On the Money Trail
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Chasing the Foreclosure Sale: An Exercise in Fortitude
by Al Jacobs, author of Nobody's Fool
February 2007

A newspaper advertisement, featuring a national celebrity enthusiastically promoting a real estate seminar, recently caught my attention.  The pitch was one I’d seen before: Attendance at the weekend “Wealth Creating Conference,” costing a mere $2,495, will enable the attendee to “…hit it big in the lucrative foreclosure market,” and become “financially independent before the year is out.”  As my mind drifts back to past recollections, I envision the events that will transpire as each enthusiastic entrepreneur-to-be, having completed sixteen hours of instruction, attempts to put the information to profitable use.  Ah, the picture is coming through so clearly . . .

Ralph Adams is diligently applying the knowledge acquired at that foreclosure seminar he attended a month ago.  As the instructor said, there’s a fortune to be made picking up troubled properties.  Why, it’s simply a matter of application and diligence, and just one acquisition alone will more than pay back the $2,495 seminar cost.  Yes, that’s what the instructor said.  It all seemed pretty clear at the time, and the foreclosure sale at which Ralph acquired a property at ten o’clock this morning couldn’t have been less demanding, with his the only bid.  To be a bit more accurate, in some western states it is a trustee’s sale, the distinction being that the proceeding is conducted outside the judicial system as opposed to a judicial foreclosure administered through the courts.  Although there are meaningful differences, the terms are used interchangeably.

It’s now six hours later, and after thirty-five fruitless minutes on telephone hold waiting to be informed of the amount due on a supplemental tax bill, he hangs up in disgust.  This seems a matter not covered during the lectures, he recalls.  Neither did the course clearly explain whether, after bidding in the property on a mortgage default, the senior lender might exercise its alienation clause and call the note due and payable.  Perhaps the presentation should have devoted less time to testimonials and more to details.  While pondering his next move, the phone rings.  The voice at the other end identifies herself as a member of the law firm representing the former owner—and still occupant—of the acquired property.  The message conveyed is clear and to the point: The notice to vacate delivered earlier in the day is defective and her client will vigorously resist any eviction action.

Ralph’s education is just beginning.  Though he doesn’t yet realize it, he is in an arena replete with peril.  The hardy souls that regularly participate in the foreclosure sale market quickly develop a set of cut and dried processes to minimize the inherent risks.  Let me discuss briefly the four basic areas of uncertainty to be factored into this enterprise.

· Shenanigans leading up to the foreclosure sale.  This can be a time of game-playing by all parties.  The noteholder’s financial stability can affect the progress of the foreclosure sale, particularly in the final stages, with repeated postponements of sale date not uncommon.  The mortgagor (debtor) may attempt to delay matters through refinancing activity, sale escrow openings, bankruptcy filing, or side agreements with the holder.  Again, postponements can result.  All these activities can make the procedure a spastic event with a succession of sale dates that seem never to end. 

· Unanticipated clouds on the title.  Before an informed bid can be made, the bidder must know what obligations will remain on title after the foreclosure sale.  All delinquent real estate taxes, senior mortgages, and unpaid association fees can be expected to remain against the property.  In addition, although liens and encumbrances junior to the foreclosing beneficiary are normally wiped out, there can be exceptions.  Certain items, notably mechanic’s and IRS liens enjoy priority status.  And finally, there are circumstances where various types of actions, particularly involving such matters as Medicaid fraud and child support claims, can contaminate a title long after acquisition.  Although title insurance provides protection in the case of a normal purchase, such guarantees are far less comprehensive in a foreclosure sale.

· Possession of the property.  Difficulties may be encountered in attempting to oust the prior owner or tenant in possession after acquiring ownership.  It’s unrealistic to expect cooperation from the dweller.  My practice is to institute eviction action within hours after the sale.  As any occupant becomes what is known as a tenant at severance upon transfer of title, the filing of an unlawful detainer action may be commenced without even the need for service of a notice to quit.  Unfortunately, an inherent advantage is maintained by whoever holds possession, and the courts control the process.  There are jurisdictions that are decidedly hostile to property owners as opposed to parties in possession.  This can result in an extended waiting period between a submission for a default judgment (one in which the defendant fails to file a response) and the actual granting of the judgment by which a writ of possession is issued.  There are jurisdictions where four months is not uncommon.  And while we’re on the subject of delay, untold mischief is possible if the occupant files an action in bankruptcy.  This automatically halts any eviction action proceeding in state court, transferring the matter to the federal bankruptcy court.  It’s not unusual for three months to elapse before the initial bankruptcy hearing.

· Physical condition of the property.  It is rarely an easy matter to inspect the property prior to the foreclosure sale.  The party in possession is often hostile and, as the Trustee conducting the sale can provide no help, the prospective bidder seldom views an interior.  Furthermore, it is common that when possession of the property is finally delivered, its condition can be abominable.  I recall one house I acquired in which, before departing, the prior owner smashed all double-pane windows, removed the light fixtures, carted off the front and garage doors, and destroyed all bathroom and kitchen appliances and cabinetry.

And so, for those entrepreneurs who plan to chase foreclosures, let me leave you with a few guidelines.  Collect the information as best you can, recognizing that you’ll not get it all.  Realize that the more cash you have on hand after acquisition, the sounder will be your position.  Most importantly, hedge your bet by limiting your bid so that cash investment plus all anticipated obligations will not exceed a predetermined amount—my personal rule of thumb is 60 percent of the property’s market value.  And finally, hope for the best . . . but be prepared for the worst.

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Al Jacobs has been an entrepreneur for forty years. His business experience ranges from property management and securities investment to appraisal, civil engineering, and the operation of a private trust company. In his book, Nobody's Fool - A Skeptic's Guide to Prosperity, Al presents his Ten Ground Rules for Success for achieving wealth and a prosperous life by outlining a philosophy for spending, borrowing, making sound investments, and how to avoid being victimized by America's many intimidating institutions.