This article discusses how to pay after winning a house foreclosure auction, including methods, timing and procedures for payment.
Let us assume that you have gone through process of a foreclosure auction all the way up until the point of winning the bid and having to pay for the home. How do you actually make payment? What methods of payment are acceptable? When is payment due? Read on…
You Won the Bid…Now What?
If you have just won a foreclosure auction as the highest bidder, congratulations! Now you must seal the deal. In most cases, the foreclosure auction will request that funds are paid in full in a very short time.
Come to the Auction With Your Money Ready
The first thing to note is that winning the auction does not guarantee you will get title to the house you bid on. You will need to demonstrate your ability to pay for the house, auction fees, legal fees, etc. to seal the deal.
What Forms of Payment Are Acceptable?
Forms of payment at the time of the sale may include cash, a bank money order, or a certified check.
Payments which are not acceptable include personal checks, company checks, letters of credit, credit cards or debit cards.
For details on the acceptable forms of payment, you can refer to the foreclosure notice or contact the County or Private Selling Officers directly.
Minimum Bid Amount
You will need to prove you can cover the minimum bid amount at registration by showing cash, cashiers check, hard money loan, etc.
The minimum bid amount is the bank’s remaining mortgage balance (or lien balance for other foreclosing parties), plus legal, transaction and auction costs. A bank will not generally accept bids below this minimum amount.
Therefore, the auctioneer will demand you show the ability to pay the minimum amount to prevent the property selling at auction, only for the buyer to fail to pay, and have to re-auction the property.
Earnest Money Deposit
Then you will need to put down an earnest money deposit when you win the highest bid. This could be a fixed amount or percentage (5-15% usually) of the total sale price. This may be due immediately, or within 1-2 days depending on the auction. Your deposit may be kept by the seller if you fail to close the deal.
Once the deposit is received, the seller — usually the lender who foreclosed — will have to approve your bid. This can take 5 minutes or two weeks. It usually happens very quickly, as the bank’s trustee is responsible for communicating this and getting approval.
After the winning bid is approved you must be able to deliver the remaining balance more or less immediately by cash, cashiers check or wire transfer. Usually this is within 1-2 days, depending on the jurisdiction and auction rules.
Once the remaining balance is paid, the bank (or other foreclosing party) will deliver the appropriate title or deed documents.
All of this means you must prepare your financing and have all the documents handy before the auction takes place. This will ensure your winning bid is accepted and you can close the deal swiftly.
How to Prove Ability to Pay at a House Foreclosure Auction
To participate in an auction, the auction company will request you to prove the ability to pay by showing cash or cashiers checks. This amount must be enough to pay the required winner’s deposit at some auctions. At other auctions, this may be the minimum bid required by the bank. Without showing up-front proof of funding you won’t be able to bid.
You will also have to deliver any additional financing information to the auctioneer upon request. Examples include a firm commitment letter from a well-known hard money lender, current bank balances, or evidence of investor money.
If you are bidding under a company name, such as a Limited Liability Company (LLC), you will have to present entity documentation and evidence of your authority to purchase at the auction, as well.
Where Do House Foreclosure Auction Payments Go?
The majority of your auction payment will go to the bank or seller who owns the property. From that amount the bank will cover its transaction and legal costs. You don’t have to pay those as they are the responsibility of the foreclosing bank.
A percentage will also be paid to the auction company for conducting the sale, typically 5% of the winning bid amount. This percentage will either be paid as a “buyer’s premium” in online auctions, or the bank or seller will arrange to pay the fee themselves from the proceeds of the sale.
When Is Foreclosure Auction Payment Due?
If you have won the auction bid on a property, you can expect to pay immediately or within 1-2 business days. This is dependent on the state in which you live and the auction house rules.
After paying the full amount due, you will complete a certificate of sale or and execution of sale receipt. Other documents you’ll fill out after purchase include the deed upon sale and IRS Form 8300 (form subject to state-specific laws).
NOTE: Since it may take time for you to receive the completed certificate of title, don’t do any work on the property. This is important as the original owner may file an objection to the sale, pay the amount owed in full, and retain rights to the property. Do not improve the property until you have firm title!
Are There Payment Variations by Auction Type?
The great majority of in-person foreclosure auctions and sheriff’s sale auctions require “firm money” payment — cash, cashiers check, or bank money order.
Many online auctions, on the other hand, allow foreclosure auction purchases to be financed through a hard money loan or even a traditional mortgage. The auction company can facilitate financing by holding your earnest deposit money (which must be a cashiers check, bank money order or wire transfer) in an escrow account. This gives the lender time to do their review, complete documentation and deliver funds.
What Payments Are Refundable? Under What Conditions?
Since sellers at auction are keen on making a sale, you will find canceling on your winning bid and getting money back is not an easy task.
Earnest money deposits are not refundable if a buyer forfeits the purchase of the home, or does not meet the timeline outlined in the contract. This is why an earnest money deposit is required as “good faith” that you will go through with the home purchase.
Generally speaking, the bank will not warrantee the habitability of a property sold at foreclosure auction. So structural defects are typically not grounds for reversal of the transaction and refund of payment.
However, buyers may be able to reclaim their earnest money deposits if what was specified in the sale contract is not true, accurate and complete. For example:
- The sale contract specifies an incorrect location of the property (e.g. wrong parcel number)
- The bank does not have sufficient claim on the title to auction the property in the first place
- The foreclosure process was not documented and executed correctly (a huge problem during the last mortgage crisis)
- The auction was cancelled by the bank, but the auctioneer did not receive notice in time
- The property is located in a jurisdiction that grants homeowners the right of redemption, and the homeowner pays all money due to the bank in full
Knowing how to pay after winning a house foreclosure auction is essential. The buyer must prove his/her ability to pay, be timely, provide all documentation and financing, and pay upon request according to agreed timelines. By being prepared you will have an easier, more hassle-free time closing an auction foreclosure deal and making a return on your investment.