This article describes who is involved in a foreclosure auction and what their roles are. There can be multiple participants who are directly or indirectly involved. It helps to understand their role and motivations to ensure you’re successful!
The Lender (typically a bank) owns the mortgage on the property to be auctioned. The Lender hires a Trustee to manage the foreclosure auction listing and commercial transaction process.
Many properties sold at auction have a primary Lender (the one that holds the first mortgage) and one or more secondary Lenders (these hold second, third, etc. mortgages).
The interests of secondary Lenders are subject to the first Lender’s priority.
The Lender who forecloses controls the minimum price at which the property can be sold at auction. This is typically the amount of the outstanding mortgage but can be higher, including superior liens, fees and attorney costs.
If no bidders are willing to pay the Lender’s minimum price at auction, the lender will take the property back onto its real estate owned (REO) books and try to sell it another way. For this to happen, the Lender will make a new agreement called a “deed in lieu of foreclosure” to take the property back and void the loan. This is a formal way of saying “the owner mailed the keys back.”
The Trustee is hired by the Lender to manage the foreclosure process. The Trustee’s job is to obtain the maximum value for the property, either by hiring a real estate agent to market the property, or hiring an auction company to auction it off.
If the Lender requires the Trustee to auction the property, the Trustee will list the property with an auction company, who then runs the auction.
A representative of the Trustee may also somebody who is involved in a foreclosure auction. In this case the Trustee bids at the auction on behalf of the Lender.
The Auctioneer is employee by the auction company hired by the Trustee to list and auction off the property. In a typical county courthouse steps auction, the Auctioneer will:
- Set the official time and place of the auction
- Maintain the list of properties to be auctioned
- Notify attendees of any properties on the list that have been removed
- Register Bidders and verify they have enough money on hand to make good on their bids
- Auction each property
- Keep records of the proceedings
The Auctioneer is not affiliated with the judicial system or any government entity. As an independent service provider, the Auctioneer must remain unbiased. Their only interest is to run a transparent and efficient auction that enables Banks and Trustees to sell foreclosed properties quickly so they can recover their outstanding mortgage loan balance.
If you are new to foreclosure auctions, it can be helpful to ask the Auctioneer or the auction company any questions you might have. This can help avoid costly mistakes and misconceptions.
Potential buyers bid for the property at auction. This can be on the courthouse steps, in an online auction, or at another venue. There can be only a few Bidders or many at a foreclosure auction. The Lender can also bid to buy back the property. The highest bidder is awarded the property, and must usually pay for it immediately or within a very short time.
In order to bid at the auction, all Bidders must register with the Auctioneer before the auction starts and show that they have brought sufficient cash or cashiers checks to cover their minimum bid. After meeting the participation requirements, each Bidder is given a number and a handheld board that identifies them, and which they use to enter bids during the auction.
The winning Bidder gets a Bill of Sale for the property by paying the auctioneer in cash or cashiers check and completing the necessary documentation. The winning Bidder must then take this, record it at the County Recorder’s office, and obtain clean title.
Most Bidders at real estate foreclosure auctions actually work for well-funded real estate companies backed by Investors. With the financial backing of Investors, company-employed Bidders can make multiple cash property purchases per day. Investors are a powerful force behind most real estate foreclosure auctions!
Investors require a return on their investment after the costs of acquiring, perfecting title, rehabilitating, and selling or renting properties. They try to ensure this ROI by buying at a discount from estimated market value for each property bought at auction. This allows real estate Investors to turn a profit, even when they run into unexpected problems with the property.
The County Recorder is responsible for keeping an official record of every property in the county. This includes the chain of title, who the owner(s) of record have been, and whether there are claims against the property’s title.
After the Property Owner (borrower) has failed to make payments for a number of months, the Lender will begin the foreclosure process by recording a Notice of Default (NOD) — also called a “lis pendens” (suit pending) — with the County Recorder.
The Lender may also post the NOD on the front door of the property itself, if required by local law. This notice is to notify the Property Owner that they’re at risk of foreclosure. It also notifies other Lien Holders that the Lender intends to proceed with the foreclosure process.
The NOD begins the pre-foreclosure period, which can last 1-3 months. If the Lender does not record a Notice of Default with the County Recorder then the foreclosure process cannot happen.
If the Property Owner does not remedy the situation during the pre-foreclosure period, then the next step is for the Lender to file a Notice of Trustee’s Sale (NTS) with the County Recorder. This is a notice of the foreclosure auction, and includes the date and time of the auction, property address, and other relevant information. The Lender must also notify the Property Owner, put a notice in the local newspaper, and post the notice on the front door of the property. The NTS notifies other Lien Holders that the property may be sold at auction.
A property that sells at a foreclosure auction often has additional liens placed against the property’s title by other lenders, tax authorities, service providers, or people who have gotten a legal judgment against the owner.
Lien Holders can include:
- Mortgage Lenders
- City, county or state Tax Assessors
- The Internal Revenue Service
- Tax lien investors
- Utility companies
- Homeowners’ Association
- Ex-spouses and child dependents
- Anybody who has gotten a legal judgment against the owner (for example a car accident victim, hospital trying to recover unpaid legal bills, etc.)
Generally, only Lien Holders whose claims are legally superior to the foreclosing Lender are entitled to the proceeds of the auction sale. This includes:
- Senior mortgage holders (if the foreclosure was brought by a second mortgage holder)
- Tax authorities (municipal, county, state or IRS)
- Tax lien investors
- The city (for such things as cost of weed/shrub removal or demolition of condemned buildings)
In order to obtain title free and clear, the buyer must pay off these superior liens, either as part of the auction price or after the auction.
Lien Holders whose claims are inferior to the foreclosing Lender generally have their liens extinguished or wiped out (technical term “sublimated”) by the foreclosure auction sale. They have no further claim upon the title of the property and they must seek to recover from the former Property Owner.
Liens must be formally recorded with the County Recorder prior to the auction to be effective. Where the liens have been properly recorded, a title search before the auction will uncover these Lien Holders and how much they are owed.
The foreclosing Lender is required to file a “lis pendens” as part of the foreclosure announcement process, and to publicize the foreclosure auction ahead of time — typically at least 30 days. This ensures that the other Lien Holders have adequate notice of the auction and can make sure their claims are well-recorded before the sale occurs.
It’s strongly recommended that winning Bidders purchase title insurance to cover the possibility of an unknown superior Lien Holder laying claim to the property.
When properties go to auction, it is typically because the Property Owner has defaulted on their mortgage and is at least several months behind on payments. This can happen for a variety of reasons, including illness, loss of a job, divorce, addiction, gambling, or simply running into cash flow issues.
Depending on the situation, a Property Owner may or may not be involved by the time the foreclosure auction happens. Banks generally do not want to foreclose on Property Owners, and will often go through lengthy efforts to avoid the costs and complexities of foreclosing. It is only as a last resort that a mortgage lender will foreclose and send the property to auction.
Property Owners sometimes come up with enough money during the pre-foreclosure period to forestall the Bank from sending the property to auction. Or the Property Owner may sell it in a short sale and pay the Lender an agreed amount. Although the property was scheduled to go to auction, it will then be removed from the auction by the Trustee.
It is also possible for the Property Owner to file bankruptcy immediately before or on the day of the auction. In this case, the property becomes governed by the bankruptcy process and the auction will be voided. A Bidder may actually win the auction and make payment, then discover the Property Owner filed for bankruptcy protection, and not get the property. It can take a couple weeks for the winning Bidder to get his money back if this occurs.
In some states, Property Owners have a “right of redemption” which means they can stop the foreclosure auction process by coming up with the money. It’s possible the Property Owner can stop the auction from happening right up to the moment of the first bid. It’s even possible that an auction sale could be voided if the payment was in process to the Bank while the auction went ahead.
In “right of redemption” states the previous Property Owner may be allowed to buy the home back from you for the amount you paid plus costs. If you live in an area with these types of laws, be aware that winning the bid at auction may not “seal the deal”.
Bidders often do not find these things out until the start of the auction when the Auctioneer reads off the properties that have been removed.
It is also important to understand that a foreclosure auction sale does not mean the occupants have been evicted. The Property Owner, family members or renters may still occupy the property, even after it is auctioned to a new owner. Buying a foreclosed house at auction means the new Property Owner often must formally evict the prior Property Owner.
Tax Assessor’s, like Lenders, can foreclose on a property.
The city, count or state Tax Assessor or Internal Revenue Service record liens for back property taxes (plus interest) against the title of the property. This happens when the former Property Owner fails to pay taxes for a sufficient period of time. Tax liens generally take priority over all other liens, and must be paid off first before you can establish clean title.
Tax liens are often sold by the Tax Assessor to investors in a tax lien auction. If the property you’ve purchased in a foreclosure auction has back taxes going back a number of years, it is likely that one or more Lien Holders exist who bought these tax liens. To perfect title, you will need to pay off their lien and ensure the liens are removed from the title by the County Recorder and/or Tax Assessor.
Real Estate Agent
In some cases, independent investors may hire a Real Estate Agent to find foreclosed properties and bid for them at auction. There are a number of Agents in each city who are experienced with helping clients find and buy pre-foreclosure and foreclosed homes. This is often a good option for people new to the foreclosures market or living outside the area, particularly if you are looking to purchase and rehab homes for long-term rental.
Real Estate Attorney
In some jurisdictions such as Fairfield County, Connecticut it is required by law that both sides of a real estate purchase be represented by an Attorney. The Attorney’s role is to represent the interests of his/her client on that side of the deal, ensure that all documentation is correctly completed and recorded, and all legal requirements for a completed transaction are fully met.
Even if you are not in a location that requires a Real Estate Attorney, it is very important to have one available to guide you through the post-sale process. If you need to evict a former Property Owner, or deal with Renters, for example, having effective legal representation is essential.
Buying a foreclosed property at auction is not a usual “clean” purchase and there are many legal and financial pitfalls that can be avoided or mitigated with help from an experienced Attorney.
The property you buy at a foreclosure auction may have existing Tenants. They may have signed a rental agreement with the former Property Owner. Or they may simply be living in the property, paying rent or not. They may be treated as “tenants in fact” by law, simply because they lived in the property for a sufficient amount of time. Tenants have legal rights and cannot simply be evicted in most situations.
It’s also possible that the Tenants were paying the former Property Owner rent on a consistent basis, and are entirely unaware that the mortgage payments were not made and the house was foreclosed and auctioned off. When you appear at the front door saying you’re the new owner and they owe you rent, it may come as a shock!
In most cases, a foreclosed property will need rehabilitation and improvements, whether you intend to rent or sell it for a profit. You will have to decide whether to evict the existing tenants, work around them or wait until their lease is up. The tenants may demand that you fix problems with the property, and you may be obligated under local renter’s health and safety laws to do so.
It is essential to obtain theft and vandalism insurance on the property immediately after winning an auction and recording your title. Existing Property Owners are rarely happy about being evicted, and are usually in financial straits.
Former Property Owners, Tenants and neighborhood vandals can do a tremendous amount of damage to a property during the period before and after the auction. People facing eviction from their home often get angry and break windows, put holes in floors, walls and ceilings, destroy appliances, etc. Departing Tenants and local vandals may cut out copper pipes and wires to sell for profit.
It’s imperative that you purchase an insurance policy with an experienced Insurance Agent soon after you buy it at auction.
This is a good summary of who is involved in a foreclosure auction at different stages, and what their roles and interests are.