How Foreclosure Auctions Work: A Guide for First-Time Bidders

When a homeowner defaults and the default is not resolved during pre-foreclosure, the lender can have the property sold at a public auction. The goal of the sale is to repay the debt from the sale proceeds. The highest bidder who meets the auction's terms becomes the buyer.

Foreclosure auctions are also called trustee sales, sheriff's sales or foreclosure sales, depending on the state. They are held at the courthouse, at another public location named in the notice or, increasingly, on online auction platforms used by trustees and counties.

Three groups typically bid:

• The foreclosing lender, which usually bids using the debt it is owed rather than cash.
• Investors, who buy properties to resell, rent or renovate.
• Owner-occupant buyers, who are less common because of the cash and risk involved.

If a third party outbids the lender, the money goes to pay the costs of the sale and the foreclosing loan, then to junior lienholders, with any surplus usually going to the former owner. If nobody outbids the lender, the lender takes the property and it becomes a bank-owned, or REO, property.

You can search upcoming foreclosure auctions on RealtyTrac to see scheduled sales in your area, and build a target list from them.

The biggest difference between auctions in different states is whether the sale follows a judicial foreclosure through the courts or a non-judicial foreclosure under a power of sale. Each state sets its own process, and some allow both.

Knowing which type of sale you are attending tells you who to call with questions, what deed you will receive and whether the sale can still be challenged or redeemed afterward. Because the details vary so much, read the sale notice carefully and check your state's rules or ask a local real estate attorney before you bid.

Before a sale, state law requires notice to the borrower and the public. In non-judicial states this is typically a notice of trustee sale that is recorded, mailed to the borrower and posted or published. In judicial states, the court's judgment leads to a published notice of sale.

A sale notice usually includes:

• The property address and legal description.
• The date, time and place of the sale, or the online platform.
• The name and contact details of the trustee, sheriff or attorney conducting the sale.
• The case number or trustee sale number.
• Sometimes an estimated debt amount or opening bid.

Sale dates change often. Lenders postpone sales for loss-mitigation reviews, bankruptcy filings, short-sale negotiations or paperwork issues, and many scheduled sales are cancelled because the owner completed a reinstatement or sold. Postponements are sometimes announced only at the sale itself or posted shortly before.

Because dates move so often, track each sale by its number and recheck its status shortly before the sale. How to build a foreclosure auction target list explains how to keep that tracking organized.

The credit bid is the lender's bid. Instead of paying cash, the foreclosing lender bids some or all of the debt it is owed. That amount often becomes the effective opening bid, because a third party has to bid more to win.

The lender's bid is not always the full debt. Lenders may bid less than the total owed when the property is worth less, or set a bid based on their own valuation. In some states and some sales, the opening bid is announced only at the auction or shortly before.

For a bidder, the opening bid answers one question: is there room between the lowest price you could win at and the most you are willing to pay? If the opening bid is above your maximum, the right move is to let the property go to the lender.

Some homes are worth far less than the debt, and lenders bid accordingly. Others have enough equity that investors compete well above the opening bid. Neither situation tells you anything about condition or title, so your maximum bid should come from your own research, not from the opening number.

Auction payment terms are strict and set by state law and the auctioneer's rules. Common requirements include:

• Cash or certified funds. Cashier's checks are typical at in-person sales; online platforms may use wire transfers. Personal checks and financing contingencies are not accepted.
• A deposit at the sale. Many sales require a deposit to bid or a deposit from the winner, with the balance due within a short period.
• Registration. Online platforms and some counties require advance registration and proof of funds.
• Fees. Some sales add buyer's premiums, transfer taxes or recording fees.

Because there is no time for a mortgage approval, most auction buyers pay with their own cash, business funds, a line of credit or a short-term hard money loan arranged in advance. How to line up funds for a foreclosure auction covers these sources, proof of funds and payment timing in detail.

An auction buyer typically receives a trustee's deed, sheriff's deed or referee's deed. These deeds usually carry few or no warranties about title. What you get is whatever interest the sale conveys under state law, bought as-is in whatever condition the property is in.

That creates several risks:

• Surviving liens. A foreclosure generally wipes out any lien that is junior to the foreclosing loan, but liens that are senior to it can survive. Property taxes and certain municipal liens often have priority. If the sale is a junior lender's foreclosure, a first mortgage can remain on the property.
• Federal tax liens. If the IRS holds a junior tax lien and was properly notified, the government may have a right to redeem the property after the sale.
• No inspection. You usually cannot see inside before bidding.
• Occupants. The former owner or tenants may still live there, and you will need to follow the legal process to gain possession.
• No title insurance at the sale. You may be able to buy a title insurance policy afterward, but insurers may have conditions.

Research before the sale is what protects you. See researching a property before auction.

Some states give the former owner, and sometimes junior lienholders, a right of redemption after the sale. During that period, they can reclaim the property by paying the amount required under state law. If they redeem, the auction buyer typically gets their money back, sometimes with interest, but not the property.

Redemption periods vary widely by state and by type of foreclosure, and some states have none for most residential sales. While a redemption period is running, the buyer may not have full ownership or possession, and lenders and title insurers may not treat the property as fully owned.

In some judicial states, the court must confirm the sale before it is final. The former owner or other parties can object, and the court may set aside a sale in limited circumstances, such as a defect in the process.

Before you bid, find out:

• Whether a redemption period applies to this sale and how long it lasts.
• Who can redeem and what amount they must pay.
• Whether court confirmation is required.
• What you can and cannot do with the property while these periods are running.

When you win, the work shifts to completing the purchase. In most states that means paying the balance on time, receiving and recording your deed, insuring the property, resolving any surviving liens and, if the home is occupied, gaining possession through the legal process or a voluntary cash for keys agreement. Each step is covered in after you win a foreclosure auction.

If the auction brings more than the debt and costs, the surplus is distributed under state law, usually to junior lienholders first and then to the former owner. If no third party outbids the lender, the property becomes REO and is typically listed for sale later; see how to buy a bank-owned home.