We launch Ideal Home Brokers Trustee Sale Service today, and not-coincidentally, we have a Trustee Sale purchase being flipped. We can put families with cash in properties at Trustee Sale prices instead of flippers.
A long time reader of the Irvine Housing Blog recently contacted us for our support.
Todd Larsen, director of the Irvine Music Academy has been struck with leukemia at age 44. He was the family's sole wage earner taking care of his wife and 10 month old son by teaching music and coaching swim lessons in Irvine.
Thankfully Todd has great health insurance but unfortunately did not have disability insurance. As you can imagine his family's world has been turned upside down. The Irvine community has been holding walk-a-thons and auctions to help the family make ends meet. (Click below to read more about how the Irvine community is rallying around the family – the second link is to Todd's blog where tickets to the event can be purchased.
Members of IHB team will be attending the event at the House of Blues in Anaheim (Downtown Disney) on February 1st starting at 6pm and we have purchased extra tickets and invite any readers that would like to attend with us to contact Shevy Akason, shevy.akason@evergreenrealty.net to reserve a ticket to attend with the IHB Group. Or if you would like to attend on your own, tickets to the event can be purchased on Todd's blog at http://www.toddrockinleukemia.blogspot.com/.
Great Townhome in Prestigious Turtle Rock Community. Desireable corner location with a bright lit and welcoming living room, dining room, open kitchen and family room layout, fireplace, and stainless steel applianes. Within a quiet community featuring a swimming pool, spa, walking trails and tennis courts. Standard Sale, not an REO or Short-Sale! Turnkey Property! Perfect for first time home buyers and/or investors.
Desireable? applianes?
Check out that rate-of-return. If you make a huge profit in a short period of time, that is what happens. No wonder flippers are everywhere….
The Trustee Sale market offers unique challenges and opportunities; successful buyers can (1) save significant money and (2) have exclusive market access — two huge advantages. Buyers at Trustee Sales routinely save 10% or more after fees and taxes. There are risks with these purchases, but with good information, these risks can be minimized.
Ideal Home Brokers researches properties and provides exclusive access to this data to our customers. We report (1) basic property information, (2) Trustee Sale comparables, (3) resale market comparables, (4) rental comparables and cashflow value, (5) detailed acquisitions costs including fees, taxes and other expenses, and (6) recommendations of maximum bid price.
Ideal Home Brokers is your window on the Trustee Sale market and your doorway to access this unique opportunity.
HOW THE PROCESS WORKS
This section contains a conceptual overview of the process, the language contained here is to inform, and it has no legal standing. Any conflict or contradiction real or implied by this section is superseded by language of Buyer Representation Agreement and remainder of the Trustee Sale Agreement (not included in this posting).
Broker herein agrees to provide Buyer with professional assistance in the acquisition of foreclosure property at the Trustee Sale (Sale), and Buyer herein agrees to pay Broker a Trustee Sale Service Fee (Fee) for the successful acquisition of a property at a Sale.
Buyer understands the risks involved, including the possibility of total loss, and has the sufficient cash resources to produce the cashier’s checks required to bid at Sales. Broker is a consultant providing available information to assist Buyer in making a buying decision and acting Agent to obtain property at Sale.
Establish Search Parameters
The first step of the process the development of a Buyer property profile that includes the following information:
Location(s)
Age range
Square footage range
Numbers of bedrooms and bathrooms
Other physical attributes important to buyer
Price range of properties that Buyer is seeking
Broker shall provide Buyer with ongoing and updated information on all foreclosure Properties scheduled for Sale matching the Buyer’s profile as well as information on all matching properties listed in the Multiple Listing Service (MLS). Buyer awareness of market values of the matching properties assists in determining property bids at Sale.
Select Properties for Initial Research
Buyer shall review matching Properties, and inform Broker as to which Property or Properties, if any, the Buyer is interested in purchasing at Sale. Broker shall conduct research and compile a preliminary property report. This report, the IHB Preliminary Auction Value Report, shall include the following:
Detailed description of Property
Property tax information (tax rate, Mello Roos status, etc.)
Basic Home Owners Association information, if any
Recent market comparable sales
Recent comparable foreclosure sales, if any
IHB Fundamental Value Report information tailored to Trustee Sales
Updated Trustee Sale Status (confirmation of current Sale date, published bid, etc.)
Buyer shall review the IHB Preliminary Auction Value Report and discuss with Broker. If the Buyer has continued interest in the Property, the Buyer shall conduct a visual drive-by of the Property and neighborhood, viewing the Property only from the public right of way. If Buyer has continued interest and the Property is also listed for sale on the MLS, Broker and Buyer shall view the interior and exterior of the Property, and Buyer shall make a determination as to whether or not to bid on the Property at the Sale.
Filter Properties with Final Research
Upon determination by Buyer that they want to bid on a specific Property at the Sale, Broker shall conduct further detailed research on the Property and compile a final report, the Title and Lien Report, which shall include:
Title -all persons currently vested on title, or previously vested at any time as of or since the acquisition of the Property.
Liens – all Trust Deeds and all other liens currently encumbering Property, and an analysis of their effect or standing, if any, at or following the Sale
Property Tax Status – total property taxes owed against the property, if any, including current taxes, delinquent taxes, and penalties
Other information – anything that Broker may deem pertinent to the Sale, Title, or to the Property itself
Final Analysis – an estimate of the total amount that will still be owed on the Property, if any, following purchase at the Sale, a description of Broker’s opinion of the overall viability of a successful Sale purchase.
Prior to the Sale, Broker and Buyer will (1) meet to discuss the Title and Lien Report, and the Property, (2) make a final determination as to whether or not to bid at the Sale, and, if so, (3) determine the maximum bid. The discussion is far ranging, and Broker will advise Buyer on (1) accounting for true acquisition costs including fees and taxes, (2) adjusting bids to allow for unknowns and assess Buyer’s goals and motivations for the Sale to ensure the property is a correct fit. An accurate calculation of the Buyer‘s maximum amount the is critical, as neither Buyer nor Broker shall exercise judgment on the day of Sale as to how much to bid. Broker, merely attends the auction to observe and participate in the bidding as pre-designated by Buyer. All Trustee Sales are final as of the declaration of the winning bid; Buyer no longer has discretion to go a “little higher” to obtain property, as Buyer can only bid up to the amount of cash they bring to the Sale. Buyer may be outbid by $1 by winning bidder.
Preparing for Sale
Upon making final determination to bid on a Property at the Sale, Buyer must determine vesting (how they wish to hold title). It is normally recommended that investor-buyers take title in the name of a legal entity, rather than their own name, whereas families purchasing to keep long-term may be better served with a living trust; however this determination is the strictly the responsibility of the Buyer – Broker offers no legal advice on vesting.
Buyer shall execute a Limited Power of Attorney, authorizing Broker to endorse checks at the Sale on behalf of the Buyer upon successful acquisition of Property, as well as redeposit any unused checks back into Buyer’s bank account. Upon a successful bid, Broker shall present Trustee with vesting instructions signed by Buyer as well as instructions for where to mail the Trust Deed.
Twenty-four hours prior to the scheduled Sale, Buyer shall provide Broker with two sets of cashier’s checks: one set totaling the maximum bid Buyer has decided to bid at the Sale, and the other checks amounting to the total Fees due to Broker for attending the auction and the successful acquisition of a Property at a Sale. This amount is based on the Estimated Cost Basis of the Property, as defined in the contract.
The best method for obtaining checks is for buyer to decide on a minimum increment and obtain checks starting with the initial increment and doubling in value with each successive check. For instance, a buyer would get Cashier’s checks for $1,000, $2,000, $4,000, $8,000, and so on until the negotiating range is covered, and then one remainder check brings the balance up to the total. The bidder on a $600,000 property who wanted to start bidding at $500,000 would obtain checks for $1,000, $2,000, $4,000, $8,000, $16,000, $32,000, $64,000, and $473,000. Some combination of those checks will cover every $1,000 increment between $473,000 and $600,000 allowing the bidder to leave the Trustee with only the amount of the winning bid. Cashier’s Checks for the IHB Trustee Sale Service Fee shall be written in two equal amounts adding up to the total fee due for the Buyer’s maximum bid, plus in certain circumstances, a small check for research and auction Fees. These checks shall be distributed as described below. Prior to Buyer’s visiting their bank to withdraw funds, Broker confirms that the Sale has not been postponed, and shall provide Buyer with a list of Cashier’s Checks needed.
Broker Bids at Sale
On the day of the scheduled Sale Broker shall again contact Trustee to determine whether Sale has been postponed or is still scheduled. If postponed or cancelled, Broker will return Cashier’s Checks to Buyer or re-deposit them into Buyer’s bank account, according to Buyer’s instructions. If the Sale is still scheduled, Broker will attend the Sale and bid on Property on Buyer’s behalf. Buyer may choose to attend or not attend the Sale. If there is no bidding competition and opening bid is less than the Buyer’s determined maximum bid, Broker shall bid $.01 more than the opening bid, and Buyer will be the winning bidder. If there is active bidding competition, Broker shall continue bidding by increasing each higher bid by a predetermined increment, until Buyer has the winning bid or until Buyer’s maximum bid amount is reached.
If the Buyer is the winning bidder, Broker shall give necessary Cashier’s Checks to the Trustee, and Trustee will provide Broker and Buyer with a receipt of transaction. Any remaining Cashier’s checks for bidding shall be returned to Buyer or re-deposited into Buyer’s bank account.
The Trustee will mail the Trustee’s Deed Upon Sale, which transfers title to Buyer, to the address specified by the Buyer. This deed must be recorded within 15 calendar days of the Sale for Buyer’s ownership to be of record on the morning of the date of the sale. This is important to prevent a post – Sale bankruptcy filing by the former owner from having any effect on the Buyer’s new property. At the time of recordation, Buyer will be required to pay the State Transfer Tax, $1.10 per thousand dollars of purchase price. If the Buyer does not receive the Trustee’s Deed in time to record it within 15 days, Broker will assist Buyer in obtaining it from the Trustee, but is not responsible for recordation after 15 days, or for any resulting claims or title issues resulting from any delayed recording of the Deed.
The two cashier’s checks received from Buyer for the Broker’s Fee shall be distributed as follows:
If the acquired Property is vacant, the Buyer has immediate right of possession. Broker shall cash each of the two cashier’s checks received from Buyer for the Fee, as full payment of Broker’s Fee.
If the Property is still occupied, by former owner or a tenant, Broker shall cash one Cashier’s Check, an amount equal to 50% of the Fee, and hold the other 50% check in Broker’s office. The balance of the Fee due the Broker is released when Buyer takes possession of the Property, or, if occupant is to be evicted, upon the filing of an unlawful detainer action as part of the legal eviction process subject to Buyer responsibility for diligence detailed below.
For properties that are occupied, as part of the Trustee Sale Service provided by Broker, Broker will assist Buyer in gaining possession.
Possession after the Sale
First, Broker shall attempt to negotiate a voluntary vacancy, whereby the Occupant leaves according to a time frame approved by the Buyer.
If unsuccessful, Broker will attempt to negotiate a Cash-For-Keys agreement, approved by Buyer and at Buyer’s expense.
If also unsuccessful, Broker shall refer Buyer to a qualified eviction attorney to begin the eviction process. If there is no voluntary vacancy and Buyer does not commence eviction proceedings within seven days of Broker’s determination that Occupant will not vacate voluntarily, the balance of the Broker’s Fee shall be due and released to Broker. An example of such a situation is when Buyer opts to allow an existing tenant to remain and pay monthly rent for a period of time.
At this point, Buyer is the proud owner of a new property, and Broker has completed his obligations to the Buyer and property.
Today we conclude the three-part series, Foreclosure 101, with a look at the details of a Trustee Sale and a high-end Irvine property defying financial gravity.
I get up, and nothing gets me down. You got it tough. I’ve seen the toughest around. And I know, baby, just how you feel. You’ve got to roll with the punches to get to what’s real
Oh can’t you see me standing here, I’ve got my back against the record machine I ain’t the worst that you’ve seen. Oh can’t you see what I mean ?
Might as well jump. Jump ! Might as well jump. Go ahead, jump. Jump ! Go ahead, jump.
The auction atmosphere of a Trustee Sale with its immediacy and permanence is not for the indecisive. Buyers need to be ready to jump when the deals are available, and these deals do exist prompting many to don wings and parachutes and take their chances.
This is the final installment of the Foreclosure 101 series which includes:
Most buy at Trustee Sales to make or save money. When compared to resale properties, Trustee Sales are generally discounted between 10% and 20% and sometimes the discounts are even greater. The first post in this series featured a property being flipped for a 25% gain, a significant profit for taking risks and trapping cash for a few months. However, flipping for profit is not the only reason to consider this market.
My disdain for flippers is apparent, but my ire is not spread evenly. Flippers who buy at auction provide necessary liquidity in a market isolated from lender financing, and flippers who renovate properties (even with pergraniteel) add tangible value; however, the flippers who annoy me are the ones who trade stucco boxes without making improvements or adding value as they merely drive up prices for families.
The problem is “how can families take advantage of this situation and save the flipper profit?” Families who have enough cash to purchase a property without financing at a Trustee Sale are missing a major opportunity to either (1) save money, or (2) buy from inventory unavailable to financed buyers. It isn’t always about the discount as simply having “first dibs” is big advantage, the fact that it is discounted to resale is a bonus.
So why don’t more buyers purchase at Trustee Sales?
Trustee Sale Risks and Limitations
The purchase of real estate at a Trustee Sale is inherently more
speculative, complicated, and risky than purchase by conventional
means. The above-average risk is due to such considerations as
potential title problems, the possibility of unknown liens, unpaid property taxes, delayed
holding periods, unknown property condition prior to purchase,
potential acts of vandalism, unforeseen governmental intervention, etc. Overcoming these obstacles requires a major investment of time and brainpower making Trustee
Sales suitable for buyers who can invest the time and effort and who will not be economically
devastated should they lose their entire investment. The major risks and limitations are as follows:
Cash Only: Trustee Sales allow cash bids only — Buyers will need to bring cashier’s checks for the full amount of the purchase to the sale.
Selection: A property fitting a Buyer’s property parameters and price range may not be scheduled for a Trustee Sale in a reasonable time.
No Inspection: Buyer will not be able to view the inside of the
property prior to the sale unless the property is actively listed in
the Multiple Listing Service, or in the unusual case where the current
owner allows access. The property is acquired “as is” which may include undetectable
physical damage.
No Insurance: Buyers can’t purchase title insurance at the sale and protect against unrecorded mechanic’s liens or judgment liens against the owner. This is rare, but it does happen, and the buyer is liable for these claims against the property.
No Remorse: The Sale is final – there is no recourse for buyers with remorse.
Unannounced Postponements and Late Cancellations: Most Trustee Sales are postponed at least once, and many are postponed numerous times, sometimes for a period of several weeks or months. If the Sale is postponed, the postponement may not be announced until buyer attends the scheduled sale, unused cashier’s checks in hand. Some owners are able to sell or refinance their properties at the last minute, cancelling the Trustee Sale altogether.
High Opening Bids: Most or all properties fitting Buyer’s criteria may
be over encumbered, and the published opening bids are often higher
than the property’s market value. The foreclosing lender has the option
of starting the bidding at less than market value, and they may not
decide whether or not to do so until the auctioneer begins to call the
Sale.
Competition: There will often be competing bidders at the Sale, and some will bid above the property’s market value.
When you think about it, the reason for the price discount is due to the combined effect of the factors listed above; prices need to be under resale to compensate buyers for the risks and unknowns. The more risks and unknowns, the greater the discount. In the post High End Auction Properties Abound I profiled the only property currently on the MLS scheduled for auction over the next several weeks. Assuming the property sells at the Trustee Sale, it will probably not be discounted as much from resale value as another property full of unknowns.
Trustee Sale Research
Most buyers when considering a Trustee Sale immediately run into a deficit of information. These properties are most often not on the MLS, and without MLS access to find basic information, to pull comps to estimate value or to locate old pictures, buyers have no way to conduct basic property research. This information barrier dissuades all but the most determined.
At a minimum, buyers need to determine the following:
Detailed description of Property
Property tax information (tax rate, Mello Roos status, etc.)
Basic Home Owners Association information, if any
Recent market comparable sales
Recent comparable foreclosure sales, if any
Updated Trustee Sale Status (confirmation of current Sale date, published bid, etc.)
In addition to the basics, most buyers will also want to know:
Title -all persons currently vested on title, or previously vested at any time as of or since the acquisition of the Property.
Liens – all Trust Deeds and all other liens currently encumbering Property, and an analysis of their effect or standing, if any, at or following the Sale
Property Tax Status – total property taxes owed against the property, if any, including current taxes, delinquent taxes, and penalties
Final Analysis – an estimate of the total amount that will still be owed on the Property, if any, following purchase at the Sale.
Since it is not possible to get Title Insurance at closing, a buyer is advised to obtain a title report on the property and the owner because judgment liens survive foreclosure. This does not protect the buyer from unrecorded mechanics liens.
The research list is long, and it may take several days, many phone calls, and out-of-pocket costs for title reports and other data. Given the difficulties of doing proper research and ignorance to what research is required, many buyers either take unnecessary risks by failing to do the proper research, or they give up on the idea and go back to shopping in the easier resale market.
Preparing for Trustee Sale
To prepare for a Trustee Sale, a buyer has three important tasks: (1) determine vesting, (2) establish a maximum bid amount, and (3) obtain Cashier’s checks in the amount of the maximum bid. We covered vesting in Foreclosure 101: Vesting Title. The buyer must give this information to the Trustee if a sale is successful.
Trustees like Cashier’s Checks, mostly because the buyer cannot stop payment after the sale. A buyer could attend the sale with a single Cashier’s check and wait for the Trustee to refund the difference. However, with a little effort, it is relatively easy to obtain a number of checks in various increments to cover bid amounts less than the maximum.
The best method for obtaining checks is to decide on your minimum increment and obtain checks starting with the initial increment and doubling in value with each successive check. For instance, a buyer would get Cashier’s checks for $1,000, $2,000, $4,000, $8,000, and so on until the negotiating range is covered, and then one remainder check brings the balance up to the total. The bidder on a $600,000 property who wanted to start bidding at $500,000 would obtain checks for $1,000, $2,000, $4,000, $8,000, $16,000, $32,000, $64,000, and $473,000. Some combination of those checks will cover every $1,000 increment between $473,000 and $600,000 allowing the bidder to leave the Trustee with only the amount of the winning bid.
The Cashier’s checks should be made out to the buyer, not the Trustee. If there is a sale, the buyer merely endorses the checks and gives them to the Trustee. If there is no sale, the buyer can either hold the checks for the next auction or redeposit them. There is no way for the money to be lost or stolen as the buyer is the only one who can cash the checks.
What happens at auction?
At the appointed time and place, a Trustee will call a public auction. The Trustee announces the property and asks the assembled if any wish to bid on the property. One at a time, the Trustee will meet privately with each bidder who must show the Trustee their Cashier’s checks to verify the amount held. The Trustee will not permit any bidder from exceeding the total of the Cashier’s checks on their person — nobody is “good for it.”
Once each bidder has shown the Trustee their money, the Trustee will call out the opening bid from the first mortgage holder. This is a pregnant moment because the advertised opening bids often do not match the actual opening bids, and even after all the preparation, a lender may come in and vastly overpay for the property because their loss mitigation procedures demand it. Lenders who underestimated the amount owed sometimes increase their advertised opening bid, but often, lenders drop their opening bid to avoid obtaining more REO.
Most buyers give up after attending a few postponed auctions. It takes half a day or more away from work or other responsibilities to attend a sale, and most busy people do not have the time. It is possible to go to only one auction and get a dream property at a 25% discount, but the more common scenario is for people to go to half a dozen auctions and obtain nothing.
In today’s market, dropped bids are the opportunities that bring third-parties to auctions. Assuming the first lien holder’s opening bid is less than the maximum price a third-party buyer is willing to pay, the auction begins. In an open outcry system, bidders verbally announce their bids and the Trustee acknowledges the highest bidder. There is no minimum increment to increase a bid, which leads to the rather tedious process of two bidders outbidding one another with small increments until one of them reaches their walkaway point. In fact, one of the major frustrations for many Trustee Buyers is the fact that they often get outbid by a single dollar, such is the nature of auctions.
If a buyer is the highest bidder, the Trustee takes the buyer’s vesting information and Cashier’s checks. In return, the Trustee gives the buyer a receipt at the sale. The buyer does not obtain the Trustee’s Deed at the auction.
Getting the Trustee’s Deed
The Trustee usually mails the Trustee’s Deed to the buyer within days of the sale; however, there is no legal timeframe the Trustee must adhere to. In contrast, the owner has 15 days to record the Trustee’s Deed in order to be considered the owner as of 8:00 AM the day of the Trustee Sale, otherwise ownership begins the day of recordation. The day of legal ownership is important because if a lien appears after the Trustee Sale but before recordation, the buyer can be liable, or at a minimum, have to deal with getting an invalid lien off the title of his new property. It is a rare occurrence, but the problem is best avoided by timely recordation.
Taking Equitable Title (possession)
Taking possession of a vacant house only requires the buyer to show up with a locksmith. If the house is not vacant, taking possession is more complex. The simplest solution is for the buyer to approach the occupants and offer them money to leave: cash for keys. Many holdover tenants, including the previous owners, are happy to get some money to cover the costs of moving out. Obviously, getting occupants to leave voluntarily is better for all concerned.
In situations where the holdover tenants are not cooperative, the new owner will need to employ the services of an eviction attorney to remove the occupants, and there are situations where renters do not have to leave due to local ordinances that protect renters. The rental contract itself is extinguished at the foreclosure sale, so renters cannot stay for the duration of their lease, and the new owner is not required to repay any security deposits. The exception to this is where the lease pre-dates the foreclosing lien – in this case the buyer takes title subject to the terms of the lease.
Is it worth it?
Buying at Trustee Sale is time consuming with (1) property research, (2) attending auctions and (3) following up to take possession, and the sale is fraught with risk, but for those who make the effort, saving what can amount to a year’s salary or more is very tempting, particularly when the resale market is likely to show further weakness. Buying at auction today puts an owner in a property well below rental parity, and likely below the resale bottom.
Property Details for 1 SHADOW Gln Irvine, CA 92620 Beds 4 Baths 2 full 2 part baths Home Size 3,800 sq ft ($366 / sq ft) Lot Size 8,282 sq ft Year Built 1998 Days on Market 1 Listing Updated 1/13/2010 MLS Number S601505 Property Type Single Family, Residential Community Northwood Tract Cris
Absolutely gorgeous inside and outside. Oversized lot on a cul-de-sac. Dramatic open floorplan with high ceilings and spiral staircase. Formal living room and separate dining room with vaulted ceilings and custom fireplace. Gourmet oversized kitchen open to family room and breakfast nook. Spacious family room with fireplace and custom built-ins. Den downstairs used as media room. Open loft perfect for home office or play area. Large master suite with large master bath and walk in closet. Tastefully upgraded with stone floors, custom paint, shutters, neutral carpeting and more. Oversized lot with new built-in pool and spa. Minutes from parks, schools, tennis courts shopping and freeways. Walk to Canyon View Elementary and Northwood High.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing
the Irvine home market and combating California Kool-Aid since
2006.
Today’s post on Non-Judicial Foreclosure is the second in a three part series on foreclosure. We will also look at a property in one Northwood neighborhood stubbornly refusing to fall in price.
Space: the final frontier. These are the voyages of the starship Enterprise. Its five-year mission: to explore strange new worlds, to seek out new life and new civilizations; to boldly go where no man has gone before.
Star Trek Intro — Gene Roddenberry
Today we embark on a five-minute exploration of Judicial and Non-Judicial foreclosure and the ramifications for different borrowers, and we will also go step-by-step through the non-judicial process.
Foreclosure proceedings in most states are either Judicial or Non-Judicial at lender’s discretion. Unlike mortgages, Trust Deeds give the lender the Power of Sale at public auction if the borrower fails
to repay the debt. With a Trust Deed, a lender can exercise this right without a court
order using the faster and less-expensive non-judicial foreclosure.
The lender may sue
the borrower for repayment of property debt in a judicial foreclosure and obtain a Deficiency Judgment which they can record as a blanket lien against all borrower property in a given jurisdiction. Lenders often will pursue judicial foreclosure and Delinquency Judgment if the amount is large and the borrower has other liquid assets the lender can take or illiquid assets the lender can encumber (look out Coastal California). Lenders greatly weaken — but do not extinguish — their claim to borrower assets in the non-judicial process. Without a judgment, lenders are merely unsecured creditors similar to credit card companies hoping to squeeze life from the insolvent.
Once a lender has decided to obtain a judicial foreclosure — a relative rarity in California so far — it enters a court process ultimately leading to a Trustee Sale and Deficiency Judgment. The non-judicial process is of most interest to us because it is a process we can follow, it is the most common, and it is a process hundreds of thousands of California borrowers are enduring.
The step-by-step Non-Judicial Foreclosure process
The Non-Judicial Foreclosure process, established by the Legislature and encapsulated in the Trust Deed, begins when a lender records a Notice of Default. There are three events, (1) Notice of Default, (2) Notice of Trustee Sale, and (3) Trustee Sale, which cannot occur quicker than the prescribed timeframes; the speediest is one-hundred fifteen (115) days with one-hundred twenty (120) being typical — assuming no delays.
The law makes no time requirement on lenders after default before lender has option to record a Notice of Default. By custom lenders give borrowers ninety days, but they can give as many or as few as they like; lately, lenders like delay. The lender is never required to issue a Notice of Default, but unless the property is worth less than the loan balance — a common occurrence of late — the lender will issue a Notice of Default as quickly as possible to move the process along and regain their stranded capital.
After the Notice of Default is recorded, the borrower is granted a ninety-day redemption period to bring the loan current before the lender has option of Trustee Sale. Historically, this period was the only period in which the borrower was allowed to bring the loan current; the Notice of Trustee sale being a point of no return. This law was changed, and now the borrower has unrestricted right to reinstate the loan up until five days prior to a Trustee Sale.
Once a Notice of Trustee Sale is recorded, the Trustee must send notification via certified mail to all known borrower addresses of the scheduled sale, and the Trustee must publish Notice of Sale in a newspaper or other prescribed media (1) three times (2) one week apart. If the Trustee publishes the day after the Notice of Trustee Sale is recorded, and published again on the next two weeks, the entire process can be completed in about three weeks.
The Trustee Sale occurs at a public site determined by the Trustee, often at the County Courthouse, but sometimes in front of the Trustee’s office. Since these auctions are often held at the County Courthouse, many people incorrectly believe the Courts are involved in the process in some way; courts are not involved in the process here in California unless the lender specifically chooses to pursue a Judicial Foreclosure.
Black hole of payment default
In 2010, payment default is akin to crossing the event horizon of a black hole never to return. The singularity sucks in and spaghettifies every troubled borrower with the relentless tug of equity-squashing financial gravity. The black hole feeds continuously on the unemployed and overextended and cleanses the universe of toxic mortgages in its purifying crucible.
The first public problem
disclosure, our detection of loan particles passing the event horizon, is the TransUnion report on 60-day delinquencies, and this data is supplemented by the First American CoreLogic report of 90-day delinquencies (Irvine 90-day delinquencies.pdf). In the
aftermath of The Great Housing Bubble, lenders by choice to maintain
their capital ratios or by force through Government moratoria chose not
to issue Notices of Default: they chose to amend, extend and pretend. Impact of
these delays, besides the multi-month extension to the process, is
accumulation of vast Shadow Inventory.
(Load the image above into a new browser tab or print the diagram to follow the discussion.)
Visible inventory
Once a Notice of Default is issued, properties move from Shadow Inventory to Visible Inventory where they are tracked by Foreclosure Radar and other companies. At this point in the process, borrowers are usually at
least 3 payments behind, but they are given another 90 day period to
reinstate the loan through (1) bringing payments current, (2) selling the property
for a net greater than the loan balance (no shorts), or (3) negotiating a
loan modification. Since most borrowers are also underwater and since short
sales are very difficult and take months to get approved, few have option of a market sale, and loan
modification or foreclosure become the only available paths.
Loan modification recycling
Loan Modification programs have consistently proven to fail. The first of these programs floundered back in 2007, and now in 2010, they continue to writhe and flail. The entire fiasco resembles a rancid meat
grinder where toxic loans are ground and reground with the fetid
meat-debt stuffed in a paper
sarcophagus printed at the Federal Reserve (The FED program to buy GSE debt is printing money).
The loan modification recycling will continue for the foreseeable future as lenders prefer to defer; lenders, and US taxpayers insuring GSE debt, are praying for appreciation to save them. Lenders must wait a decade or more to be successful, and practicality suggests more properties will grind through the foreclosure process.
When loan modifications are completed, the lender issues a Notice of Rescission announcing the borrower has reinstated the loan. This resets all statutory timeframes, and if the borrower were to default again — something they do with great regularity — then the process starts all over.
Restarting the process removes a property from both Shadow Inventory and Visible Inventory, and although these properties are no longer measured in our statistics, most will ultimately go through the foreclosure process. Consider properties in the Loan Modification Recycling process as Shadow Shadow Inventory (or double-secret probation).
Lenders hope to recycle the toxic mess until values come back.
Trustee sale postponements
Besides the delays creating Shadow Inventory, Trustee Sales are postponed for a variety of other reasons — but mostly because the lender doesn’t want to either take a loss or buy the property. These postponements add weeks or months to the process, and there is no knowing if an auction will occur as scheduled. The frequent postponements make purchasing at Trustee Sales difficult for the few all-cash novices making the attempt.
Foreclosure Suffering Flow Chart
Another way to conceptualize the foreclosure process is to look at borrower circumstances and outcomes. Above we defined the timelines of events that occurs once borrowers enter the whirling vortex of mortgage debt, but we have not discussed the ramifications of this process on the borrower both short- and long- term.
(Load the image above into a new browser tab or print the diagram to follow the discussion.)
Bad Credit is best result
All borrowers who default on their loans endure credit problems because credit scores are impacted by delinquencies; no defaulting borrower avoids this fate. Beyond that, the range of possibilities ranges from (1) complete freedom from further financial obligation to (2) complete liability for every penny of lost lender funds and legal judgments to obtain same. Obviously, most prefer the former to the latter, and unfortunately, many believe they can and have escaped the bills, but the system is not finished with them quite yet.
Many who become delinquent lose their homes and become renting-former-owners; they snobbishly will never identify with being a “renter.” Renting-former-owners believe they will own real estate again in a year, eighteen-months tops.
Not going to happen.
The GSEs and FHA have guidelines preventing them from loaning to anyone who discharged mortgage debt over a five-year lookback period, and few private lenders extend such loans. Many have suggested the large number of renting-former-owners are a pent-up-demand that lenders will gush over. Perhaps so, but the borrower pool has proven default, so why would a lender want that business? — except perhaps to obtain huge fees, charge usurious interest, and go back to subprime lending-as-usual. Do we want that again? Really?
Borrower options
The borrower has four major options when in delinquency: (1) make up missed payments, (2) sell in resale market, (3) enter into a loan modification agreement with the lender, or (4) do nothing and wait for the Trustee Sale.
The best outcome for everyone is for the borrower to make up the missing payments, and sometimes they borrow from Peter to pay Paul and cure the mortgage delinquency through other borrowing, but this outcome is rare because borrowers are in financial distress.
If the delinquent borrower attempts a sale, they are giving up their house, so this isn’t a pleasant outcome, but if they have equity, they can sell the property, pay off the loan, and obtain their cash equity to move on with life. If they do not have equity, they must wait for approval from the bank for a short payment on the sale of collateral (short sale) or acceptance of a deed-in-lieu legal abandonment. This has serious negative credit repercussions, and few borrowers bother to read the onerous terms of the short sale agreement where lenders often make the borrower personally guarantee the shortfall.
A common outcome lately has been a delay; loan modifications are the rolling loans gathering no loss, an attempt by both parties to avoid dealing with a problem that isn’t rolling away.
Lenders Captain the Titanic
No matter what option a borrower chooses, lenders push forward with the process leading to Trustee Sale. The Titanic is heading inexorably toward the iceberg with lenders at the helm, and it is up to borrowers to divert its course. If borrowers do nothing, a Trustee Sale is assured.
If a property goes to Trustee Sale and borrower loses legal title, they must vacate the property and the ramifications of their previous decisions become apparent; good or bad, they reap what they sow. If the borrower bought at the peak and borrowed too much, but they never refinanced or took any mortgage equity withdrawal money, they have a Purchase Money Mortgage, and they have no further financial responsibility to the lender or to the IRS. They endure the credit hit, but they are rewarded for their small modicum of restraint and prudence with debt forgiveness; this is the best possible outcome.
Recourse sucks for borrowers
If the borrower adds to or refinances a purchase money mortgage — even if the refinanced balance is the same size or smaller — they give up their recourse protections, and lenders gain several options borrowers find unappealing: (1) seek deficiency judgement, (2) become unsecured creditor, (3) charge off debt and issue borrower a 1099 creating a tax liability. There are no good outcomes for borrowers who lost their recourse protections.
In the best case scenario — remember these people already lost their homes and their credit is trashed — the borrower is reported to the IRS and ends up with a major tax liability because forgiveness of debt is considered income (that HELOC money was income after all). This point is critical: borrowers who have not received a 1099 have not had their debt discharged.
Many think that because lenders are not badgering them that somehow the lender forgot they are owed money. Lenders haven’t forgotten, they just haven’t put the systems in place to chase down payment on mountains of unsecured debt. Many bright attorneys are working to create this debt collection doomsday machine to slice people to rubble. Look for this to be a developing story over the next several years.
The worst possible outcome is reserved for those borrowers with assets. If lenders believe they can obtain more money than it will cost them to pursue the borrower, they will opt for a Judicial Foreclosure to obtain a Deficiency Judgment. I recently attended a meeting of the Turnaround Management Association, a group of turnaround specialists. Many of the assembled attorneys, investors and consultants derive their livelihood from pursuing borrowers who personally guaranteed defaulted debt. This group is going to be very busy.
California Legal Code Pertaining to Foreclosure
The links below lead directly to the State of California code where you can wade through the legalese for yourself.
Start of foreclosure process. Initial notice recorded after borrower fails to meet the terms of their loan. CC 2924c.(a)(1)
Sets auction date. Can be recorded 3 months after Notice of Default CC 2924 c. (b)(1)
Initial auction date can be just 14 days after Notice of Trustees Sale is recorded. CC 2924 f. (b)(1)
Beds 3 Baths 3 baths Home Size 1,600 sq ft ($418 / sq ft) Lot Size 3,264 sq ft Year Built 1998 Days on Market 4 Listing Updated 1/13/2010 MLS Number S601543 Property Type Single Family, Residential Community Northwood Tract Glle
Equity Seller has to move!Charming Plan D/3bdr Highly Ugraded Northwood Single Detached Home.3 Full Bdrms plus office,Main floor Bd&Bath.Beautiful Gourmet Kitchen with Maple Cabinets,,Formal Dining RM open to GREAT ROOM,Cathedral Ceilings,Firplace,Recess Lighting, Designer Paint,New Carpet,Plantation Shutters through out. Built In Media and Office.French Doors Open to Entertainers Backyard.Pre-wired for Security System,Full Size 2 Car Garage w/Built-in Cabinets..Walk to Blue Ribbon Award Winning Cayonview Elem & Northwood High School.
I like this neighborhood, and apparently so do many cash-heavy buyers. Prices on many homes here have held over $350/SF, and this owner thinks he can get over $400/SF. He might be right as someone will probably borrow $417,000 and put $252,000 down. Cash is king.
It’s mine it’s mine it’s mine I can do whatever ever I can do whatever ever
Give me lots of toys So it don’t matter to me This property belongs to me And only me, let me break it down baby
It’s mine I can give it if I want it It’s mine It don’t matter if they want it I can give it to them I can take it back (back) It don’t matter ’cause I got it like that It’s Mine — Girlicious
Ownership is primal. The first two words children learn in any language are “no” and “mine.” People have an deep intuition of what is theirs and what is not. Emotionally, It’s Mine defines ownership; in the real world, it is not so black and white.
When people own real estate, what they really “own” is a bundle of property rights. What rights are the bundle, and how are these rights held? Today, I want to take a step back and review real estate law and outline property rights and vesting title. As I recently took the excellent Broker’s review course from Real Estate Trainers, much of the legalese comes from their study manual.
The Owner of Real Property can be (1) an individual owning in his or her own name; (2) a group owning together either as Community Property, Tenants in Common, or Joint Tenants; (3) an entity such as an LLC or a Corporation, (4) or a living trust.
Many people hold unshared title in their own name, and it is not limited to singles as many married owners in California are listed as either a man or a woman owning as “sole and separate property.” This distinction is important in a Community Property state like California where it is assumed that husband and wife act as a family unit with ownership apportioned equally between the two parties. In instances of inherited wealth, prenuptial agreements, or other business dealings, spouses often buy and sell property in their own name; however, these separations are tenuous in a marriage, and in hostile divorces, sole and separate can be anything but.
Tenants in Common is the most common form of multi-party ownership other than Community Property. Each Tenant in Common can dispose of their share of ownership as they see fit including passing it to descendants upon death. This stands in contrast to Joint Tenants where the death of one tenant causes their share of ownership to pass automatically to the other. Joint Tenancy is more common as a form of spousal ownership in states without Community Property laws.
Investors and others hoping to limit liability and remain somewhat anonymous often buy and sell real estate through special entities. These entities have the legal status of individuals capable of entering into contracts including owning real estate. There are advantages and disadvantages of using entities, and anyone considering doing so should consult an attorney and a tax advisor.
Another way people hold title is through a living trust. The trust itself holds title just as an individual or entity would, the main feature of living trusts, which make them a desirable method of holding real estate, is that property can transfer upon death directly to the heirs avoiding probate.
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What does an Owner Own?
An owner, to the exclusion of all others, has a bundle of rights: possess, use, sell, enter, give away, lease, encumber, dispose, exclude or, do nothing subject to governmental powers and claims of others, and the owner may dispose of the whole bundle or any one of these rights at any time. Ownership can be held in a number of ways known as Estates, of particular interest to us is the perpetual Freehold Estate; it has no termination date and no party to accept ownership after reversion as does the Less-Than-Freehold estate known as a lease.
Most homeowners possess a Freehold Estate known as a Fee Simple Estate or Fee Simple Absolute where the owner holds title without any qualifications. In my description of property rights above, I mention ownership is subject to claims of others, the most common being the mortgage encumbrance. Owners whose properties are encumbered by Trust Deed (similar to mortgage) also signed a Promissory Note with a lender stating they will pay back borrowed funds according with terms and conditions described in the Note. These owners still possess a Fee Simple Estate, but the mortgage lien is such an onerous encumbrance that an argument can be made that lenders are owners, and owners are money renters.
Trustee sale occurs because borrowers, for whatever reason, are not meeting their financial obligations. A process is set in motion when borrowers default leading often to a change in ownership either through (1) market sale, (2) short sale, (3) deed-in-lieu (legal abandonment) or (4) trustee sale.
Mortgage or Deed of Trust?
The legal system of Mortgages and Promissory Notes identifies the parties to the transaction and establishes rights and responsibilities. There are two basic systems from managing the complexities: Mortgage or Trust Deed. In California as in some other states, we have a Trust Deed system, but since it is the more complicated of the two, I will address the Mortgage system first.
The Mortgage system is simple; the borrower signs a Promissory Note and issues a Mortgage to the lender. The borrower is the Mortgagor, and the lender is the Mortgagee. The borrower still holds title, and if the lender desires to force foreclosure auction, they must petition in court as any other litigant would. I can only imagine the court system backlog in Florida where this system is in place. In reality, in the Mortgage system, all foreclosures become judicial foreclosures because they move through the judiciary, but the term Judicial Foreclosure has special meaning and entails obtaining a judgment against the borrower (a topic for tomorrow).
Courts are ill-equipped to handle several hundred thousand mortgage actions. What is ordinarily a rare occurrence courts can easily handle can become a crisis, and the Trust Deed system avoids the court backlogs.
In a Trust Deed system, a neutral third-party is involved similar to an escrow; in fact, the trust deed system functions just like an escrow lasting the term of the Promissory Note because legal title is actually held by the Trustee not by the Owner. The borrowers have a recorded interest in a property, and they possess all the rights of ownership subject to the Trust Deed encumbrance, but their interest is not unencumbered ownership, and it will not become true ownership until they pay off the Promissory Note; until the Note is paid off, legal title is held by a Trustee while Owners have Equitable Title with rights of possession and use.
The trustee is empowered to call a public auction without going to court — avoiding court being the main reason the system was developed. This gives lenders the option of forcing sale at minimal cost and minimal delay. The system is streamlined and capable of expanding and contracting to meet demand. Lately, the Trustee business has been a stellar growth industry.
A business transaction
First and foremost, the documents exchanged by borrowers and lenders are a business transaction as Henry Blodget recently informed borrowers:
“Specifically, when you borrowed money to buy your house, you engaged
in a business transaction. The bank or mortgage-lender evaluated the
risk of the transaction and concluded that it would was a risk worth
taking. To protect its money, the lender also required that you pledge
the house as collateral, and it required you to have some equity in the
house as an additional cushion. In the event that you didn’t pay, the
lender retained the right to seize the house, sell it, and pay itself
off before you got your equity. The lender loaned you the money because
it concluded that this was a smart business decision.
You, meanwhile, also made a business decision. You decided to
borrow money to buy your house even though it meant risking your
equity, home, and credit rating.
And now it turns out that both of you made a bad decision.
Fortunately, you don’t have to fight about what happens next.
The contract between you spells everything out: If you stop paying, the
lender gets the house. That’s it. Unless the contract specifically
differentiates between a failure to pay based on hardship (involuntary)
and a failure to pay based on a collapse in the value of the house
(voluntary), there’s no difference. If the lender thought at the
beginning that you had a “moral obligation to pay,” it would have
specified that in the contract.
Now, compare this to a situation in which you DO have a moral
obligation to pay: When you borrow money from a friend at no interest,
for example, and you promise that friend that you will give him or her
every penny back.
THAT is a moral obligation to pay. In this case, your friend did not
lend you money to make a profit. Your friend loaned you money to help
you out–with no collateral or contract other than your promise to pay.”
Many people persevere in business transactions throwing bad money after bad for vanity, entitlement or misplaced moral obligation.
The big bluff
Threat of calling a foreclosure auction is supposed to be a bluff. Neither the lender nor the borrower want an auction, but similar to Texas Hold-em, each party has cards to play, and where they are in the process and the relative strengths of their bargaining positions matter.
Ordinarily, threat of forcible eviction from the family home compels borrowers to do whatever is necessary to make payments, and the carrot (keep a home) and stick (threat of foreclosure) are enough to keep the system working. However, when people don’t have equity or when it is in their best interest financially to get out of a loan, lenders find the threat of forcible eviction less compelling; in fact, the more underwater a homeowner is, the less power lenders have. What possible threat can a lender hold over a money renter who is 30% underwater?
What property right does the 30% underwater homeowner particularly value that they don’t obtain as a renter?
The right to improve a lender’s property? Good luck getting a loan for that.
The right to lease out for less than the mortgage payment? Not a great deal for the owner.
The hope of appreciation years from now? Bring on the kool aid….
To be continued…
In tomorrow’s post, we explore judicial and non-judicial foreclosure and go step-by-step through the non-judicial foreclosure process. On Friday, we will go through the mechanics of a Trustee Sale auction and discuss the difficulties and opportunities this market offers.
Beds 2 Baths 2 full 1 part baths Size 1,343 sq ft ($334 / sq ft) Lot Size n/a Year Built 1999 Days on Market 1 Listing Updated 1/7/2010 MLS Number P716608 Property Type Condominium, Residential Community Northpark Tract Othr
Private gated community of North Park with full time gate guard. Beautifully landscaped, well maintened community. New custom paint and new carpet and Travertine floor. 2 car side-by-side garage. Association offers pool, spa, parks, tennis courts, club house and more.
maintened?
This kind of transaction is common at Trustee Sales. The cash markets often see discounts of 15%-20%. I haven’t pulled comps, but I suspect this is priced to the high side of reasonable, and the seller will drop the price $25,000 to quickly close the deal. In and out in 30-60 days with a $40,000 profit (10%) makes for a nice annual rate of return — if you could repeat flips over and over.
If you are a family with cash looking to buy at a discount, the Trustee Sale market is where you should be house shopping.
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The video below is a children’s lesson on how long-term property disputes slow economic development and give rise to eminent domain legislation. There is probably also a lesson about a stubborn refusal of buyers and sellers to move the little bit necessary to please both parties.
