More and more investors are looking at buying foreclosed properties by bidding for them at the Public Trustee Sale.  If the investor has 100% of the cash necessary to make the bid then there is no need to look into borrowing funds. Yet, if the investor needs a loan to make up part of the bid, then the process can get complicated fast.

Buying property at a Public Trustee Sale

Before discussing how to borrower money, let’s review how the Public Trustee sale works and how a private investor can bid against the bank that is foreclosing and end up owning the property.  As we discussed in Part 1,roughly 4.5 months after a bank (or any lender) declares a loan in default and sends it to the Public Trustee for foreclosure, the Trustee holds a public auction where anyone can bid on the property against the lender.  The lender is entitled to an automatic bid of the full amount of their loan principal, all default interest, and any legal and other costs they incurred.

An example of Hypothecation and a Public Trustee Sale in Action

Here is a hypothetical scenario where our old acquaintance John Sharpe bids against First Imaginary Bank to try to get title to a property. First Imaginary has made a loan of $300,000 to Joe Loser to buy a single-family house located at 123 Happiness Lane for $450,000.  Joe put down $150,000 in cash, but then decided not to make his payments.  First Imaginary filed a foreclosure (as they were entitled to do) and after the appropriate time period the Public Trustee is selling the foreclosed property at auction. First Imaginary ran up an additional $6,000 in interest that they were entitled to and spent $4,000 on legal fees.  First Imaginary is bidding $310,000 for the house.  John values the house at $425,000 and sees a chance to make a profit.  John therefore comes to the actual auction at the Public Trustee’s office and makes a bid of $311,000, which is $1,000 higher than First Imaginary’s bid.  The Public Trustee now declares that John wins the auction and gives John 1 day to bring in $311,000 in certified funds.

When John brings in his good funds, then the Public Trustee delivers to John a document called a Certificate of Purchase, which shows that he now has the right to get a deed to the house at 123 Happiness Lane – subject to the right of anyone else that has a claim on this property that is junior to the Deed of Trust. The Public Trustee waits approximately 8 business days to see if any one that had a recorded interest in the house (like a holder of a 2^nd mortgage) wants to come in and pay the full $311,000 back to John Sharpe.  If someone did do this, then John gets all his money back and the 2^nd mortgagor could end up owning the house.  This doesn’t happen often, and in fact, no one did come in so after 8 business days John Sharpe is given what is called a “Confirmation Deed” by the Public Trustee and as soon as he records it he now owns the property.  Not a bad deal – a property Mr. Sharp values at $425,000 for $311,000.

Hard Money Lender in Colorado Supplies the Remaining Funds

Part Three of this Blog will describe how John Sharpe was able to borrow $200,000 from Montegra so that, when combined with John’s $111,000 he had sufficient funds to buy the 123 Happiness Lane House at the Public Trustee’s auction.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.