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How do auction foreclosures work?
When it comes to auction foreclosures, sometimes a borrower cannot keep up with his mortgage repayments. A default on your mortgage may be due to a reduction in one's income due to a job loss or simply bad monetary planning, i.e., spending more than one's income and failing to meet his mortgage obligations.
When a borrower defaults on his mortgage repayments, the lender will instigate the due legal processes to recover the amount owed by taking ownership of and selling the mortgaged property. This is called a foreclosure process.
In the US, the actual foreclosure process varies by state. Most states follow the procedures relating to the two primary types of foreclosure: judicial foreclosures and non-judicial foreclosures.
When a property is sold by auction, the processes differ significantly from a typical residential sale. One of the key differences is that the property is sold "as is," that is, in its current state of repair and subject to any existing maintenance or repair issues. Some properties need a minor repair, whereas others need extensive renovation to bring them back to a habitable standard.
Another critical point is that, in a foreclosure auction, the lender is not allowed to profit from the sale. Foreclosed properties are often sold at a loss, but if there is a profit, it is supposed to go to the foreclosed homeowner after the mortgage debt, and any other liens have been paid.
Indeed, the purpose of a foreclosure auction is to get the highest possible price for the property in order to mitigate the losses a lender suffers when a borrower defaults on a loan.
Types of Foreclosure Auctions
There are two main types of foreclosure auctions:
- A live auction is where bidders must attend in-person to bid on foreclosed properties. Often, at an Auction, they will auction off hundreds of foreclosed properties at one event. The auction proceedings are open to the public, and anyone can attend without registration.
There is usually limited due diligence available for properties at live auctions;
- With online auction foreclosure, interested parties submit their offers digitally during a designated time on a pre-determined day. Some online auctions require prospective purchasers to bid in fixed, minimum increments, so you can't increase by, say, $1 at a time. Bidders may also be allowed to see the offers made by other prospective purchasers, but sometimes parties do not know what prices others are offering.
With properties offered at online auctions, it's easier to find out precisely what you're buying. There is a standard closing, the title's been checked out, and you can go inside the property and do an inspection and all necessary due diligence.
Many auction websites charge a fee on top of the sales price. Usually a 2% to 3% fee in addition to the purchase price
Types of bids at Auction foreclosures
It's also helpful to know about the different types of bids at foreclosure auctions:
- The property may be sold on an "absolute basis", meaning that the highest bid wins, whether it is only marginally or significantly higher than the next bid. Even if the highest bid is still greatly below market value, the highest bidder still wins the property;
- With a minimum bid at a auction foreclosure, the highest bid has to reach at least the set amount determined by the lender at the very minimum. Sometimes the minimum bid is the balance of the mortgage amount or tax liens. If bidding at the auction does not reach the set minimum required, a sale won't proceed. The title still belongs to the lender, who will most likely list the property as an "REO property."
It's common to find minimum bids at both live and online auctions.