Buyers at a foreclosure at auction can get a great deal on a property but will also face some challenges. In this article we discuss the basics of how to buy a house foreclosure at auction.
How a House Foreclosure Auction Works (the basics)
STEP 1: The lender (bank, etc.) will appoint one or more people, called trustees, who sell homes at the courthouse steps. These individuals have a fiduciary duty to the borrowers to sell the home at auction for the highest bid possible, even though they are appointed by the lender.
STEP 2: The foreclosure auction is held and the house is sold to the highest bidder.
STEP 3: If the home sells at a foreclosure at auction for more than the amount the owners owe on the mortgage, the trustees will make sure the extra goes back to the original borrowers.
STEP 4: A government agency, often the local sheriff, collects the money from the highest bidder and gives it to the bank to pay off the mortgage.
STEP 5: The buyer is provided a bill of sale and the deed to the property. The buyer can then record these at the county recorder’s office.
Some Foreclosure Auction Nuances
To protect the borrowers, the trustees will not disclose the outstanding balance owed on the loan to any bidders at the auction.
Banks will often bid at the sale to make sure someone doesn’t pay less than the outstanding loan balance. If the bank ends up as the high bidder at auction, it will take title to the house as REO (Real Estate Owned). The bank will then turn around and put the house up for sale on the market.
A real estate agent can alert a buyer the same day the bank puts the home on the market, giving them a chance to get an early bid.
Issues Buyers Face Buying a House Foreclosure at Auction (and some solutions)
There are some issues a buyer will face no matter where they shop for foreclosed properties. Here are 6 ways to solve them:
1. Title searches can uncover houses in foreclosure potentially going to auction.
Hiring an independent title search professional called an abstractor, or an online company to find a foreclosure at auction, might be a cheaper option. If you find a potential house to buy you can invest in title insurance to reduce the risk. Title insurance costs vary by state, however, either search option will cost around $200.
2. Check the foreclosed home’s exterior condition by doing a walk-around.
Look through the windows and even ask the neighbors what they know about the property and the owners who live there. Checking the inspection records on file with the local government is also helpful, especially if it was a rental.
There are almost always things wrong with houses sold at a foreclosure auction. Repairs and unexpected problems will likely show up, so it is recommended to bid well below comparable sales. The agency that runs the auction should have amounts from recent auctions to look at as well that can guide any current bids. Local tax and assessment records will have information about current and past auction properties, such as square footage and lot size.
Bidding no more than 70% of the home’s market value is a way for a buyer to protect themselves at an auction.
3. A real estate agent can give you a Broker’s Price Opinion (BPO).
The BPO will show what similar nearby homes that weren’t foreclosure sales have sold for recently. This is invaluable information to understand the “after repair value” (ARV) of the house. You can then back into your maximum bid price by subtracting all the rehab, financing, legal and marketing costs from the estimated ARV.
4. Try to focus on only two or three homes in your desired locations.
Pay a real estate attorney to run a title search on each property and find out about any liens. How the policy treats liens filed between the time of the search and the time of closing is important to find out.
5. Getting a mortgage can take longer than the auction period.
Having other sources of cash may be necessary to carry the process through. Some funding options include:
- Hard money lenders willing to partner with you to provide auction financing
- Home equity lines of credit or cash-out refinancing.
- Retirement accounts, as long as they make sense from a tax perspective.
- Fund a partnership with other investors interested in foreclosed homes (i.e. private money).
- Online Peer-to-Peer and crowdfunding websites.
6. An alternative is going straight to the owners and offering to purchase the home as a short sale.
Although the bank has to agree to let the owners sell for less than what they owe on the mortgage for this to work. A buyer can purchase the owner’s title insurance policy to make sure the house is free of liens. A home inspection should follow to check for needed repairs. This will allow plenty of time for the buyer to line up needed financing.
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Be Aware of Local Variations in the House Foreclosure Auction Process
Buyers should always research and learn the rules for their area before attending a foreclosure auction.
State and local governments have unique processes which typically include:
- The bidding process
- The amount of deposit
- Where the auction is held
- Whether the home owners can get their properties back after the sale
Officials at the county tax department or a realtor experienced with foreclosure auctions can help a buyer understand how things work.
Find Foreclosed Properties In Your Area
Learn how to flip a foreclosed house here >
Learn more about the secrets to finding government foreclosures to flip >
Watch How to Buy a House Foreclosure at Auction here >
For more useful information on how to buy a foreclosure at auction see this article by Zillow.