Trustee Sale vs REO Property: What Happens After Foreclosure
Key Takeaway
Understanding the auction process helps you avoid it. At a trustee sale (foreclosure auction), your home is sold to the highest bidder - often an investor or the bank itself. If no third party buys it, it becomes REO (bank-owned). Either outcome means you lose your home. The best strategy is to sell before auction.
If you're facing foreclosure in California, understanding what happens at the trustee sale - and what happens if your home doesn't sell - can help you make better decisions. While this guide is written from a buyer's perspective, the information is valuable for sellers to understand their options and timeline.
Quick Comparison: Trustee Sale vs REO
| Factor | Trustee Sale (Auction) | REO (Bank-Owned) |
|---|---|---|
| What It Is | Public auction of foreclosed property | Property owned by lender after failed auction |
| When It Occurs | After Notice of Sale period (21+ days) | After auction with no third-party buyer |
| Who Sells | Trustee (on behalf of lender) | Bank/lender (through agent or auction) |
| Payment Required | Full cash same day | Financing available |
| Property Inspection | Usually not possible | Usually available |
| Title Insurance | Not provided at sale | Standard with purchase |
| Typical Discount | 20-40% below market | 5-20% below market |
| Competition | Professional investors | Open to all buyers |
| Occupancy Status | May have occupants | Usually vacant |
What Happens at a Trustee Sale (Foreclosure Auction)
The Trustee Sale Process
Notice of Sale Posted and Published
At least 21 days before auction, the Notice of Sale is recorded, posted on the property, and published in a newspaper. This announces the date, time, and location of the auction.
Auction Day Arrives
The trustee sale is held at the location specified in the NOS - typically the county courthouse steps or a designated auction site. Sales are usually between 9 AM and 5 PM on business days.
Opening Bid Announced
The trustee announces the opening bid - usually the total amount owed to the lender plus fees. This is the minimum bid to purchase the property.
Bidding Occurs (or Doesn't)
Bidders must have cash or cashier's checks to bid. If someone bids higher than the opening bid, competitive bidding may occur. If no one bids, the lender takes the property.
Third Party Wins
Buyer pays in full (cash/cashier's check). Receives Trustee's Deed. Must handle eviction if occupied.
No Bidder (Bank Takes Back)
Lender "credit bids" amount owed. Property becomes REO. Bank handles eviction and resale.
Why Properties Become REO
Most foreclosure auctions result in no third-party sale for several reasons:
- Opening bid exceeds property's market value
- Property condition is poor or unknown
- Title issues make purchase risky
- Cash requirement limits buyer pool
- Occupants make possession uncertain
Understanding REO Properties
REO (Real Estate Owned)
Properties owned by banks after foreclosureWhen a property doesn't sell at trustee sale, the lender becomes the owner by "credit bidding" the amount owed. The property is then called REO - Real Estate Owned. The bank will typically:
- Secure the property: Change locks, winterize if needed
- Handle eviction: Remove any remaining occupants
- Assess condition: Determine what repairs, if any, to make
- Clear title: Resolve any liens or title issues
- List for sale: Through a real estate agent or auction company
For Buyers: REO Advantages
- Can use traditional financing
- Property inspection allowed
- Title insurance available
- Usually vacant and accessible
- Bank motivated to sell
- Clear title (bank resolves issues)
For Buyers: REO Challenges
- Higher price than auction
- More competition from buyers
- Sold "as-is" condition
- Bank negotiations can be slow
- May have deferred maintenance
- Multiple offer situations common
Why This Matters If You're Facing Foreclosure
Understanding the auction and REO process helps you make better decisions about your own situation. Here's what you need to know:
Key Insights for Homeowners Facing Foreclosure
You Lose Control at Auction
At trustee sale, your property is sold to whoever bids highest - or to the bank if no one bids. You have no say in price, terms, or buyer. Selling before auction gives you control.
Auction Prices Are Often Low
Cash buyers at auction expect significant discounts for the risk they're taking. Your property may sell for 20-40% below market value. Selling directly often nets you more.
Surplus Funds Are Rare
If the auction price exceeds what you owe, you're entitled to the surplus. But this is rare - most properties either don't sell at auction or sell close to the debt amount. Don't count on surplus funds.
Eviction Follows Either Outcome
Whether your property sells to a third party or becomes REO, you'll face eviction if you're still living there. Selling before auction lets you move on your terms.
REO Sales Take Time
If the bank takes your property, it may sit for months before selling. During this time, it deteriorates and loses value. This is all value you could have captured by selling earlier.
Trustee Sale vs REO: Detailed Comparison
| Aspect | Trustee Sale | REO Property |
|---|---|---|
| Purchase Process | Bid at public auction, pay same day | Submit offer through agent, standard escrow |
| Due Diligence | Limited - no interior access typically | Full inspection rights |
| Financing | Cash only, immediate payment | Conventional, FHA, VA available |
| Title | Trustee's Deed, buyer takes title risk | Clear title, title insurance included |
| Condition | Unknown, "as-is-where-is" | As-is, but can inspect first |
| Liens and Encumbrances | Junior liens wiped, but IRS/senior liens may remain | Bank clears most issues |
| Occupants | May be occupied, buyer handles eviction | Usually vacant |
| Negotiation | None - highest bid wins | Some room for negotiation |
| Typical Buyer | Professional investors, cash buyers | Investors and regular homebuyers |
| Risk Level | High (unknown factors) | Lower (more information available) |
What Happens After Trustee Sale (If You're the Homeowner)
If Your Property Sells to a Third Party
- New owner receives Trustee's Deed Upon Sale
- You no longer have any ownership rights
- New owner may offer "cash for keys" to encourage you to leave
- If you don't leave voluntarily, new owner will file for eviction
- You'll receive a 3-day notice to quit
- If you still don't leave, unlawful detainer lawsuit follows
If Your Property Becomes REO (Bank Takes It Back)
- Bank becomes the owner through credit bid
- Bank's REO department takes over the property
- Bank may offer "cash for keys" incentive
- If you don't accept, bank will file for eviction
- Banks often prefer cash-for-keys to avoid eviction costs
- After you leave, bank prepares property for resale
Cash for Keys: What to Expect
Both third-party buyers and banks often offer "cash for keys" - money in exchange for leaving the property quickly, in good condition, and without requiring formal eviction. Typical offers range from $1,000 to $5,000 depending on the property and situation. This is often better than waiting for eviction, which leaves you with nothing.
Important: Deficiency Judgments in California
In California, if your foreclosure was on a purchase money loan (the original loan used to buy the home), the lender cannot pursue you for any deficiency - even if the property sells for less than you owed. This protection applies to both trustee sales and REO sales. However, if you refinanced or took out home equity loans, those lenders may have different rights.
Avoiding Trustee Sale: Your Better Options
Both trustee sale and REO outcomes mean you've lost your home and any remaining equity. Here are better alternatives:
| Alternative | Outcome | Timeline |
|---|---|---|
| Sell Before NOD | Keep equity, control sale, minimal credit damage | Unlimited time |
| Sell After NOD (Pre-Auction) | Preserve equity, avoid auction, less credit damage than foreclosure | 90+ days |
| Short Sale (If Underwater) | Avoid foreclosure, less credit damage, may require lender approval | 60-120 days |
| Cash Buyer Sale | Fast closing, certainty, can close even after NOS | 7-21 days |
| Wait for Auction | Lose home, lose equity, maximum credit damage | Day of auction |
Don't Wait for the Auction
If you're facing foreclosure, selling before the trustee sale is almost always better than waiting. You keep more equity, have more control, and suffer less credit damage. Get a free consultation to understand your options.