How to Buy Foreclosed Homes in California

Written by Alex LongMay 24th, 202210 minute read

how to buy foreclosed homes in California

How to buy pre-foreclosures | How to buy properties at auction | How to buy REOs | How to buy HUD homes | Summary | FAQs

California is a famously expensive state to buy real estate, particularly in popular cities. However, California foreclosures can be an appealing option for buyers looking for a discount.

Before you dive into the foreclosure market, you need to manage your expectations and know what you're doing. If you’re an investor, California has made it a bit harder to acquire foreclosed homes recently, but that doesn’t mean you can’t still find good deals.

We recommend working with an experienced team of professionals, especially if you’re new to the process, to ensure you have a positive and profitable experience.

» MORE: Find expert agents in California, get cash back after closing!

This guide will tell you everything you need to know to get started finding, evaluating, and buying a California foreclosure.

At a glance: State of the California foreclosure market

  • March 2022: California had the 15th highest rate of disclosures in the U.S.[1]
  • 5,378 foreclosure filings out of more than 14 million housing units in first three months of 2022[2]
  • Counties with highest foreclosure rate (from highest to lowest): Trinity, Lake, Calaveras, Siskiyou, Yuba [1]
  • Counties with high foreclosure volume: Contra Costa, Los Angeles, San Diego, Santa Clara[3]

✍️ Editor’s take: California is such a big state that it’s hard to make broad-sweeping statements about it, particularly when discussing topics like the foreclosure market.

If you’re a primary homeowner, California has passed a law making it possible for you to match an investor’s winning auction bid to claim that house for yourself — so in that sense, it’s a decent state for primary homeowners or nonprofits looking to scoop up an auctioned property that sold for a low number. It’s not quite as good for investors who get the losing end of that deal, but they should still consider foreclosures as one avenue for acquiring properties with potential.

It may take some elbow grease and upfront investment, but in expensive California markets, fixing up foreclosures might be one of the better options left for investors trying to make the numbers work.

How to buy a foreclosure in California

“Foreclosure” is a general term that can refer to a variety of property types and/or stages in the foreclosure process:

  • Pre-foreclosures: These are California homes that have been informed of intent to foreclose and are being listed on the open market to avoid an actual foreclosure.
  • Homes being sold at auction: These are homes that have been advertised publicly for at least three weeks and are being auctioned off by a third-party trustee.
  • Bank-owned foreclosures (REOs): Foreclosures that don’t sell at auction are purchased by the bank and listed on the open market with agents as real estate owned (REO) properties.
  • HUD homes: The Department of Housing and Urban Development (HUD) sells FHA foreclosures via online auction. This is a good option for aspiring homeowners; HUD has plenty of inventory and prioritizes owner-occupant buyers.

In California, the rules governing foreclosures can vary depending on location, the stage in the foreclosure process the property is in, and what kind of buyer (investor, homeowner, non-profit organization, etc) you are.

Buying California pre-foreclosures

⚡️ Key takeaways

  • Pre-foreclosures are properties under threat of foreclosure that have been listed on the open market.

  • You can find them on California MLSs and other listing sites like Zillow or RealtyTrac.

  • This is usually the best stage to find deals, because homeowners are highly motivated.

  • You may have the chance to do inspections, appraisals, and title checks if the owners allow it.

  • They may qualify for conventional financing, depending on quality, location, and lien status.

Pre-foreclosures are properties whose owners have been notified of foreclosure intent, usually because of delinquent mortgage and/or tax payments.

In California, borrowers usually miss payments for three months or more before the lender initiates a foreclosure avoidance assessment — this is a meeting between the lender and borrower to discuss a plan for avoiding foreclosure, and it's required by California law.

If the borrower doesn't make progress toward paying their debt in line with the foreclosure avoidance plan, the lender can file a notice of default 30 days or more after that initial meeting. In most cases, foreclosure proceedings don’t require going through the court system.

Once the notice of default is filed, the lender must advertise the property publicly for at least three weeks before it goes to auction. This time period may be your best chance to snag a pre-foreclosure deal.

Where to find California pre-foreclosures

If a borrower cannot catch up on their payments, they will sometimes list the property on the MLS with an agent. Your agent will have access to these listings — if you’re working with one — but you can also usually find them on popular sites like Zillow, RealtyTrac, or PropertyShark.com. These sites allow you to filter your search with either a “pre-foreclosure” button or a keyword search where you can enter the word “pre-foreclosure.”

Working with an agent is generally a good idea when looking for pre-foreclosures since they have access to the MLS and can see these listings before they appear on the popular real estate sites. They can alert you when these pre-foreclosures hit markets you are interested in, giving you a chance to initiate contact with the owner before some of your competitors even know the property exists.

» FIND: Connect with top California agents, set up instant MLS alerts

How to buy California pre-foreclosures

Buying pre-foreclosures in California is similar to buying conventional homes. The biggest differences are:

  • The seller is extra motivated.
  • You may be operating in a condensed time frame.
  • Additional complications may arise if the owner decides to repay their debts or declare bankruptcy.

Once you find a property you want to buy, you or your agent can reach out to the owner and submit your offer. Remember that distressed owners are people, and they are going through a rough patch, so they probably won’t like the idea of you taking advantage of their misfortune.

The seller will either accept, deny, or counter your offer. If they're amenable, you can make your offer contingent on an appraisal and/or inspection.

⚠️ Short sales: Sometimes, sellers in pre-foreclosure owe more on their mortgage than the home is worth — this is called a short sale. In these circumstances, you may have to be prequalified by and negotiate directly with their bank. Your agent will be able to guide you through this process.

✅ A few more helpful tips

  • Consider including a letter in your offer explaining your situation and why the seller should work with you.
  • If the foreclosure deadline is approaching, a fast close makes your offer more appealing.
  • Work with an experienced agent to find good properties and negotiate mutually beneficial deals.
  • You’ll also want a good attorney to run a thorough title check and ensure you don’t run into any nasty legal surprises down the road.
  • Keep in mind, this seller is losing their home — so be considerate!

Buying homes at California foreclosure auctions

⚡️ Key takeaways

  • California foreclosures go to public auction before being repossessed by the bank or U.S. government.

  • Auctions are held by trustees on regular business days between 9 a.m. and 5 p.m.

  • They're usually all-cash purchases only.

  • You probably won’t be able to see or inspect the property, so the risk level is high.

When a borrower fails to repay their debt or file for bankruptcy prior to the date of the foreclosure sale, then an auction is held to sell the property.

If the auction is a non-judicial sale — meaning the foreclosure wasn’t filed as a lawsuit — the sale is final. If it's a judicial foreclosure (less common), the previous owner has up to one year to redeem the property by paying off their debts plus the costs associated with the foreclosure sale.

If no one submits a winning bid at the auction, the bank or government will take possession of the property and attempt to sell it themselves.

Where to find California foreclosure auctions

All California auctions must be advertised to the general public at least three weeks in advance. They are posted on the bulletin board in the courthouse and listed in the Real Estate or Classifieds sections of the local newspapers.

You can also search all California newspapers by clicking “foreclosure sale” under Notice Type on capublicnotice.com.

Auctions are also sometimes listed on popular websites like Auction.com, Servicelinkauction.com, or RealtyTrac.

How to purchase a California foreclosure at auction

The rules governing auctions vary by county, but pretty much everywhere your first step will be securing your financing. Since auctions usually require cash to purchase, you’ll need adequate funding in your personal accounts or you’ll need to acquire the funds from a business partner, hard money lender, or private investor.

Once you have the funds ready, you should contact the trustee for important details regarding the auction, such as:

  • Bid increments
  • Date of auction
  • Down payment amount
  • Minimum bid
  • Payment timeline
  • Payment type accepted

👉 Before you bid:

  • See if you can inspect the property: If you contact the trustee in advance, they might agree to let you do an inspection (more often, they won’t). Just know that all auctions are as-is sales.
  • Have an attorney run a title check: You should run a title check in advance to avoid any issues with title transfers (also consider purchasing title insurance!).
  • Decide maximum bid: Competition and emotions are dangerous forces in auctions, so determine the maximum bid you’re comfortable with in advance.

Some auctions are held in person, and others are online. You should know which is the case for the property you want to bid on and then either attend in person or online as determined by the trustee.

Bid in the predetermined increments until you win the auction or reach your maximum bid.

⚠️ Be aware of California’s redemption period: In California, judicial foreclosures (which require the lender to file a lawsuit) are much less common than non-judicial foreclosures, but that doesn’t mean they don’t exist.

In the case of judicial foreclosures, the original owner has up to one year to pay off their debt plus auction fees to redeem their property and reclaim ownership. This means you should plan to hold judicial foreclosures for at least a year before doing much work or just avoid them altogether — which is what we recommend.

✅ A few more helpful tips

  • Most auctioned properties are bought sight-unseen, so plan to bid cautiously.
  • Many of these homes have been neglected or vacant for extended periods of time, so budget for repairs.
  • Don’t assume you’ll have access to the property right away — it could be months before you get in.
  • Find out if there are tenants in the property. Investors generally must honor the lease from the previous owner, and owner-occupants must allow tenants at least 90 days to vacate the property.
  • Avoid judicial foreclosures so you don’t have to worry about redemptions months later.
  • Don’t do any substantial repairs for at least 45 days if you’re an investor — per California law, owner-occupants, tenants, or nonprofits have 45 days after an auction to match your bid to effectively take the property out from under you.

Buying bank-owned foreclosures in California (REOs)

⚡️ Key takeaways

  • California mortgage foreclosures that don’t sell at auction get repossessed by the bank.

  • These are commonly called real estate-owned (REO) foreclosures.

  • REOs are usually sold on the open market with real estate agents.

  • You may be able to use conventional financing — especially if you get a mortgage from the bank selling the property.

  • Getting a good deal is possible, but not always easy: Banks are eager to get REOs off their books – but are also looking to minimize losses.

In California, banks take ownership of properties that don't sell at auction and then attempt to sell them on the marketplace like a conventional home — these are REO properties.

The biggest difference for buyers is you’re buying from a bank, not a person, and that bank may have very specific protocols for making offers and negotiating.

That said, you may still be able to get something under market value, especially if the bank has been holding it for months.

How to find California REOs

Fortunately, finding REO properties is relatively easy. Banks list their foreclosure properties on the open market with agents, so REOs will show up in all the usual places: local MLSs, Zillow, RealtyTrac, and so on. You can locate these listings by filtering with terms like "sold as-is," "foreclosure," or "lender owned."

In the first few months of 2022, there were 655 REOs in California.[2] Considering there are over 14 million housing units in California, these represent a relatively small portion of the total housing market. That means there will probably be quite a bit of competition for the small pool of REOs, which makes it harder to get a significant discount on these properties.

To get a competitive edge, find a good real estate agent who can set up MLS alerts that notify you the instant a new REO hits the market in your target ZIP code(s).

💡 Quick tip: A good way to get the inside track on bank-owned properties is to establish a relationship with the REO department of local lenders. Banks are eager to get REOs off their books, so if you establish yourself as a credible, repeat buyer, they might come to you first before they list on the MLS.

How to buy REO foreclosures in California

Once you identify the REOs you want to buy, the process is similar to any other home purchase: You and your agent will submit an offer, do an inspection, and negotiate terms.

You may or may not be allowed to use conventional financing, depending on the property’s condition. Sometimes you can get more flexibility or better terms financing through the bank listing the REO.

Standard closing fees are still required, and sometimes closing can take longer than usual, so avoid these properties if you are pressed for time.

⚠️ Consider an attorney and owner’s title insurance

Sometimes lenders will only issue special warranty deeds for REO properties, as opposed to the general warranty deeds that are more common in conventional sales. Special warranty deeds only assure buyers that no encumbrances — that is, unpaid debts against the property — were acquired during the time the lender owned the property, but it does nothing to protect you from encumbrances from earlier.

We recommend you consult an experienced attorney to protect you against issues with title if you are new to the process.

✅ A few more helpful tips

  • Be sure you have a letter of pre-approval before getting started, as lenders aren’t interested in wasting time on buyers who can’t pay.
  • REOs probably aren't going to be the cheapest deal because lenders aren’t desperate to offload a property and want to recoup their investment.
  • REO lenders have carrying costs, so the longer the property has been on the market, the more likely they'll negotiate with you.
  • Avoid end-of-month closings because closing agents are super busy at this time.
  • Work with an experienced agent and attorney to ensure your offer is submitted correctly to be seriously considered.

Buying HUD foreclosures in California

⚡️ Key takeaways

  • FHA loan foreclosures are sold online through the HUD Home Store.

  • You can only submit offers through licensed agents registered in HUD’s system.

  • HUD has its own (relatively rigid) bidding and purchasing process and protocols.

  • HUD homes are the best opportunity for homeowners because HUD prioritizes owner-occupant buyers.

HUD homes are like REOs in the sense that they didn't sell at auction and were repossessed by a lender. But, since HUD home mortgages were backed by the government, they take possession after foreclosure instead of a bank.

Since the HUD process doesn’t vary much by state, we won’t go into detail here (full guide coming soon!)

How to buy California HUD foreclosures

To find HUD properties, search on the HUD Home Store. You must use an agent registered to use HUD to submit bids, so be sure to verify your agent is approved.

HUD only cares about price: It evaluates bids on a rolling basis, and will always accept the highest bid at the end of a given day that meets the minimum purchase price for that property.

🏡 HUD prioritizes owner-occupant buyers: All HUD properties are initially only available to owner-occupant buyers for a set period before bidding is opened up to investors. This makes it a good option for retail buyers looking for an affordable home. On the flipside, the properties that make it to investor bidding are often fixer-uppers.

Summary: How to buy a foreclosure in California

In California, whether you’re buying a pre-foreclosure, foreclosure at auction, REO, or HUD home, there are a few things you need to do:

  • Step 1: Determine your financing — If you want to buy a pre-foreclosure, REO, or HUD home in California, traditional financing may be an option depending on the condition of the property. If you want to bid at auctions, you’ll probably need the cash on hand — whether it’s yours or a private investor’s is up to you.
  • Step 2: Search for your property Check your local MLS and sites like Zillow or RealtyTrac for pre-foreclosures and REOs. You'll likely find auction homes on your county sheriff's website, while HUD homes are on the HUD Home Store.
  • Step 3: Do your due diligence — Conduct a title search to ensure there are no outstanding liens or issues with the property. If possible, get an inspection and appraisal. While not required in California, working with an experienced attorney and/or agent will be invaluable here.
  • Step 4: Make an offer or bid In the pre-foreclosure stage, be respectful of the people you’re dealing with. For an REO or HUD home, be sure you’re carefully following the specific instructions for that kind of home.
  • Step 5: Close on property If you acquired the property at auction, remember not to assume the deal is complete until the sale has been confirmed and the redemption period is over — remember the 45-day matched-bid law if you’re an investor.
  • Step 6: Move or rent Congratulations! Move in and enjoy your new property — unless there’s a tenant in place. Then you need to give them at least 90 days to move out. If you’re a landlord, you need to honor the terms of their lease.

If you’re ready to find your next real estate deal, find an agent with foreclosure experience who can start finding you deals now!

FAQs about buying foreclosures in California

</p><p>When most people think of foreclosures, they are thinking of <a href="#auction" onclick="globalTOCClick('#auction');" data-link-type="jump-link">foreclosure auctions</a>. Buying a foreclosure this way requires acquiring the necessary funds in cash — either yourself or from an investor or hard money lender — and then submitting bids at auction with the hopes of being the highest bidder. These can take place in person or online, depending on the county. If you submit a winning bid, you must pay up-front for the property.<br><br>You can also buy foreclosures that don’t sell at auction, which are called REOs. The process for this is the same as conventional purchases, except you’re buying directly from a lender.</p><p>

</p><p>As you might expect, the most <a href="#state-of-market" onclick="globalTOCClick('#state-of-market');" data-link-type="jump-link">foreclosure volume</a> can usually be found in the higher-population areas around the state. A quick search on <a href="https://www.realtytrac.com/foreclosures/ca/" rel="nofollow" target="_blank">RealtyTrac</a> shows high concentrations of foreclosures in and around metro areas like Los Angeles, San Jose, and San Diego. The highest percentage of foreclosures are in the following counties: Alpine, Yuba, Trinity, Shasta, and Lake.</p><p>

ARTICLE SOURCES
[1]

Sofi.com. "Foreclosure Rates for All 50 States in March 2022." Accessed May 20, 2022. Updated May 16, 2022.

[2]

Attomdata.com. "U.S. Foreclosure Activity Sets Post Pandemic Highs in First Quarter of 2022." Accessed May 20, 2022. Updated April 21, 2022.

[3]

RealtyTrac.com. "Foreclosures." Accessed May 23, 2022. Updated May 23, 2022.