ArcaMax

Dear Monty: We are looking for a duplex or triplex to live in and as an investment. We live in a large metro area with many foreclosures. Does the possibility of a lower price at a trustee sale outweigh the risks of a quick decision without the usual due diligence process?

Monty's Answer: The short answer: probably not. But like many things in real estate, the "it depends" clause looms large. Trustee sales (also called foreclosure auctions) are very risky without years of experience. The lure is obvious. Properties sometimes sell at auction for 20%, 30% or even 40% less than their perceived market value. The auctioneer's fast-talk rhythm, the competition of other bidders and the prospect of instant equity can feel intoxicating. Trustee sales are structured to protect the lender, not the buyer. To participate, you often need cashier's checks in hand; tens or hundreds of thousands of dollars before you've even seen inside the house. There are no contingencies, no inspections and no title insurance guaranteed. You buy "as-is, where-is."

Risks You Assume

No. 1: Hidden property condition. That bargain $300,000 house might have $75,000 in foundation issues, black mold behind the walls, or an occupant who refuses to leave. You can't test the furnace or check the plumbing before bidding.

No. 2: Clouded title. Trustee sales typically wipe out junior liens, but not always. IRS liens, mechanics' liens or unpaid utility assessments could survive the auction. If you don't know how to run a proper title search, you're playing roulette.

No. 3: No financing safety net. The lender expects cash -- often within 24 hours. If you don't have it ready, you're out. No calling your banker on Monday morning to arrange a mortgage.

No. 4: Emotional pressure. Auction environments are built for speed. The gavel drops, and you're either in or out. Many bidders commit more money than they intended in the heat of the moment.

With this background in mind, for most buyers, particularly first-time buyers, the answer is no. The missing due diligence process is precisely what creates the illusion of a discount. If you thoroughly vet the property, as you would in a traditional purchase, the price is likely to normalize toward market value.

That said, experienced foreclosure buyers can make trustee sales work. Here's how:

-- Specialists only: Successful foreclosure buyers are often seasoned contractors, investors or attorneys. They know how to pull title reports, estimate rehab costs on the fly, sneak an early look and evict occupants legally. They are also comfortable walking away if the numbers don't line up.

-- Cash is king: You must have liquid funds, not just credit lines. The competition is tough, and speed is everything.

-- Risk is priced in: Experienced bidders assume every house hides a problem and factor that into their maximum bid. They aim for a margin wide enough that even after surprises, there's room for profit.

If you're a typical homebuyer looking for a safe place to live, trustee sales are more of a gamble than an investment. If you are a seasoned investor who thrives in chaos, they can occasionally produce outsized wins.

Ultimately, weigh your risk tolerance honestly. A low price at auction is meaningless if it saddles you with lawsuits, surprise repairs or sleepless nights. Sometimes, paying full retail with proper due diligence is the real bargain.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @montgomRM or DearMonty.com.

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