It's happening everywhere, and it's happening often: Well-intentioned people purchase homes only to find themselves unable to make payments because of hardship, or unwilling to pay when the house value plummets far below the purchase price.
In fact, in 2010, a record 2.87 million properties received default notices, went up for auction or were repossessed, and 2011 is expected to be far worse with a frightening 20 percent jump in foreclosures [source: Levy and Gopal]. So, not only will there be even more homes in foreclosure, but the prices will also be even lower. The good news is that this set of circumstances is a perfect storm for anyone wanting to buy a home at a foreclosure auction.
Buying at a foreclosure auction, however, is serious business. Before you speed off to your first auction, check out the following tips.
First, you'll need to identify homes that are in -- or about to be in -- foreclosure. Identifying foreclosed properties as early as possible is important for giving yourself time to do your homework.
To find prospects, check the newspaper. Auctions for the city or county are often published in the legal notices section. Some areas even issue special publications with foreclosure listings. Real estate agents often keep a tight eye on certain neighborhoods, so if you know an agent in an area you desire, you may ask for a heads up about new foreclosures.
There are also companies that specialize in handling auctions for financial institutions, so you can get on their e-mail or mailing lists, or you can sign up for paid subscriptions to services that regularly provide you with foreclosure news.
If you have your eye on one particular property that will be in foreclosure, you can contact the lender's attorney or the trustee for information about the sale date.
The foreclosure process contains three stages: foreclosure auction; bank-owned properties, called real estate owned (REO); and pre-foreclosure.
The foreclosure auction is literally that: People show up at a predetermined time, usually in a public location, and bid against each other on a property. Anyone can come, and often representatives from the financial institution that was owed money by the owner in default will attend to make sure bidding begins at an amount that will ensure they recover their costs. At foreclosure auctions, the highest bid wins.
If a home isn't sold at auction, it may become REO. These are homes that have gone through an unsuccessful foreclosure auction. With insufficient bids, these homes become bank-owned properties. We'll look at pre-foreclosure next.
Homeowners at risk of losing their property have likely received notification from the lender; then, at about 90 days, the lender files a Notice of Default. The foreclosure process has begun.
Until a property is legally foreclosed, and before auction, there's a window of opportunity for savvy buyers to make deals with owners or lenders. This is pre-foreclosure, a period in which many believe investors stand to make the most money.
Only a few weeks' notice may be given that a property is about to go up for auction. You can find out through public records and legal notices, paid services, networking and referrals. If you move quickly after that notice, you can try for a last-minute deal with the owner, who may be quite motivated to sell at a low price since accepting an offer saves a strike on the credit record.
There's also a benefit to the lender, who prefers to get rid of a property before it goes into foreclosure. Lenders are delighted to avoid the hassle and expense of trying to sell foreclosed properties.
Besides getting a steal, there are additional advantages to buyers who strike pre-foreclosure deals:
- Unlike buying at auction, you'll have time to inspect the property.
- You may not have to pay the entire purchase price up front in cash.
- There may be less competition for pre-foreclosure properties than at auctions.
Foreclosure auctions give a whole new meaning to buying "as is" because you often can't gain access to inspect the interior. You may see what you're getting on the outside, but short of peeking in the windows into dark rooms, you have no way of seeing the inside conditions. Even if the homeowner is still living in the house, he isn't likely to welcome you in.
The problem with buying a mystery box is that if the homeowner failed to make payments, then the home could be in disrepair. If the home has been sitting empty, the damage could be significant.
You can try calling the bank to see if the representatives will grant you access. They may agree since they are highly motivated to sell the property. If you can't get a peek inside, however, you'll need to factor probable repair expenses into the total amount you're willing to bid on the house.
Before you go to an auction, there's a lot of homework to do. You need to estimate the value of the property so you don't overpay, defeating the purpose of buying at auction to get a deal. Also, understand that your bid is final -- you can't back out or renegotiate the price later. So if you overpay, you're stuck.
The first step is to gauge pricing in the neighborhood. Obtain the history of sales in the area to see how much money homes have sold for in the past year. You might also want to drop in on some open houses to evaluate the market value of different homes currently for sale.
Next, determine what you plan to do with the property. Some people fix them up and sell them, or flip them as is. Others rent the house for income, and yet others will live in the home. This decision will help determine what your maximum bid price should be.
In the end, err on the side of a conservative maximum bid so you don't end up on the wrong side of the expense/gain equation.
Come prepared! There are two things you need to do before you attend an auction: register and get cash.
Before being able to participate in a foreclosure auction, bidders are often required to be preregistered with the auctioning company. So be sure to contact the company well ahead of time to ensure you can provide whatever documents need to be on file.
Prior to the auction date, contact the auction official (this may be a trustee, an attorney or a sheriff) to find out how much cash you need to have with you should your bid be accepted. In some states, you may have to pay the entire balance due the very day of the auction. In other cases, you may be required to hand over certified checks that cover a percentage of your winning bid, such as 10 percent, with the balance due in as soon as four weeks.
The foreclosure auction process is not for the weak-kneed. Experts suggest you observe a lot of auctions before you attend one where you plan to bid. This way, you can get accustomed to the environment. You can also become acquainted with seasoned foreclosure investors and may pick up a few tips from watching them or talking to them.
When you're ready jump into the fray, and after you've selected a property, done your evaluation and set your maximum price, find the location of the auction. It may be at a public location, such as the steps of a courthouse, or it may be held on the property to be auctioned. Be sure to arrive early. If you're late, you could miss the auction entirely since it may last only a few minutes.
Although the process varies from state to state, the basic idea is the same: The property goes to the high bidder in a live bidding process conducted by a sheriff, deputy or court-appointed referee. The first bid will usually be made by a representative of the foreclosing lender to ensure a minimum amount owed to him can be recovered. Keep in mind that this bid may have nothing to do with what the home is actually worth. If the home has significant damage, for example, the lender's bid doesn't take that into account. So be careful of changing your own evaluation based on the bid amounts.
- When you're ready to make a bid, some recommend you wait as late in the process as possible. Wait until the auctioneer is about to lower the final gavel.
- Don't get swept up in the moment: Stay below or at the maximum bid you determined before you arrived.
- Auctions are often postponed or canceled at the last minute for a variety of reasons. Contact the trustee or attorney the day before to confirm.
Other than during pre-foreclosure, there's only one time when you can negotiate, and that's when a property was up for auction but didn't sell, and instead became real estate owned, or REO.
The lender with an REO is motivated to negotiate with you. The company has no interest in owning the home and will gladly forego costs associated with maintaining the structure, property taxes and even fines if the property condition lapses.
For these reasons, a bank will negotiate with investors in order to recoup some of the loss and get rid of the responsibility of the home. A lender with an REO is likely to negotiate the price of the house itself as well as repairs.
Before you decide to bid, find hidden costs. For example, research the title to see if there are outstanding liens or other legal burdens. Should you win the auction bid of a home with such an encumbrance, you could actually be responsible for paying off the entire amount.
You could also be surprised by banks that loaned earlier mortgages to the homeowner. For example, if the third mortgage lender is conducting the auction, yet there are first and second mortgages still owed, you'll likely have to pay those senior lien holders over and above what you pay for the house. Always have the title checked before you attend an auction. You could also be responsible for back utilities.
Other warnings to keep in mind include the following:
- The home is unlikely to come with a warranty, so if there's a bad foundation or mold infestation, you have no legal recourse.
- If the owners or renters won't move out, it's up to you to evict them. And depending on state laws, if a lease precedes the date of foreclosure, a tenant may have the right to stay.
- In some states there's a period after the foreclosure during which the homeowner can redeem the property (right of redemption).
Considering the intricacies of buying property at auction, you may want to consult a real estate agent to help. An agent can help you determine the pricing of the property since he can easily view recent sales in the neighborhood. The agent can also check into any legal problems, such as liens.
Another great thing about using an agent is that if he has been in business long enough, he may already be familiar with the condition of the interior of the home. If not, he can find out about it from other agents, since at some point, the home may have been up for sale.
For more information on foreclosures, check out the links on the next page.
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- Bronchick, Bill. "Buying at the Foreclosure Auction." REIClub.com. (Feb. 18, 2011)http://reiclub.com/articles/buying-foreclosure-auction
- CNBC. "States with the Highest Foreclosure Rates." Feb. 10, 2011. (Feb. 20, 2011)http://www.cnbc.com/id/29655038/States_with_the_Highest_Foreclosure_Rates
- Levy, Dan and Prashant Gopal. "Foreclosure Filings in U.S. May Jump 20% From Record 2010 as Crisis Peaks." Bloomberg. Jan. 13, 2011. (Feb. 19, 2011)http://www.bloomberg.com/news/2011-01-13/u-s-foreclosure-filings-may-jump-20-this-year-as-crisis-peaks.html
- Nationwide Foreclosure Center. "Secrets of Power Bidding." April 2008. (Feb. 19, 2011)http://www.nationwideforeclosurecenter.com/2008/04/secrets-of-powe.html
- Orlando Sentinel. "Pre-foreclosures create a window of opportunity." (Feb. 21, 2011)http://www.orlandosentinel.com/classified/realestate/foreclosure/orl-foreclosures-home-preforeclosures-story,0,4578292.story
- RealtyTrac. "5 Steps to Buying a Foreclosure." (Feb. 14, 2011)http://www.realtytrac.com/learning/how-to-buy-foreclosures.html
- RealtyTrac. "Foreclosure Procedures By State." (Feb. 14, 2011)http://www.realtytrac.com/foreclosure-laws/index.html
- Setzer, Glenn. "Foreclosure Happens, But There Are Solutions." Mortgage News Daily. Aug. 2, 1995. (Feb. 19, 2011)http://www.mortgagenewsdaily.com/822005_Default_Mortgage.asp
- U.S. Department of Housing and Urban Development. "Avoiding Foreclosure." (Feb. 20, 2011)http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure