Smart Money: Trustee sale hazardous place for amateurs

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: My wife and I have been reading the trustee sale notices in our local newspaper. I want to know more about the risks involved and if you recommend buying a property this way. M.M., Oxnard, Calif.

Dear M.M.: Whether it's a trustee sale, a sheriff sale or any type of a distress sale, it's a very complex undertaking with many conditions. Additionally, there could be a substantial down payment required when your bid is accepted and there is a cash settlement within a very short period of time. You may not be able to inspect the property before buying it and cannot put in any conditions regarding the property's state into the arrangement.

Understand that there are professionals that make a very good living purchasing properties of this kind. They know the dos and the don'ts. Amateurs can get very bloody. Go to some of these sales, make notes, see who's there, take a look and see what was sold, and inspect the properties. There most likely are books and tapes that can be purchased for a lot of money, but there is no substitute for getting your feet wet without making a bid. You can make money, but you also can get burned if you don't know what to do.

Dear Bruce: My home has been for sale for more than three years, listed with various real estate companies. I've also tried to sell it on my own. I have dropped the price considerably with no success. If I let the house go to foreclosure and the bank sells it for a minimal price, am I responsible for the difference? What other options do I have? W.W., Altoona, Pa.

Dear W.W.: I do sympathize with your situation, however, sale is a function of price. I'm sure if you put it on the market for $1 someone would buy it. That being said, the price between what you are asking and $1 is what the house is worth. That you dropped it "considerably" is not really meaningful, because it could be that you started out with an unrealistically high expectation.

To make the house sell in the market where you are functioning, you'll have to continue to reduce the price until it becomes attractive to a willing and capable buyer. If you do let it go to foreclosure it is obviously going to bring a lot less than you are currently asking for it and perhaps less than you owe on it. This, along with the expenses of the foreclosure, is called the deficiency, and you will be responsible for that amount. Keep reducing that price until the property sells. I know that's a bitter pill, but that's reality.

Dear Bruce: Our home in a nice outlying suburb has been for sale for almost two years. We live in a very depressed area. The Realtors say the market in our price range ($365,000) is not very active and that there is a 24-month supply of them. We've had many lookers but most want to be closer to the city. We did have a sale, but that fell through. Right now we have it priced at what we paid for it in 1999. We are considering taking it off the market. Any advice? K.M., via e-mail

Dear K.M.: The house is overpriced with regard to the market. It doesn't mean that it's not a gorgeous piece of property that might be worth double that elsewhere. You didn't say why you wanted to sell it (whether you're leaving the area, need a larger or smaller home, etc.). If something has been for sale for a couple of years and nobody is buying, that is a solid indicator that the property is overpriced in the current market.

Whether you want to take it off the market is another matter. Any object, commodity or service is worth precisely what a willing buyer is able to pay and a willing seller is willing to accept. That's a very hard principle for many of us to accept. You can understand it intellectually, but to accept it is very difficult.

Dear Bruce: We purchased a home assuming a Veterans Administration mortgage (government-insured) and then sold it the same way. Ultimately, one of the subsequent owners defaulted and the home was put into foreclosure. The person that defaulted made up their payments and continues to live there. Their foreclosure action now shows on my credit record. When I called the mortgage company, they said not only was it on ours but it was on everybody's that was in the ownership line. I thought we were out from under it when we sold it? I'm told now that I have this blemish on my credit record. Is there anything that I can do? J.C. Citrus Heights, Calif.

Dear J.C.: Unfortunately, you are caught in a box that a lot of folks have been in. They think that once a mortgage has been assumed by someone else, they are off the hook. Everybody in the daisychain can be assessed if a default takes place. In this case a foreclosure action was started, but there was no foreclosure and it is now on your credit record and will remain there. What you might try to do is to contest it and ask the credit-reporting agency to reaffirm this. It may be that the mortgage company just won't bother responding. If that's the case, then it will come off in 30 days. If they do respond and reaffirm it, then I'm afraid you are stuck with it.

Dear Bruce: Is refinancing a good idea? We are a few years into our current 15-year loan, which is at 6.25 percent interest. The proposed loan is a 15-year loan at 4.25 percent, an application fee and other costs. We plan to stay in the house for at least five years. Is this a good time to refinance? D.S., via e-mail

Dear D.S.: You didn't tell me what kind of a loan you are considering. At 4.25 percent, I have to believe that it is an adjustable rate mortgage. Without knowing what it is keyed to and for how long, it is difficult to make a call. At 6.25 percent, you would have been far better off to refinance a few months ago. (Isn't it wonderful to have 20/20 hindsight?) Adjustable rate mortgages are no great bargain unless you only plan to stay for a short period of time. You say at least five years, but you could mean 10 years or more. If you definitely plan to get out in four or five years, the adjustable rate mortgage may very well make sense. Otherwise, stay with your current mortgage. In the event that mortgage rates fall, which they very well may do, I would leap on a 5 percent to 5.25 percent fixed.

Dear Bruce: My 96-year-old aunt gave us her home. She wants nothing more to do with it. We have kept her name on the deed because we've had a hard time getting homeowner's insurance since we live in Nevada and the house is in California. Should we take my aunt's name off the deed? What would that mean for my husband and I regarding taxes? We don't have enough for itemization. We are considering renting the property, which would mean getting a property manager. Will this affect our taxes? Would you advise us to see a lawyer? I have been told to set up a living trust. I don't know where to go from here. S.G., Las Vegas, Nev.

Dear S.G.: Yes, I would very much suggest and urge you to retain counsel. The gift taxes are payable by the donor, not the recipient. If gift taxes were to be a factor here, they would be assessed against your aunt, not you. There should be a way to handle that by having your aunt execute the appropriate tax forms and claim against her lifetime estate. Homeowner's insurance on a rental property will be almost impossible to get. You will be able to find the various coverages, but they will cost you. Managing your property long distance does not make sense. You indicated that the home is in California, which is a pretty hot real estate market. You should at least consider selling the house and investing the cash elsewhere. Again, the most important thing to do first is to seek counsel.

Dear Bruce: I read an ad that offers up to 14 percent annually, secured by first trust deeds (mortgage loans). It says that the interest is paid quarterly and can be set up from two- to four-year terms and have tax advantages. What do you think? R.B. Thousand Oaks, Calif.

Dear R.B.: While we have addressed similar letters often, it bears repeating. The only time anyone is going to offer as much as 14 percent annually means there is a substantial risk involved. In today's world of cheap money, why in the world would anyone pay 14 percent when a solid citizen can borrow money easily on first mortgages at just over 5 percent? What they are asking you to do is to loan your money in a very shaky environment. It makes no sense. Unless you are into substantial risk, I would not consider such a thing.

Dear Bruce: I want a list of foreclosures and have tried to obtain one from my credit union, banks and real estate offices, but to no avail. Each tells me that they have no such list. I have looked in the real estate section of our newspaper, but evidently I'm looking in the wrong place. Where can I obtain the information on this type of investment? Reader, via e-mail

Dear Reader: It varies by state, but the first place that I would call is the county clerk's office. I know in my state of Florida that office has a listing of all homes coming up for foreclosure. The newspaper also provides this list, so you may want to give your local paper a call. When HUD-financed homes are foreclosed upon, those may also be purchased by finding a HUD-participating real estate agent in your area. HUD Homes are sold in an "offer period." At the end of this period, all offers are opened and the highest reasonable bid is accepted. If the home isn't sold in the initial offer period, you can submit a bid until the home is sold. You can visit their Web site at www.hud.gov for more information on purchasing a HUD home.