The Second Stage of Foreclosures: Home Auctions
The auction is the stage of the foreclosure process in which the default preforeclosure phase of the property has ended. The lender is now seeking to recapture its losses by auctioning the property in a public sale to the highest bidder. This event may also be known as a trustee sale.
The proceeds from the real estate auction will be disbursed to the lender who initiated the foreclosure action, which in most cases is the lender holding the first mortgage. Once the first mortgage holder's position has been satisfied, any additional funds will be used to settle any other remaining obligations. If all encumbrances against the property are resolved, any additional funds will be disbursed to the homeowner.
Purchasing at foreclosure auctions is a fantastic opportunity to buy houses at bargain-basement prices, but you must be prepared. This section will provide an overview of home auctions and the land auction process to ensure you are knowledgeable and well prepared for your first auction.
Preparing for the Home Auctions: Before you bid on any auction property it is paramount that you do a title search on the property. The goal is to determine whether there are any liens or judgments against the property. These can include unpaid personal property taxes, civil lawsuit judgments and state and federal tax liens. If you present the winning bid, you will be granted title to the property subject to all liens and encumbrances. This can have a significant effect on the value of the property you purchase. The last thing you want is to be the winning bidder on a property with unexpected liens filed against it.
You will also need to be prepared with financing in order to bid at the auctions. Cash or cash equivalent will be required at the auction. If you are the winning bidder on a property, a 5 to 10 percent deposit is required at the conclusion of the auction with the balance of the purchase price due within a few days.
We highly recommend that you attend at least two real estate auctions prior to making your first official bid. This will help you get comfortable with the trustee sale process and provide the confidence you will need to be successful. You must be careful at an auction, as it is very easy to get caught up in the excitement of the bidding process and make a poor decision. Composure and discipline are essential to buying discounted property at an auction.
The Opening Bid: Prior to the auction, the trustee establishes the opening bid. The opening bid is determined by totaling the remaining loan balance, court costs, interest and back taxes, legal fees and liens and judgments. The winning bidder will normally satisfy all these expenses at closing. If no one bids above the opening bid, the lender will take back the property at which point it is added to the list of Bank Foreclosures, also called REO Properties. Depending on how the original mortgage was guaranteed by the lender, the property title may instead transfer to a government service enterprise. In this case it will join the inventory of government repossessed homes and and join the list of HUD homes and VA foreclosures.
How to Bid: You will approach the auctioneer one at a time and give your name and discreetly show him the amount of your cashiers check or cash. The auctioneer will note your name and the limit of your bidding ability as evidenced by the cash or cashiers check you showed him. Bids over this recorded amount will not be accepted from you unless you show an additional check or cash during the bidding.
Prior to the opening bid, the trustee will read aloud the legal description and terms of sale for each property. The legal description of each property is technical; so don't expect the trustee to provide insight into the quality or the distinctive characteristics of these properties coming from the pre foreclosure lists.
The Winning Bid: If you submit the highest bid at an auction and the hammer strikes the third time, you now own the property. At this point, you will be expected to make a deposit of 5 - 10% of the purchase price. The remainder of the purchase price will be required sometime between 24 hours and 30 days after the auction. Remember, the deposit is non-refundable and all sales are as-is and final.
While you are now the owner of the property, in some cases it may be possible for the owner to buy back the property. The period is called the Redemption Period which essentially gives the original owner the opportunity to redeem himself. In most cases, this is unlikely to happen since if the owner was in a financial position to buy back the property he probably would not have defaulted in the first place. However, it is important to be aware of this issue whenever bidding at an auction. The redemption period varies from state to state and in some states there is no redemption period at all.
Conclusion: There is no doubt that foreclosure auctions can present some of the most attractive real estate buying opportunities available. This is due to the fact that the opening bid is based primarily on the mortgage balance and not on the market value. Where else can you find an asset being offered for less than market price? The key is to find home auctions with limited competition. Often times, this can be the case when there is poor weather and few people want to venture outside. We wish you the best of luck at your next trustee sale or land auction!