Foreclosure Auctions Offer Abundant Deals, Risks

Don’t believe late night TV infomercials. Buying properties in foreclosure is not an easy way to get rich quick.

“It’s the most dangerous way to buy a piece of real estate,” warns David S. Absher, president of Dual Arch International, whose Modesto, Calif., firm auctions foreclosed properties daily on the steps of the Stanislaus County Courthouse. “When you buy a house at real estate auctions, it comes with no guarantees whatsoever. All you get before you bid is a sidewalk view of the property.”

In other words, if the inside has been gutted by fire, trashed by vandals or stripped of appliances, fixtures and cabinets by previous owners, you’re out of luck. Also common are would-be bidders who mistakenly believe get-rich-quick promotional pitches about buying property with only a 10 percent down payment or with simply a letter of credit.

That’s not true.

Bidders must have cashier’s checks made out to the home mortgage company for the home’s full purchase price before they’re even allowed to bid.

“Those guys on TV are making their millions by selling you tapes and books, not by buying real estate themselves,” Absher said.

Most foreclosed homes that went to auction this fall in Stanislaus County weren’t purchased because the outstanding debt was more than the homes were worth, according to the Modesto Bee.

The mandatory minimum bid, therefore, was too high to attract bidders, and lenders got stuck owning the property. That was the case recently with a five-bedroom home on Alberto Way in Oakdale, which required an opening bid of $479,099.53. No one bid.

That doesn’t mean good deals can’t be found.

Eddie Diaz thinks he got one. Two weeks ago he outbid three other California mortgage seekers for a home in Oakdale. The minimum bid was $156,526.50 for the two-bedroom home built in 1910. After about 80 bids, Diaz ended up with the property for $198,500.

“I’m very good with carpentry,” said Diaz, explaining his plans to fix up the home and keep it as a rental.

Hope of finding a bargain is what lures people to auctions. In Stanislaus County, there are a few experienced investors who attend virtually every auction, along with a few rookies who mostly watch and occasionally try their luck bidding. In California, where housing affordability is not always easy to find, a lot of people are seasoned pros at finding deals because they’ve been forced to.

“If you don’t see the big players bidding, there’s a problem with the home,” cautioned Al Ferreira, owner of California Pacific Brokers in Modesto.

Ferreira was a bidder on courthouse steps for eight years, so he knows the dangers.

“It’s very high-risk,” said Ferreira, noting that the worst mistakes are made by those who don’t do enough research.

One woman thought she got a steal after placing a top bid at a foreclosure sale. She thought she had bought the home’s first deed of trust, but it was the second deed of trust, often called a second mortgage loan. When the first mortgage eventually went to foreclosure, the second deed became worthless.

“She lost $100,000,” Ferreira said.

Absher confirmed that story and said such mistakes are easy to make because legal title recordings can be confusing, complicated and incomplete.

“There can be a lot of liens,” Ferreira said. He cautioned bidders to particularly be wary of bail bond liens because they can signal trouble. “Those houses are usually pretty beat up.”

Ferreira no longer bids on foreclosed homes because he’s found an easier way to make money: He sells homes on behalf of the mortgage lenders who foreclosed on them. Ferreira now lists more than 20 lender-owned properties for sale in Stanislaus and Merced counties, and he expects to list 40 homes by the end of the year.