The Ins and Outs of a Public Foreclosure Auction

In the fast-paced foreclosures market, many sales are made at public auctions. While attending auctions can be a great way to purchase a property well below its market value, the process moves rapidly and can sometimes seem like a dizzying blur to the prospective buyer.

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These events are often frequented by more seasoned buyers and investors who understand the ins and outs of the process, so you need to be prepared if you plan to attend an auction. That means understanding the auction process before you arrive, including how to make a bid and actually pay for the property if you bid successfully.

Real estate investment trainer and author T.J. Marrs says he rarely frequents auctions and prefers to buy during the pre-foreclosure period whenever possible, simply because of the growing number of bidders driving up the prices at auctions. However, he advises those who do plan to buy at auctions to “get to know the property by either personal inspection, professional inspection or by getting as much background information on the property as possible.”

Those who heed that advice and take time to understand the foreclosure auction process have a better chance of achieving a successful outcome.

First things first: Know when and where, make time to prepare
While the details concerning public auctions differ from state to state, and whether the sale is judicial or non-judicial, usually foreclosure properties are auctioned off at the site of the property or at the courthouse in the county where the property is located. The date of a scheduled auction is typically posted at the courthouse, at the actual property and in a local newspaper.

Thanks to online data services like RealtyTrac, buyers and investors can use the Internet to locate auction property nationwide. RealtyTrac maintains a daily updated list of sale notices nationwide along with property research tools, giving buyers the information they need to prepare for an auction. Buyers can find the street address, which gives them a chance to view the property (at least from the outside), evaluate the neighborhood to determine what the property is worth, and plan a reasonable amount they would be willing to bid for the property at the upcoming auction.

Most likely, you’ll be bidding on a property without really knowing its condition on the inside, so it’s important to do any research you can in advance in order to minimize the risk of over-bidding and increase your return on investment. It’s also a good idea to research the title on the house and to find out what you’re actually bidding on at the auction, such as whether it’s the first mortgage or second mortgage. This information is crucial to bidders because it affects whether liens will remain on the property or dissolve as a result of the foreclosure auction.

“You have to know the property inside and out and know the party that is auctioning the property is, in fact, in the first lien position,” advises Marrs, noting that if you buy from a party that is in a secondary lien position, you could be responsible to pay for the first lien in addition to the auction price.

Game Day: What to do
The morning of the auction, it’s a good idea to contact the lender’s representative to confirm whether the auction is still taking place as scheduled, since lenders sometimes change the date of the auction at the last minute.

This is also a good time to verify the opening bid for the property, so you’ll know what to expect and be better prepared to plan your bidding strategy.

The rules (and art) of bidding
The lender typically sets the opening bid by calculating the full amount owed on the loan. This includes the principal, interest, any late charges, penalties, and foreclosure fees (as allowed by state law). At the auction, proceedings are opened when the lender or official running the auction announces the sale and the opening bid amount, with bidders free to call out bid prices until a high bid is reached.

At your first auction, knowing what not to do is almost as important as knowing what to do. The day of the auction, it’s important to feel confident in your ability to bid, so that you won’t be distracted by comments or “advice” given by other bidders. Remember, everyone attending the auction is likely there to bid against you, so it goes without saying that you’ll be hard-pressed to find a mentor to guide you through the process and look out for your best interest.

“Since you’re paying cash and there are a lot of unknowns, certainly you should keep your maximum bid in a safe range, like 60 to 70 percent of market value,” suggests Marrs, adding that one might be willing to go higher than 60 to 70 percent in more competitive markets.

Handing over the money
Once congratulations are bestowed on the highest bidder, it’s quickly time to pay up. The majority of auctions require the successful bidder to pay for the property in full, in cash and on the spot. So it’s important to have your finances in order well before the date of the sale and come to the auction with cash or certified funds such as a cashier’s check, money order or a bank certified check made payable in the buyer’s name.

In some cases, the successful bidder is given 24 hours or even up to 30 days to pay the full amount cash. Check state foreclosure laws to determine the auction payment options for each state.

A few things you should know before moving in your furniture
Once you’ve placed the high bid and paid in full, the property is yours for good, right?

Not exactly.

Like anything else, there’s a bit of fine print to be aware of when buying at a foreclosure auction. In some states, the original owner of the foreclosed property has what’s called a right of redemption. For a set amount of time (often up to 12 months), the original owner has the right to pay the full amount owed for the property, plus any applicable fees and interest, and buy it back it, barring any additional foreclosure activity. It’s a good idea to check the foreclosure laws in your state to understand what right of redemption exists. Though these procedures are rarely taken advantage of, it’s important to know what they are.

Foreclosure auctions certainly present great opportunities to grab bargain deals in the real estate market. But they’re not for the faint of heart, nor the unprepared. Still, doing your research on the property for sale and on how the process works can demystify things, allowing you participate with confidence.

Good luck and happy bidding!

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