Recently I have received an increasing number of inquiries from clients expressing an interest in purchasing real property at a trustee’s foreclosure sale. To be sure, buying property at a trustee’s sale can be highly profitable, but it can also be somewhat confusing and a lot less profitable if the investor does not do the homework. There are two major risk areas – risks regarding title and risks regarding the condition of the property.
Risks Regarding Title
The successful purchaser at a trustee’s sale receives a Trustee’s Deed. This deed transfers title to the buyer “without right of redemption and clear of all liens, claims or interests that do not have a priority subordinate to the deed of trust…and subject to all liens, claims or interest that have a priority senior to the Deed of Trust.” What does all this mean?
First, all trustee sales are final in that the prior owner cannot take back or redeem the property. (Ariz. Rev. Stat. Ann. § 33-811(E)). Second, the trustee’s deed operates only to convey the title and interest, which is subject to foreclosure. This means that the interest of the foreclosing lienholder in the property is of critical importance because a successful buyer acquires that interest and no more.
Generally we assume that the first mortgage holder is conducting the trustee sale, but that is not always the case. Second lienholders, mechanics lienholders, homeowner associations may be foreclosing their lien. Where the first mortgage holder is foreclosing on the lien, the title will transfer clear of all liens, claims or interests which are inferior as junior to the first deed of trust. These junior liens generally are second mortgages, home equity lines of credit (HELOC), HOA liens, and/or mechanic’s liens.
However, on those occasions where the junior lien holder is foreclosing on the property, the new owner will take title to the property but subject to the first mortgage and other prior liens. Even in the case of a foreclosure by the first mortgage holder, property tax liens take priority over the first mortgage. See Ariz. Rev. Stat. Ann. § 42-17153(C)(3). In other words, the successful bidder at a trustee’s sale will have to pay all back real estate taxes. Therefore, do not start this trustee sale process without obtaining a title commitment from a qualified title insurance company which identifies all liens in encumbering the target property.
Risk Regarding Condition of Property
One of the big problems associated with buying at a trustee’s sale is that the buyer generally does not have an opportunity to go inside the residence and make a thorough and complete inspection. We all know the problems associated with roofs and air conditioning systems in Arizona, but there are a whole host of other repair issues that may arise. The prior owner may have totally neglected the property; therefore a home inspection prior to a trustee’s sale is critically important. A drive-by of the property may give some indication of its condition, but most of the time the lending institution does not permit an inspection of the property. At the trustee’s sale you are buying the residence ‘as-is,’ ‘where-is,’ and you must balance the risks associated with the condition of the property and the bid price you are making. Be careful!
Lat J. Celmins