So you have the winning bid at a foreclosure auction. Congratulations! Now what? Here we will discuss what happens for the buyer immediately after the foreclosure auction ends.
Paying for the Property
Completing the sale at the auction is very straightforward. The high bidder of the auction will have to pay for the property in full. Cash or a cashier’s check will be required.
Also, make sure to bring government identification along with payment, such as a driver’s license or passport. You will provide your contact information to the auctioneer and declare how the property will vest, meaning as a partnership, LLC, or a trust. This gets the ownership transfer documentation process started.
After the documentation step, it is time to pay up. The auctioneer will give the name of the trustee to whom you will pay cash or sign over the cashier’s checks.
A Certificate of Sale Receipt will be given after the property is fully paid for.
If you pay too much (your cashiers check is for more than the amount due), the amount paid over the winning bid will be refunded ~10 days after the trustee sale. This refund will generally arrive with the deed for the property.
Upset bidding may exist in some states. This can extend the bidding period beyond the auction. Check the state’s requirements and procedures for auctions to find out more.
The Trustee’s Deed
When the bidding is over, the winner will get a Trustee’s Deed of Sale as proof of property ownership. In some states, it takes about 15 days to file all the paperwork and clear the check(s) for the sale. It will likely take 15 days to receive the deed from the trustee after the sale. If 10 days have passed without receiving it, then make sure to follow up.
Once you get the Trustee’s Deed of Sale this finalizes the foreclosure sale. The foreclosed home owner has no further right to the property.
Legal jargon will be in the Deed of Sale, such as no warranties, explicit or implied will be granted. This means any outstanding property taxes or liens are thereby attached to the property for the new owner to handle.
The new owner will have to record the deed with the county the property resides in. Each state and county requirements may be different, so make sure to check them.
The Deed should be recorded as soon as possible to avoid any cloud on the title that may show up from other documents that could be recorded within that period.
The sale of the Deed will be perfected once the Deed is recorded with the county recorder. Many states will perfect the deed at 8 a.m. on the date of sale. This may happen if the deed is recorded inside 15 days of the date of sale. Otherwise, the deed is perfected at the the date and time of recording with the county recorder.
Clearing the Title
Title insurance is not available before a trustee’s sale. However, you should have already done your due diligence with a title search and judicial record search (to find mechanics lien judgements, tax liens, etc.)
Most investors looking to flip a property will get a preliminary title report after the sale to determine if any clouds exist on the title. A title company can issue an owner’s policy after the preliminary report is available. If clouds exist on the title, a prelim report will give the investors time to clear up the title while they get the property ready for resale.
The investor can also get a binder policy which can help with any liens that will be recorded. This will cost 110% of an owner’s policy, which the seller gets back (less ten percent) when they sell.
Entering the Property
Even if the property is vacant, do not enter the property until you have a legal right to do so. You should work with a real estate attorney for assistance when dealing with currently occupied properties.
A deed only gives you right of ownership, but not to occupy. Different states have their own laws that protect tenants in foreclosed properties. It is important to follow the correct procedures when it comes to evicting previous owners or tenants.
If the Trustee Rescinds the Sale
The trustee may rescind the sale under certain circumstances. This can include:
- Mistakes in the process of the sale which invalidate the sale
- The trustee may not have notified the IRS in the required time where there is an IRS tax lien on the property
- The former owner sues the trustee
- The former owner files bankruptcy at the last moment and the auction proceeded without knowing
Always ask for the legal reasons when given a notice of the intent to rescind. An attorney can potentially help you fight the recission if the economics make sense. If the rescission is likely to happen, make sure to get it handled quickly so you can get either get your money back or get the property.
A property with attached liens is a major issue a foreclosure auction buyer needs to deal with. This can include tax liens, mechanics / contractors liens, HOA liens, divorce judgement liens, and liens from second or even third mortgage lenders.
Liens recorded prior to the auction will show up in a title search. There are often unrecorded liens, as well. A judicial record search can often turn these up. Make sure you are able to pay off any liens, or simply do not buy the property at auction.
Outstanding Property Taxes
Clearing the title includes paying any outstanding property taxes. House flippers can delay paying the taxes until they resell the property, but this can add additional penalties and interest to the tax balance.
Protecting Your Rights
Submit a Preliminary Change of Ownership Report (PCOR) when recording the deed to protect your rights as an owner. This is required when properties are transferred and allows the assessors office to determine the correct tax assessment.
This is not usually required on a trustee’s deed, but make sure to get one anyways. It will be helpful in protecting your rights if the base year tax assessment is not to the expected amount, and you intend to appeal.
Buying Using a Separate Entity
If you are buying the property under a separate entity, such as a Limited Liability Company (LLC), then you will need to provide additional required documentation. Before the auction, make sure to review the auction requirements list for such an action. Different states have different rules for this process. If this is not allowed or done incorrectly, you may be stuck buying the property as an individual.
The Legal Eviction Process
Start the legal eviction process as soon as possible if the property is occupied. You should engage a real estate attorney to guide you with the correct procedure — this is essential or you might risk a long drawn-out battle over possession of the property with the prior owner or tenants. This can substantially delay any rehab projects, add financing and carry costs, and threaten the profitability of a house auction flip.
State laws regarding eviction differ for renters and former owners. If the occupants leave on their own, this process can be cancelled, but is useful nonetheless.
You can also file an unlawful detainer lawsuit with the county. This will take 20 days until a court date, where the judge will issue an eviction ruling. The occupants have five days to leave the property or a the sheriff will change the locks, thereby issuing a lockout.
Protecting Property Improvements
Homeowner’s or landlord’s insurance policies exist to protect owners that are renovating the house for a flip. However, this could require the home to be occupied for them to be valid.
Getting answers from an insurance agent experienced with house flipping and rehab projects will be helpful. Many inexperienced agents may not be aware of the vacant house exclusion.
A blanket builder’s risk policy is an alternative, but can be many times more expensive than a homeowner’s policy.
In this article we discussed what happens after winning a foreclosure auction, and the steps you need to take to complete the sale effectively.
You have successfully bought the property at auction. Now is the time to reap the rewards. At this time you can make keys, do inspections and start the renovations. Soon the property will be ready to flip and you can continue on to more properties to build a successful house flipping enterprise.