In the United States, a trustee deed is a deed conveying title to foreclosed real estate either to the high bidder at auction, or to the lender if no bid matches or exceeds the outstanding debt. A trustee deed is materially different from the bargain and sale deed that conveys title from a seller to a buyer in a traditional real estate transaction, because it doesn't include most of the covenants and warranties found in a bargain and sale deed.
Most real estate sales in the United States are funded by a loan, often secured by a mortgage and a promissory note. In the event the buyer defaults on the loan, the lender’s recourse is to repossess the property and sell it at auction. About 20 states require that the lender file a lawsuit against the borrower to effect the repossession, commonly called judicial foreclosure because the process takes place under the supervision of the court.
The remaining states, though, permit a procedure called non-judicial foreclosure, in which the property can be repossessed and sold without having to obtain the court’s permission. In these states, a deed of trust is given to a third party — the trustee — as security for payment of the loan. The deed of trust authorizes the trustee to proceed with foreclosure proceedings upon certification from the lender that the loan is in default, and is different from a trustee deed, which is created only after the real estate is foreclosed and sold at auction.
When real estate is foreclosed in a non-judicial action, the trustee is responsible for selling the property to satisfy the debt. Each state has its own requirements, but generally, the borrower must first be alerted that the loan is in default. If no arrangements can be made between the borrower and the lender, the trustee goes forward with the sale, making public notice and conducting the sale itself, which is usually an auction conducted by the trustee on the steps of the courthouse of the county in which the property is located. The property is sold to the high bidder, although it’s usually the case that if the winning bid is less than the amount owed on the loan, title to the property will revert to the lender.
After a foreclosure auction, title to the property is transferred via a trustee deed, which is a deed prepared by the trustee conveying title to the winning bidder, or to the lender if the high bid is less than the outstanding debt. This is different from the bargain and sale deed accompanying a traditional sale of real estate, which warrants that the title is free of any liens or other encumbrances, a representation usually guaranteed by title insurance.
A trustee deed, on the other hand, transfers title to the property without any representation or warranty as to the existence of other clouds on the title, and is not covered by title insurance. This is why experts in the field recommend that beginning real estate investors not purchase foreclosed property at auction, but from the lenders themselves after they’ve taken title to the property, when title will be conveyed with a bargain and sale deed.
