Buying a Home at a Pre-Foreclosure Auction
When a homeowner is unable to catch up with their missed payments in time, the property will advance into pre-foreclosure. If the homeowner is unable to sell the home before the date stipulated on the Notice of Sale, then the property will advance to the auction stage of the preforeclosure process.
A pre-foreclosure auction is also known as a Sheriff Sale or a Trustee Sale and it usually is conducted on the steps of the county courthouse. Some auctions take place in the yard of the property being sold. Other auctions are conducted online. Some lenders hire commercial auctioneers to handle the sale of their properties.
Home buying that is going through an auction is much different then purchasing the same property through either a real estate agent or going through a short sale. There are some important things that a buyer/bidder must understand about auctions, including the risks and local procedures.
Auctions can be intimidating, but if you know how to come prepared and what will happen at the auction, you will be much more confident to bid, and perhaps win, that cheap house that you have your eye on. Purchasing pre foreclosure homes through an auction can yield great benefits.
Properties that are going to be sold at a Trustee or Sheriff Sale auction will be published in your local newspaper weekly for at least three weeks before the auction. This will give you sufficient time to do your research and due diligence.
Once you find a property that interests you, it is extremely important to order a Title Search on this pre foreclosure home. When you are bidding at an auction, you are bidding for the equity interest of the defaulted mortgage. If there are mortgages, IRS liens, Home Owner Association Fees or even past due taxes that are recorded prior to the defaulted mortgage (with the exception of taxes and IRS liens), you could inherit them as well. A title search will reveal if there are any other outstanding debts or encumbrances attached to the property. This will cost around $100.
You will also want to determine the market value of the property. You can do this through personally researching recent comparable sales, asking (or even paying for) a broker’s price opinion (BPO) from a trusted real estate agent or even hiring an appraiser to do a drive-by appraisal. Knowing what other similar properties have sold for at local auctions can help you get a feel for these prices as well.
The information provided by the auction company should also state what the starting bid, if any, is on the property. This will help you to determine if this property is a good buy. The minimum bid is usually the loan balance plus any foreclosure fees incurred by the bank. If the minimum bid is not met, then the lender will take possession of the property. Be aware that you may also be competing with that same lender at the auction.
Once you know the market value and perhaps the starting bid amount, now is the time to crunch the numbers and calculate your highest bid amount. Never go to an auction without knowing the price that you will not cross. This will prevent you from overbidding on the property and if you win, over paying on it as well.
Some auction companies will host an open house before the auction date. This may be your only chance to inspect the property - so come prepared. If you are inexperienced and need help, bring a contractor or a home inspector with you. Even if you must pay for their assistance, it will cost you much more if you miss a serious problem with the property.
Not all auctions, however, offer open houses for preforeclosures. County auctions (i.e. Trustee and Sheriff Sales) hardly ever offer inspections. You are basically buying a home sight unseen which is a risk all bidders must be prepared to accept. Feel free to drive-by the property. If the house is empty, you can try peeking in the windows and even talking to the neighbors. If there are renters in the property, show good judgement.
Now that you have inspected the property, go back to your highest bid price calculations and factor in any repair costs including labor and permits. You may need to adjust your top bid price to account for the condition of the property.
At a Sheriff’s Sale, you must be prepared to pay for the property in full at the end of the auction. Some auctions will require a deposit of 10% and then the remainder within 24 hours. Either way, there will not be time to go and get bank financing. Other sources of funding can be done through hard money loans, personal savings or a generous relative. You need to figure out how you will pay for the property before you show up at the auction.
What to Bring to the Auction
Some auctions will require you to register before attending or bidding. Check with the notice in the newspaper or call whoever is handling the auction to find out.
Non-sheriff sale auctions usually require all bidders to prove, before the bidding starts, that they can pay the 5 -10% deposit. This is done by presenting a cashier’s check(s) made out in the name of the bidder. The winning bidder must sign over the cashier’s check then and there to secure it. Usually the deposit will be around 10%. You should bring several cashier’s checks of various amounts ($1,000, $2,500 and $5,000 for example) to be able to pay for the deposit. You will usually have 30 days to pay for the property. If you cannot come up with the finances in time, you will lose the property and your deposit.
All bidders must be prepared to also pay an additional fee on top of the purchase price. This is the auctioneer’s fee and is usually around 3 - 5%.
Sometimes addresses can be very similar and it can be an easy mistake to begin bidding on the wrong property. It is a good idea to bring a clipboard with property photos, the address and your top bid amount. Just make sure you have a cover sheet so no one else can see your information.
A day or so before the auction, double check that the property is still scheduled. It is also a good idea to confirm the location and time of the auction as well.
How to Win at an Auction
Some bidders like to make others assume that they are bankers hoping that they will shy away from the bidding process. They do this by dressing and behaving like a banker. It may give just the edge you need.
The bidding process can be very stressful and the fervor of rapid bidding can quickly drive up the price – even exceeding market value in some instances. Successful bidders keep their calm and bid with their head and not their adrenaline. Many experienced investors wait until near the end of the auction to begin bidding. There is no sense in driving up the price. It is better to wait until some of the crowd drops out of the bidding process.
The first few properties often sell for less than the ones at the end of the auction. This is because people are waiting to see the actions of other bidders and to feel comfortable with how the process works. If your chosen property comes up near the start, do not be afraid to jump in and get your feet wet.
After the Auction
After paying either the deposit or the full amount, you will want to make sure that you get all of the appropriate paperwork indicating that you have won the auction. Check to see if there are any other steps you must take to finalize your purchase and how long you must wait until you can take possession of the property.
If there are any outstanding liens on the property, most states allow a very short amount of time for these lenders to make a claim on the property – often 10 to 15 days. If there are no other claims made on the property, it will then transfer to the winning bidder.
You will receive at the time of paying the auction price or several weeks later, either a Trustee’s or Quit Claim Deed. You need to make sure that you will be able to sell the home later. This may require that you record the deed at the county. You may also need to file for Quiet Title if you receive a Trustee’s Deed.
About half of the states have some sort of Statutory Right of Redemption that gives the original property owner some additional time to buy back the home (plus all fees, auction costs and a hefty interest rate). During this time period, the new owner cannot possess the property, make any changes or evict any residents. But in the event that the owner redeems the property, you will get all your money returned plus the accrued interest which reach an APR of 24%.
Properties that are bought on an online auction require the same amount of due diligence and preparation. Some online auctions offer properties that are free of past liens and come with a clear title and transfer with a Warranty Deed.
The bidding process can last much longer – from a few days to several weeks. There is also a registration process which varies from state to state and from site to site. You will also need to make sure you understand their payment policy as well.
The Benefits of Buying Foreclosure Properties at an Auction
Buying at an auction can be an exhilarating experience that offers instant gratification. Regardless of the risks and financing difficulties, many experienced investors state that properties sold at an auction are at the cheapest price in the foreclosure process and offer the best chance to reap a big fat return on their investment.