One of the most important things a real estate investor can learn is how to buy a home at a foreclosure auction. However, there is much more than most people think to the auction process. In order to invest successfully at a foreclosure auction, you need to understand the process from beginning to end, starting with knowing how to find foreclosure properties you want to buy at the auction and concluding with how to take control and ownership of the property.
Here are a few pointers on buying a property at real estate auction. Learn everything you need to know to get started, from the foreclosure auction process, to how to get participate in foreclosure property opportunities to taking ownership:
It’s important to get up-to-date auction information and act on it as quickly and on a regular basis. Develop a system to keep track of properties that interest you. A good tracking system is important since most successful auction buyers pursue several properties sometimes over a period of several months.
After you find a property online, it’s a good idea to drive by the property to get a better idea of the property’s condition and the type of neighborhood. For some buyers and investors, driving by the property has also facilitated a casual meeting with the owner (you may be able to still work out a last-minute deal before the auction) or yielded a wealth of unexpected information from a talkative neighbor.
After a property is scheduled for auction, the owner still has a chance (sometimes less than a month) to stop the auction by paying the amount owed to the foreclosing lender. It’s also not uncommon for real estate auctions to be postponed by the lender without a new date being published. Although cancellations and postponements are announced at the time and location of the originally scheduled auction, you may try calling the trustee or sheriff’s office (depending on which one is conducting the auction) to find out beforehand.
Most real estate auctions are at a public place in the same county where the property is located. In many states, all the auctions in each county are at the same location. You can find this information listed on RealtyTrac or request the information from the trustee or the county clerk. If you call the county clerk, make sure you clarify that you are looking for the location of mortgage foreclosure auctions, not tax foreclosure auctions.
The bidding procedure varies from state to state, so you should become familiar with the procedure in your area before bidding at an auction. In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier’s check to the auction. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount to the auction and pay the remainder of the amount within a certain timeframe if they are the highest bidder. If you get a friendly representative when you call the trustee, you might be able to get information about how the bidding works in your area, but you should plan to educate yourself. You can get started by reading RealtyTrac’s information on state foreclosure laws. You could also contact a local real estate agent or attorney in your area, or attend an auction as an observer to see the process in action.
You need to find out as much as you can about the estimated market value of the property, how much is owed on the property and if there are any other liens against the property. This is all public information and you can research on your own with the county recorder or you can use RealtyTrac’s property reports and tools to help.
The opening bid at the auction is determined by the lender and the auction company conducting the sale, but is rarely the amount that the property will sell for. The actual price the lender will accept for the property (often called the “reserve price”) is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings. If no one bids at or above the reserve amount, the foreclosing lender will take possession of the property. As bidding takes place, it’s important to know what amount you can pay to make sure the auction property represents an actual bargain compared to the property’s market value. RealtyTrac subscribers have access to the opening bid amount and the estimated market value for properties scheduled for auction.
If there are outstanding liens on the property, the winning bidder at the auction may be responsible to satisfy these liens in some cases, so it’s important to check for any liens and the priority of the liens before you bid at the auction. A real estate attorney or title company can check for liens, or you can check directly with county records.
The priority of a lien is usually determined by the date it was placed on the property. So a first mortgage will usually have the first priority, and all other liens will be considered junior liens. In most states, the public auction clears out any junior liens, but there are exceptions such as tax liens, which typically will continue to be in effect after the auction.
Based on all the factors used to determine the potential bargain – and your financial capability – you’ll need to determine how much you can and should bid at the auction.
Determining your bid amount is especially important in states where bidders are required to bring the full amount in cash or cashier’s check to the auction. You won’t even be allowed to bid if you don’t meet that requirement. If you don’t have that type of cash lying around, you have a couple of options. If you own a home, you might be able to take out a home equity line of credit, which is a cash loan. If you can’t secure a cash loan, you may consider trying to buy a pre-foreclosure or bank-owned property, both cases where you can usually obtain a mortgage loan secured by the property being purchased. You can also seek a joint-venture (JV) partner or a private lender to help you with funding your deal. Be sure the terms of the partnership or loan do not undermine your ability to generate returns, though!
It’s also important to determine the bid amount even in states where you don’t need to bring the full amount to the auction. By setting a firm ceiling for your bid, you’ll avoid getting caught up in the heady auction atmosphere and overbidding, which can result in little or no bargain for you. Also, if you’re not able to pay the remainder of the bid within the time frame stipulated by state law, the deposit you paid at the auction is often nonrefundable.
A reasonable purchase amount at home auctions is generally considered to be at least 20 percent below full market value, and much better deals are often possible. Other factors to consider are the rate of real estate appreciation in the area and the potential for increasing the property’s value by making repairs and improvements.
Call the trustee the day before or the day of the auction to check one last time if the auction has been canceled or postponed. If an auction is postponed, the trustee should provide the new auction date.
Arrive at the auction location early and locate the auctioneer as quickly as possible. Bidding at an auction can be intimidating, especially if you’ve never done it before. Take as many cues from the other participants as you can, but don’t let them dictate how much you bid. You may encounter investors who attend many auctions every month and who don’t necessarily appreciate new competition.
If you are the winning bidder, make sure you get the necessary documents from the auctioneer to verify that you are the winning bidder. Clarify with the auctioneer and a real estate attorney what further steps need to be taken before you take ownership and possession of the property. In some states, ownership can be transferred immediately or within a few days. In other states, you may need to wait a month or more for the sale to be confirmed by a court. Some states have redemption periods for the owner, in which case the owner can buy the property back from you if they pay the full amount paid at the auction, plus applicable fees. You should avoid spending money on repairs or improvements during the redemption period.
If the trustee does not evict the current owners, you may be responsible for this. If eviction is necessary, you can contact a local real estate attorney or the county sheriff for the proper procedure.
Online Foreclosure Auctions and Public Health Policy Changes
In 2020, many of the “traditional” venues for foreclosure auctions were closed as the United States struggled with the global coronavirus pandemic. Prior to 2020, many auction platforms had already been moving online, and the public health crisis accelerated this trend. Although most auction platforms that had been on-site retained this option, many began to experiment with entirely virtual auction events. If you want to buy a home at auction during a time of health concerns in the area where the auction is located, make sure you know and are equipped to abide by all health regulations, such as social distancing or mask-wearing, and that you remain updated and informed about local, state, and national foreclosure moratoriums and eviction bans.
For more information on the foreclosure laws in your state, read RealtyTrac’s educational materials on state foreclosure laws.
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