What they don’t tell you about bankruptcy sales
Bargain hunting in SF’s impossible real estate market
I am a firm believer that there are no true shortcuts in life. Deals and hacks exist, luck certainly exists, but work, time, and risk are components that are inherently involved. This is especially the case with buying real-estate, and especially the case with buying real estate in San Francisco. If you are willing to put in the elbow work, the due diligence, and are convicted of what you want, there is always a way to get there. The question turns from “can I get this?” to “How is this going to play out?”
In Summer of 2017 by San Francisco, real estate hunt began, and as a young first-time buyer who was not living in San Francisco at the time, getting ripped off should have been the most likely outcome of my ambition to buy. People told me that I was biting off more than I could chew, and I should be more patient. The latter was true, but the more I was told that there was no easy way to find a good deal from my vantage point, the more convinced I became that there must be away.
It took about two months of going on showings and doing thorough online research to get to a place where I knew what I wanted. It took about another month to develop conviction that a particular condo building on Rincon Hill/East Cut, the Harrison, was the place I wanted to invest in and live in, above all else, and it took about a week to realize that everything the developer was selling was just a little overpriced. If the condo made it more than a few weeks on the market, it was not what I was looking for.
One day, sometime in Winter, there was a glimmer of hope. One of the lower level apartments, 1,100 square feet, went on the market in my price range. As soon as I got on the phone with my realtor, we found out that it was in the contract, snatched up overnight. I was determined to get the next one. The thing about me is that I can run long distances, but have laughably slow reflexes. Little did I know that the home buying strategy would follow the same pattern.
This is a story about buying a home through a bankruptcy sale in the City of San Francisco. I came to the table as a complete novice. Not only had I had no experience in bankruptcy sales, but I had no experience in home purchasing. Throughout the multi-month process, I experienced excitement, hope, stress, suspicion, and relief. But what was most salient is how much I learned (probably the hard way).
I want to tell a little bit about my experience to make future home-buyers consider the potential boons of buying a home not-off-the- shelf, and also to provide some hard-learned advice that might not be on Zillow or your realtor’s radar.
One random spring morning, as I was stalking listings online, I took a double-take and honestly dropped my coffee. A certain apartment at the Harrison (the building of my dreams) was listed as a potential foreclosure. Estimated foreclosure cost, 30% under value. I immediately called my realtor, sent him screenshots, and prayed that this was not a mistake. He said he would get back to me with more information. He called later that day saying that it looked like the property was paid for in cash so it was probably spam. Apparently on sites that aggregate real-estate listings, some realtors will submit properties that aren’t actually on the market as a way to get foot traffic to their brokerage.
Information about foreclosures or bankruptcy sales are not easily found and the information around them is often inaccurate. You can find a listing on Zillow that says it’s a potential foreclosure, but if you look closer, an auction date was set months ago and no updates to the listing have been made. Maybe the owner ended up paying their debts off, maybe someone bought it a year ago and public records had not been updated, maybe the title was in dispute and no-one could even properly buy the property. These are all more feasible than not and your realtor will have to do some deep digging to get the facts straight.
Three days later, my realtor called with good news. The foreclosure listing was real, no spam. Although the listing was real, my realtor knew there was some drama going on with the seller that he was not certain of and he needed to further investigate. The next day he called and told me that the listing was a probate sale: the owner was deceased and his estate was trying to sell the property. Although probate sales are tricky due to the added red tape, it seemed like as long as I was willing to jump through some hoops, the purchase could happen. I told my realtor I wanted to participate in the probate sale and he said he would go to the estate’s broker to find out next steps.
A week later my realtor called me and let me know that in fact the property was not going through probate. The seller had been raised from the dead and was alive and well. Well, maybe not well. The seller was foreclosing due to unpaid mortgage payments. I probably brushed off the fact that it took a week to find out the status of the seller’s existence in this world, but I was not deterred from pushing ahead. I read up as much as I could about foreclosure sales, and was pleased that the process seemed mildly less complicated than a probate sale. I needed to wait for further details about proceeding.
A couple days later after speaking to the realtor who was representing the property, my realtor came back with another change in plot. This condo was not a foreclosure, it was a chapter 11 bankruptcy sale.
A bankruptcy sale is different because the the property is seized by the bankruptcy court and belongs to the court-appointed trustee’s estate, not the original owner as the court has an obligation to sell all of the debtor’s assets. Normally, the debtor and potential buyers will enter into an home purchase agreement. A process will be made so that if other people want to submit bids for the property, they can. If other bidders submit bids, an auction will be held. The bankruptcy court will then conduct a hearing to consider whether the sale to the successful bidder should be approved.
This is not quite what happened in my case.
I was told that we had to wait before I could make any moves on the property- there was going to be a court hearing at the SF Bankruptcy Court that would reveal more information. The court date came and went and the trustee-appointed broker sent out an offer sheet to my realtor. We thought that we had the green light. The thing with bankruptcy sale offers, is that they are non-contingent, and if it is accepted, you are locked into the offer. No “just-kidding’s it wasn’t serious” allowed. I realized, despite the realtor’s telling me that everything was fine, standard, and low risk, I needed a real-estate lawyer who specializes in bankruptcy sales to guide me through the process.
The lawyer looked at the offer sheet, and raised dozens of red flags. Flag 1: The broker had not yet been appointed by the court (i.e. he didn’t have the right to sell the property yet. Flag 2: The property’s title was in question. Flag 3: The current owner was fighting a year long legal battle of fraud and was forced to sell a portfolio of SF real estate to pay back his debts. He didn’t want to sell it at all and was going to do whatever he could to delay the proceedings.
Totally shocked by the state of the transaction, I became suspicious and distrusting of everything. My incentives were not aligned with anyone else’s. All I could do was wait and hear what the court ruled. I relayed my lawyer’s uncoverings to my realtor and he equally as shocked as I, asked the selling-broker how on earth any of this was ethical. But apparently in the world of bankruptcy sales, this was business as usual.
About a month later, the court confirmed the broker’s right to sell the property, but the title issue has still not been resolved. I won’t go into the details of the debtor’s case, but basically the seller had transferred the title of the condo to an LLC entity right before he had to file for bankruptcy in an attempt to protect the assets from being included in the bankruptcy estate.
The tricky thing about titles is that they follow a chained system. A title is passed from one owner to the next, and if there is a break in that chain, future “owners” who think that the correct title was passed onto them, might find out that they actually do not own the property. This is why title insurance exists. For example, if person A owned a home but then transferred the title to an LLC, and was then forced to sell all assets in bankruptcy, the court might try to sell person A’s property. The court would pass person A’s original title to the purchaser, person B. But the issue is that the person B technically is not the rightful owner, even if they paid for the home, because they were passed down an invalid title from person A. The LLC would still own the asset. You may be thinking, what a flawed system- and it is. Most real-estate markets around the world simply issue new titles that are not dependent on the state of the immediate prior title. But not in San Francisco.
And this was precisely the situation in which I found myself. Without the lawyer’s investigation, I was an ignorant person B.
The court needed to clear up the issue around the title and rule whether or not the LLC transfer by the debtor was invalid or not. It took another court ruling, two weeks later, to determine that in fact the transfer was invalid and the Bankruptcy court’s trustee held the valid title. I needed to keep the bankruptcy lawyer on retainer to confirm the court’s ruling as I was not physically able to go to court, given I was living on the east coast at the time. At this point, I thought the coast was clear. I had gotten past multiple delays in court, had confirmed that the selling broker was in fact authorized to sell the property, and had the title validity confirmed. I thus put in an offer on the property.
Two days later I got a text from my broker containing a screenshot of a text from the selling broker, saying that the offer had been accepted.
I jumped for joy and thought that we were close to a close but part of me knew that after all the issues thus far, the acceptance came too easily. Three days later, we found out that the text was a mistake. The trustee’s broker was apparently in the process of selling dozens of properties and accidentally sent the text to the wrong person (hence the ‘call me ASAP’ text). How could such a mistake, after text proof that we were told our offer was accepted, occur in a high-states professional industry? It happens because reality is messy and humans are humans.
To add insult to injury, I also found out a competing bid was submitted. Apparently there is a 14 day grace period after an offer is submitted for other competing offers to be considered. I was told that I was the only offer, only to be retold three days after the competing offer deadline, that I was outbid. The feeling of being played, deceived, and disappointed were stinging. But I had come too far to just give up. I wanted to see this to the end. I was going to participate in the live auction (if multiple offers are submitted, a live auction is held to determine the winning offer). If I won the auction, this would be done. This needed to be done. I was exhausted.
I was traveling in Asia at the time and the phone auction was scheduled to happen at 3am. I got up after an adrenaline laced sleep and dialed into the auction line. I was bidder number 1. The competing bidder was bidder number 2. Both of our brokers were listening to the call. I had a second line open with my broker on the phone just in case we needed to deliberate strategy. I was ready for the long fight as offers could only be raised by $5,000 each round.
Round 1
- I opened at the price bidder 2 outbid me at.
Round 2
- Bidder 2 raised by $5,000,
- I matched.
Round 3
- Bidder 2 raised by $5,000
- I matched.
Round 4
- Bidder 2 declined to bid any future
- I won.
I won. What?! I was immensely relieved that bidder 2 had a hard line they were not going to cross. The adrenaline leaving my body left me shaking. Apparently my broker was in his office and jumped up shouting in the middle of a quiet open-office floor, eliciting many a stare. It was done.
But it was not done. The debtor petitioned against the sale. I had to go to court to see if the judge would rule in my favor and let the sale go through. After all that had happened, it was going to come down to the decision of a judge. After all that had happened, the court might not even sell the property. In my mind, it felt like almost a year of work could have been for nothing. I was not informed of the risk I had assumed until this point.
My realtor and I went to Bankruptcy court. It’s an interesting place. After going through security much more robust than TSA protocol, my realtor and I found our way into a room, sterile, and identical to what you see in crime dramas. There were about four bankruptcy cases than needed to be heard by the judge before our line item was to be discussed. Those cases set a pretty somber tone in the courtroom. About an hour later, the sale was presented to the judge.
The debtor’s lawyer stated their petition, which transported me into the theater of the absurd. The trustee’s lawyer rebutted, the judge deliberated. The silence before the decision was sharp and painful. My realtor said he had never heard such stillness in SF. The judge ruled in my favor. The rest was going to be a “normal” real estate transaction. I walked out of that courtroom lighter than I had entered. But the fact that I didn’t know the process would come down to a court battle until I was sitting in court, still makes me uneasy.
The following transaction was not simple either but they consist of all the routine struggles of closing on any property. The day we could close kept on being pushed back because of complications. Even after I signed everything, had the title in my name, I found out that I still had to wait to move in because the judge had to record the sale.
In August, I moved in, and I have never felt more at home. Maybe it’s cognitive dissonance, but the amount I learned from the process has given me much more perspective into what can go wrong with buying a home, and in the future, I will be able to approach real-estate with more confidence and experience, given this story in my back-pocket.
If I had to give a prospective home-buyer TL;DR advice from my experience, it would be this: Look for foreclosures and bankruptcy sales, but only in buildings you have seen and are certain of (you are buying the place as-is, without contingencies, probably in all-cash). Lawyer up. Read all the fine print. Don’t take anyone’s word as the truth. Be prepared for multiple twists and turns. If you have patience for the bumpy ride, you probably will get value. If a judge is involved in your transaction, be patient. An urgent timeline is going to be deeply frustrating. But when the time does come, the experience will be deeply rewarding.
This story is published in The Startup, Medium’s largest entrepreneurship publication followed by +391,714 people.
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