Complete the sale. When you place the winning bid, you meet with the auctioneer to provide your contact information, how you want the property to vest (for example as an individual, a partnership, an LLC or a trust) and pay up. The auctioneer has the name of the trustee, to whom you sign over your cashier’s checks. You get a copy of the document indicating that you bought the property.
Payment in full. You have to pay the full amount on the spot in cash or with a check (or multiple checks). Any amount you tender over the winning bid amount is returned in a refund check along with the deed approximately ten days following the trustee sale.
If you bought a junior lien, the senior liens still have to be dealt with. Most loans have a due-on-sale clause that the auction triggers. The new owner can’t assume the existing loan, although the lender will sometimes work with you if you make the loan current (pay off any past due balance) and continue making payments. In any case, be capable of paying off the senior debt or stay away from buying junior debt at the steps.
Taking Deed. The Trustee’s Deed of Sale confers the title of the property to the investor that placed the wining bid. There are no warranties, explicit or implied and it is conferred with all encumbrances, such as outstanding property taxes or other liens. The trustee should send you the deed within fifteen days after the sale. If you haven’t received it after ten days, follow up, because you want to record the deed as soon as possible.
Some circumstance may cause the trustee to rescind the sale. For example, there could have been mistakes in the process that invalidate the sale, the borrower may have been in the middle of a loan modification or enrolled in the HAMP program, or in the case of an IRS lien, the trustee may have failed to notify the IRS during the period required. If you receive notice of the intent to rescind, ask for the legal basis for the rescission. You can get an attorney and fight the rescission if you think you have a case.
In some cases, the trustee may be facing legal action from the previous owner and may see you as the easier (less expensive) target to cave. If they realize that it’s going to cost them more not to settle with you, then they may pay you a premium for your time/effort as a bona fide purchaser for value of the property. Even if the rescission is inevitable, it’s in your interest to get it cleared up as soon as possible to get access to either your property or your money.
It’s important to remember that the deed gives you the right of ownership, but not the right to occupy. Laws that protect tenants in foreclosed property vary by state. Violating them can be expensive. See Taking Possession for more information.
Record the deed as soon as you get it to avoid the (slim) possibility that additional documents are recorded in the duration that could create a cloud on the title.
- Perfecting sale of deed. Recording the deed with the county recorder perfects the sale of the deed. In California, it is considered perfected at 8 a.m. on the date of the sale if the deed is recorded within fifteen days of the date of sale, otherwise it is perfected at the date and time of recording.
- Protecting your rights. Submit a Preliminary Change of Ownership Report (PCOR) when you record the deed. It is required on all property transfers and gives the assessors office details they need to determine the proper tax assessment. It is not required on a trustee’s deed, but insist that they take it anyway, as it helps protect your rights if you choose to appeal the base year tax assessment.
- Protecting your improvements. Some investors take out a homeowner’s or landlord’s policy on a house they’re renovating to flip, but those policies may not cover a vacant house, so any claims could be denied. Ask your insurance agent to check specifically about this detail because many agents aren’t aware of the vacant house exclusion. If necessary, look into other options, such as a blanket builder’s risk policy, for which you provide a list of properties each month. These types of policies can be two to four times more expensive than a homeowner’s policy.
- Tax protection. Outstanding property taxes must be paid to clear the title. In a flipping strategy, you can delay paying the taxes until you’re ready to sell, but you may incur additional penalties and interest.
- Clearing title. A lender will not underwrite a loan on a property if title insurance is not available. It is not possible to get a title insurance policy before a trustee sale. In a flipping strategy, most investors open escrow after the sale and get a preliminary title report to make sure that there are no clouds on title that would prevent them from selling the property. The preliminary report indicates that the title company would be able to issue an owners policy on that property for a buyer. Occasionally title issues do come up in the prelim giving the investor time for curative title work while they prepare the property for sale. A binder policy is another option if you are concerned about other liens being recorded or intend to hold the property for longer than a few months. It costs 110% of an owner’s policy. When you sell, you get back the cost of the policy less ten percent.
- Eviction proceedings. If the property is occupied, start the legal eviction process immediately. Eviction laws vary by state and are different for renters and former owners. If it becomes unnecessary, you can cancel it, but if other methods, such as cash for keys, fail, you haven’t lost any time. See Taking Possession for more information.