Buying a Foreclosure in Claremont: The Three Stages

Buyers who ask about foreclosures usually have one picture in mind, and it is usually the wrong one. They are imagining a discounted house with a bank behind it and a straightforward escrow.

In practice, distressed property is bought at three quite different stages, and they have almost nothing in common. Different sellers, different risks, different money, different competition. Choosing which one you are actually equipped for is the first real decision.

Stage one: before the sale

At this stage the owner still owns the home. A default may have been recorded, which is public information, but no sale has occurred.

The seller here is a person, not an institution, and the transaction is an ordinary purchase: an offer, a contract, disclosures, inspections, financing and escrow. If the debt exceeds the value, the transaction becomes a short sale requiring lender approval, which introduces uncertainty and delay.

What it demands: patience, and a genuine willingness to walk away. Timelines can stretch, and a pending trustee's sale can end the opportunity entirely.

What it offers: the ordinary protections of a normal transaction, including access to the property and the ability to use financing.

The ethical weight: this is the stage where the owner still has options, and the owner deserves to know that. How to approach an owner at this stage without doing harm is worth reading before you contact anyone, because the pressure tactics common in this space are exactly what the law and ordinary decency prohibit.

Stage two: the trustee's sale

This is the auction, and it is the least forgiving purchase in residential real estate.

Bidding is generally cash on a very short timetable. There is typically no interior access, no inspection, no seller disclosures and no negotiation. The property is bought as it stands, with whatever condition, occupancy and title situation comes with it.

What it demands: liquid funds, title research done in advance, an accurate repair estimate made without seeing the interior, and the discipline to stop bidding at your number.

What it offers: speed, and the possibility of a price reflecting all that risk.

What can go wrong: a great deal. The full list is set out in the article on auction risks, and anyone who has not read something like it has no business bidding.

Stage three: bank-owned, or REO

When a property does not sell at auction, title reverts to the foreclosing lender, and it becomes real estate owned — REO. It is then usually listed for sale in the ordinary way.

This is the most accessible of the three. The property can generally be seen, financing is often possible, and escrow proceeds through familiar steps. What differs is the seller: an institution that did not live in the house, will typically provide limited or no disclosures about its condition, and will often use its own addendum with terms favoring the seller.

What it demands: thorough inspections, careful reading of the seller's addendum, and realistic expectations about repair requests.

What it offers: access, financing and a conventional closing process. The REO purchase is covered in detail here.

Choosing honestly between them

Match the stage to your actual resources rather than to the return you would like.

If you need a mortgage, you are looking at stage one or stage three, and realistically at stage three. If you need to see the interior before committing, the same is true. If you have liquid funds, a tolerance for unknown condition, and the patience to research title on properties that never come to sale, stage two becomes available.

Buyers get hurt when they choose a stage for its reputation and then discover they cannot meet its requirements. There is no shame in the accessible route; most successful distressed purchases in a city like this one happen there.

The constants across all three

Condition is unknown until proven. A property that has been through financial distress has usually been through deferred maintenance. Assume unseen problems and budget for them.

Title is the sleeping risk. Junior liens, tax obligations, association claims, easements and recording defects all live in the record rather than in the walls. A title search happens before you commit, not after.

Occupancy is a legal process. If someone is living in the property, gaining possession has requirements and duration, and only a court and a sheriff can conclude it.

The math has to survive daylight. Purchase price plus repairs plus carrying costs plus closing costs, against a realistic value for the finished home. A distressed purchase that only works on optimistic assumptions is not a bargain.

A word on how to conduct yourself

Every one of these properties represents somebody's difficult period. That is a fact worth carrying into how you behave, particularly at stage one, where a household is still in the home and still making decisions.

Be straightforward about who you are and what you want. Do not use urgency as a tool. NO BUYER SHOULD EVER TAKE AN UPFRONT FEE FROM A DISTRESSED OWNER, and no buyer should offer to fix a foreclosure for a fee at all — that conduct is regulated, and it is how the people described in the article on foreclosure scams operate. If an owner would be better served by selling on the open market, say so, and point them to a HUD-approved housing counselor, whose help is free.

A purchase where both parties leave whole is available at every one of these stages. It just requires not treating the seller's situation as the opportunity.

The wider landscape starts at the foreclosures guide. Legal questions belong with an attorney and tax questions with a CPA. Anthony Grynchal has been licensed in California since November 2009.