Courthouse auctions: Mining foreclosure gold

Every week, tens of millions of dollars worth of foreclosed real estate is sold nationwide at sheriff’s sales and trustee’s sales, and savvy investors are finding a few golden bargains mixed in with many lumps of coal at these public foreclosure auctions. Investor Gregory Metcalf in Orange County, Calif., said sometimes he’ll scoop up five or six properties in a day.

“This is a highly specialized area of real estate,” warned Metcalf, the dean of the auction bidders who buys 500 to 600 properties a year and shows up daily at each of the Orange County trustee sales in Santa Ana, Orange and Placentia, Calif. “You would be foolish not to get training to learn how to work courthouse auctions. Spending $3,000 or more on training is nothing, because if you make a mistake here you’ll get killed.”

Last year, the auctions were largely deserted, with only a handful of the “regulars” attending the sales.

Not anymore. Now, from Malibu to Manhattan, courthouse auctions are attracting large crowds of bidders and gawkers — and investors are snagging bargains left and right. With the housing market enduring one of the largest declines in housing prices since the Great Depression, Metcalf and other regulars have an unrelenting cascade of foreclosures to select from. Sales are stalling, however, because delinquent borrowers are renegotiating the terms of their loans with lenders, working out new payment plans with banks. Some borrowers are filing for bankruptcy, delaying the foreclosure process. Others sell their distressed dwellings ahead of the auction via short sale. The rest go back to lenders.

Shrewd auction buyers won’t bid on underwater properties unless there are huge discounts and a potential to make a quick buck.

“In a declining market, you have to be very cautious about what you are buying,” warned attorney Ward Hannigan, owner of InnoVest Resource Management, a San Diego-based firm that specializes in buying courthouse auctions and a private, one-on-one foreclosure trainer. For one thing, cautions Ward, buying a house at auction is far different from buying a house through a broker. And though auctions offer a real opportunity to find a house at a lower-than-market price, the risks, he said, are real.

Mining the Minefield

As Hannigan, Metcalf and other regulars have learned over the years, no minefield of American real estate is as explosive and dangerous as foreclosure sales. Buying at the foreclosure sale is plagued with risks. Most defaulting properties have multiple loans, and buyers need to verify that they are bidding on a property that has no senior liens. For protection, buyers should hire a title search company to make sure the property is not encumbered by liens.

Experts said the most important rules when buying at auction are to have an exit strategy, don’t get too greedy, and be patient waiting for the best deals.