Buyers at a foreclosure at auction can get a great deal on a property but will also face some challenges. Here are some important things to consider…
How a House Foreclosure Auction Works (the basics)
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.
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. To protect the borrowers, the trustees will not disclose the outstanding balance owed on the loan to any bidders at the auction.
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.
Banks will often bid at the sale to make sure someone doesn’t pay less than the house is worth, so they they don’t lose too much money on it. If the bank ends up as the high bidder at auction, it will turn around and put it up for sale on the market. A buyer can then purchase the home just like any other. 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. A buyer will most likely not have to pay more on the market than if they had bid at the foreclosure auction to outbid the bank.
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 home’s exterior condition by taking 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’s almost always something 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 do a broker’s price opinion (BPO) on the foreclosed home a buyer wants to bid on. The BPO will show what similar nearby homes that weren’t foreclosure sales have sold for.
4. Buyers should try to focus on only two or three homes in their 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, so having other sources of cash may be necessary to carry the process through. Some funding options include:
- 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.
- 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.
Be Aware of Local Variations in the House Foreclosure Auction Process
Buyers should research and learn the rules for their area before attending a foreclosure auction. State and local governments have unique processes set up 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 with the details of the process in their area.
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.