1116 Sonoma Ave. in Modesto, Calif., sold for one-third of what the bank was owed, May 12, 2009. (BRIAN RAMSAY / bramsay@modbee.com)
This foreclosed home at 1116 Sonoma Ave. in Modesto, Calif., sold for one-third of what the bank was owed, May 12, 2009. (BRIAN RAMSAY / bramsay@modbee.com)

The latest foreclosure news continues to be bad, but it comes with a twist: More homes are being sold at bargain prices on the courthouse steps.

During April, 389 homes were lost to foreclosure in Stanislaus County. That included 47 homes sold to the highest bidder during trustee sales on Modesto's courthouse steps.

Most foreclosed homes never attract a bid because the minimum price is considered too high by potential buyers. Title to those foreclosed homes then goes to the bank as compensation for the defaulted mortgages.

Last month, mortgage defaults cost banks more than $114.2 million in Stanislaus County, according to ForeclosureRadar, which tracks foreclosures.

But more and more lenders have started lowering the price they'll accept as an opening bid during trustee sales, so real estate investors increasingly are buying on the spot.

That happened Tuesday for a Sonoma Avenue house in Modesto. The lender was owed about $334,000 for the mortgage on that home, but agreed to start the bidding at $80,000.

Four investors took turns bidding to buy the 1,625-square-foot, three-bedroom, two-bath house, which was built in 1975. After dozens of bids, the top offer came in at $110,900. That's less than one-third what the lender was owed.

That Sonoma Avenue property was among a handful of houses that attracted bidder interest this week.

"Once in a while, the banks do make mistakes," said Eddie Sousa, a veteran buyer in the courthouse auctions. "Sometimes at 9 or 10 in the morning, just a couple hours before the auction, they'll reduce the opening bid."

Sousa said a bank may price a property very low because it thinks a home has too many problems, such as an unkept swimming pool that may appear to pose a hazard. When he sees a dramatic price drop, he tries to visit the property before the auction starts.

Tuesday morning, for instance, a 1,400-square-foot home with a $320,000 debt was placed for auction starting at $80,000.

"On the surface, it looked really good. But once we drove by, we could see it had a bad roof," Sousa said. "You can get some really good deals (at trustee sales), but you can lose a lot of money really quickly. It's risky."

Getting a real deal requires knowledge, research

So here's some advice for those considering competing for a trustee sale:

Buyers beware.

This is a dangerous way to buy a home for those who don't know what they're doing and don't have money to spare, according to Sean O'Toole, who runs ForeclosureRadar.

"If you don't have the time to do your own research, it's best to leave these auctions to the sophisticated investors who know what they're doing," O'Toole said.

That's because buyers get no guarantees. They don't get to inspect the property before they buy, which means the inside could be a gutted mess.

Buyers can get stuck paying for delinquent taxes or other legal liens on the property. Because the sale doesn't go through a title insurance company, there's no assurance the buyer will get "clean title" to the house.

And the full amount of the winning bid for the house must be paid on the spot. Cashier's checks are collected from potential buyers before the first bid is cast.

So bidders must submit the entire amount they're willing to spend in advance.

Hundreds of homes per week are auctioned in trustee sales in Modesto, with the action starting about noon every weekday.

A cadre of experienced buyers attend virtually every auction, and they have the financial backing needed to jump on the good deals. They come armed with computerized research, spreadsheets, handwritten notes and cell phones to help them decide what properties to bid on and how much to bid.

Patience, speed, and construction and real estate expertise are needed for success in this field.

There's a lot of waiting around at the courthouse for auctions to begin. There is no set schedule for when any particular house will go up for bid, and the auctioneer often leaves the steps between auctions to wait for phone authorization to sell more homes.

Once an auction begins, however, bidders must act fast. They must listen carefully for the opening amount, because the foreclosing bank may have lowered its asking price dramatically at the last minute.

There may be a hidden reason for such a low opening price, however, so bidders should understand construction costs and real estate markets.

"Despite the discounts offered at the trustee sale auctions, we'd like to remind everyone that these discounts come with significant risks, especially for consumers and inexperienced investors," O'Toole said.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

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