6 pros and cons of trustee sales

Ginger Dean

August 26, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

With interest rates at all time lows people are purchasing more rental properties and secondary homes to take advantage of the low housing prices as well as the number of homes in default. Savvy investors are always looking for homes that are in foreclosure because they are looking to purchase a bigger home, a new home or a secondary home at a low price. One way to do this is through trustee sales.

A trustee sale is a real estate transaction that involves three people as opposed to just a buyer and a seller. The trustee is a third party who takes the home from a seller due to default on the original mortgage loan and auctions the property off to the highest bidder.

Buying a home through an auction as a trustee sale has both its pros and cons. What is best for each buyer depends on his or her personal financial situation as well as the reason why each want to purchase a home.

The disadvantages of trustee sales

  • Undesirable property condition. If a home is up for auction, it means that the homeowner can no longer afford the mortgage payments. It also usually means that the homeowner can't afford to maintain the property. Trustee sales allow people to purchase homes at low prices, but the cost of repairs, maintenance and upkeep may not be worth it.
  • Tax liens. When a home goes into foreclosure, it is not only the mortgage payments that are in default: usually the property taxes are also in default. If you purchase a home through a trustee sale at auction, you may end up incurring more costs to repay back taxes that are owed.
  • Cash sale rules. Trustee sales usually require the property to be purchased in full with cash or a cashier's check. Purchasing a home with a trustee sale can be a good investment if you buy the property at a low cost; however, it can also take a large portion of your savings in one single purchase.

The advantages of trustee sales

  • High profit margin with right property at the right price. By the time a home goes to auction, the bank is hoping to sell the property as quickly as possible and at the best price possible. Sometimes this means accepting a lower auction price than is owed on the original mortgage loan. This is a loss for banks but a gain for buyers because they can get a property at a low price and flip it to sell at a profit.
  • Low time and effort to find properties. There are foreclosure auctions and trustee sales everyday across the country -- it's definitely not hard to find one. However, buyers have to be aware of the risks involved in purchasing real estate through a trustee sale.
  • Not a lot of time needed to find these properties. Before properties go to auction they are sometimes listed as a foreclosure, but requirements can vary from state to state. This gives buyers a chance to contact the owner and work out a deal to purchase the home before the property goes to auction. The time periods on the foreclosure process varies by state -- it begins when the seller receives a "notice of default," not from the first day that the loan payments have been in default.

Trustee sales can be a goldmine or a money pit. Hope for the best and commit to performing your due diligence on the property to prepare for the worst. Now that you have the pros and cons regarding this type of sale, make the decision based on what works best for your situation.


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