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Be Ready Before Bidding Begins

By RealtyTrac | Published: Jul 28, 2010 | 39 Comments

Buying a property at a public foreclosure auction is not for the faint at heart. It usually requires patience, persistence and a fair amount of cash, since most state foreclosure laws stipulate that the winning bidder pay all or part of the winning bid on the spot.

But for those willing to do the work and able to front the cash, auction properties can yield bargains of 20-40 percent below the market value, and sometimes even more. Like any high-yielding investment, foreclosure auctions come with a certain amount of risk. Managing that risk successfully depends on first doing thorough research on the properties you plan to bid on, perhaps the single-most important step in a successful and profitable auction purchase.

"You've got to know the property inside and out and you've got to know that the party who is auctioning the property is, in fact, in the first lien position," said T.J. Marrs, a real estate investment trainer and author based in Vancouver, Wash. Since many properties may have multiple liens (first and second mortgages or tax liens, for example), this is a critical piece of information to have before the auction begins. Marrs added that if the party auctioning the property is not in the first lien position, the winning bidder may have to pay off other outstanding loans against the property.

First-time auction buyers or investors may be wise to rely on a local real estate agent or real estate attorney to ensure they're making good decisions about which properties to bid on and how much to bid.

Whether working with a real estate professional or not, you can follow this property research checklist to make sure you're fully prepared when you attend an auction.

Research state laws and observe a local auction

Each state governs how the foreclosure process — and specifically the auction procedure — works in that state. The process can vary widely from state to state, so aspiring buyers or investors should study the foreclosure process in their state. Important factors to consider are how quickly a property can go to auction after the owner defaults, how much cash is required at the auction and if the owner has any redemption period after the auction.

In some states, a property can be sold at auction less than a month after the owner defaults, while in other states the foreclosure process can stretch out more than a year, not including any redemption period. The length of the foreclosure timeline certainly influences how quickly you need to research a property and secure the necessary cash to bid at the auction.

If there's a redemption period, the former owner can typically buy back the property by paying the full amount of the winning bid (plus any applicable fees and penalties) during the redemption period. If you're the winning bidder, you should wait until the end of the redemption period before sinking any additional capital into a property purchased at the auction.

First-time auction buyers should attend a local foreclosure auction to observe how state foreclosure laws play out in the real world. Auctions are often postponed or canceled, so it's a good idea to call the trustee or attorney listed on the day of the auction to confirm.

Secure financing

Before bidding at an auction, you'll need to evaluate the cash you have available to spend on an auction purchase. In addition to considering liquid assets such as bank accounts, stocks and bonds, you can apply for a home equity loan to cash out the equity in your home or other real estate assets.

Once you calculate the cash you have available, you can determine how much of that cash you feel comfortable using to purchase an auction property. Of that amount, you will need to set aside some for estimated repairs and some to pay off outstanding liens that survive the auction purchase (although if you purchase the auction property below market value, you may be able to take out a home equity loan on the newly purchased property to fund repairs.) The remainder of the cash can be used for bidding at the auction.

Some states require as little as 5 percent of the purchase price in cash at the auction. Others require the entire purchase price in cash. Either way, you will need to present the necessary cash at the time and place of the auction, usually in the form of a cashier's check. That means you should be ready to withdraw your cash quickly when an auction opportunity arises.

If the winning bid is below the amount of the cashier's check presented at the auction, the trustee at the auction should reimburse the winning bidder for the difference, although reimbursement may take several days or longer. Many bidders bring several cashier's checks in incremental amounts so they avoid having to wait for a substantial reimbursement.

Analyze market value

Once you're comfortable with how the foreclosure process works in your state and your spending limit, you can dive in and start pursuing specific auction properties. For any property scheduled for auction, the first step is to compare the property's estimated market value to the opening bid.

The opening bid is the total amount owed to the foreclosing lender and is the minimum amount the property will sell for at auction. This amount is included on the public auction notice.

If the opening bid is higher than the estimated market value, that particular property does not present a bargain-buying opportunity.

A quick market value analysis is just the beginning, however. You need to dig deeper to find a property's true investment potential.

Check lien & loan history

Before bidding a dime at the auction, it's important that you carefully research a property's title for any liens and loans that won't be cleared out by the auction sale. All liens and loans affecting a property's title are available at the local recorder's office.

Unlike typical real estate purchases, auction sales don't always transfer ownership of the property with a clear title; therefore, it's possible for a buyer to purchase a property at an auction and still have to fork over additional funds to clear out other outstanding debts secured by the property. You might be willing to do this, but you need to know about any outstanding debts before the auction so you can set your maximum bid appropriately.

To determine which liens and loans will be cleared out by an auction sale, you should look at the priority of the liens and loans taken out by the current owner. Priority is typically determined by the date when the lien or loan was recorded. The first recorded takes highest priority and the most recently recorded takes the lowest priority.

The defaulted loan that triggered the auction sale typically clears out any "junior liens" that have a lower priority. There are a few exceptions such as property tax liens, which take priority over all other liens and are not cleared out by an auction sale. Any "senior liens" that have a higher priority than the defaulted loan will usually continue to encumber the property after the auction.

Property title research is probably the most complex and technical part of the auction-buying process, and it's impossible to overemphasize its importance to a profitable auction purchase. First-time auction bidders should seriously consider enlisting the help of a local real estate agent, attorney or title company for this part of the research.

Estimate needed repairs

Estimated repairs should be factored into any property purchase, but there's an added twist with auction properties: in most states, auction bidders don't have any opportunity to view the inside of the property before they bid, let alone hire a professional inspector to inspect the property. You may be able to approach the current occupants and ask permission to view the inside, but that permission is not guaranteed.

While this makes it difficult to pinpoint exact repair costs, you can obtain a ballpark estimate just by viewing the property from the outside. You will be able to infer a lot about the property's overall condition by observing the condition outside. Serious buyers will park their cars and walk by the property and around the neighborhood, also looking for neighbors as potential sources of information. You can also check natural hazard reports to see if the house is located in a zone that makes it more prone to flood, fire or earthquake damage.

Still, the exact cost of repairs is unknown, and you should leave some extra margin for profit in your maximum bid in case repair costs escalate above your estimate.

Calculate your maximum bid

The maximum bid is simply the amount a buyer is willing or able to pay at a public auction. It's important that you set a maximum bid before the auction to make sure you don't get caught up in the emotion of a bidding war and end up overbidding.

Marrs, the real estate investment trainer and author, recommends setting a maximum bid of 60-70 percent of the property's market value as a general rule of thumb. This amount may vary based on the local real estate market conditions. From this baseline bid amount, you should subtract estimated repair costs and any outstanding liens and loans that aren't cleared out by the foreclosure sale.

At the auction, stick to your maximum bid and don't be influenced by other bidders. Sometimes, the foreclosing lender or junior lien holders will bid at the auction to make sure all of their debts and costs are covered by the winning bid. This can sometimes inflate the winning bid close to market value, eliminating any chance at a great bargain.

Of course, the bidding will go up incrementally, so you shouldn't immediately jump to your maximum bid. Continue to go up incrementally until you reach your maximum bid or are declared the winning bidder.

You should consider foreclosure auctions, whether you're looking for a great bargain on a home for yourself or entering the real estate investment arena. Auctions aren't for all buyers, but with the proper resources and the right research they can be a prime opportunity to purchase property below market value.

Comments

By Fran Rokicki,  Mon Dec 6 2010, 11:15
I have attended HUD auctions, with my clients. You need to be careful that you don't get caught up in the moment. Bidding bounces all over the room and you need to be sure that you don't overpay on the market value of the property.
By J. Mario Preza, CRB, CDPE,  Tue Feb 15 2011, 10:39
Well said and well written. However, I would add (or modify) to the comment about the "local real estate agent" to emphasize experienced and/or knowledgeable, because I have heard, even here on Trulia, some horror stories brought on by inexperienced agents who gave little or no advice to the prospective buyer/investor who, relying on that, bought a lien instead of a property without lien(s).
By Dan Lobb (469) 767-0930,  Wed Mar 16 2011, 23:34
In order to bid you may need to have deposited certified funds with the county prior to the auction.
By Stephanie Lammers,  Thu Apr 28 2011, 14:34
if these are 'public auctions' why do I need an agent? or 'belong' to a club to participate in an auction?
By Isabela,  Wed May 4 2011, 14:27
This is a property needs lot of TLS. It looks so great on the outside but the owner has damaged everything on the inside (out of spite, desperation, etc). Get ready to pump money in it to make it at least at a min standard to live in it; at this time, it's not even close to it. Good luck on bidding, I am not in this one.
By Ms. S. LaForge,  Sat May 21 2011, 16:08
Where can I go to research property titles records. Sla
By Ms. S. LaForge,  Sat May 21 2011, 16:12
Please reply asap... Graciously yours SLa
By P Festino,  Mon May 30 2011, 15:18
You can go online to the county mortgage sites. It is always a good idea to have a title search done before buying the property.
By Open Every Weekend,  Wed Jul 27 2011, 11:36
Nice article! I especially agree with your last point, knowing your maximum bid. As an active real estate auction participant, I've witnessed too many investors eat right through their potential profits because they didn't know when to quit. In Indiana, full payment is required on properties bought at sheriff sales, which hinders one's ability to achieve financing from traditional lenders. Now, that's not to say that someone can't be financed through non-traditional avenues but they're a lot riskier. This is one advantage of Open Every Weekend. Properties that are auctioned with Open Every Weekend have a specified selling period that gives buyers adequate time to perform their due diligence and secure any needed financing. See what's selling this week!
http://www.OpenEveryWeekend.com
By Mary Lynn,  Thu Aug 4 2011, 01:52
It is ridicuous to auction off a property when BOA had an offer on the table for the property on Successful Ln. They never countered or replied to the offer, but the buyers were being told by the listing agent that the offer was a good offer and continue to string the buyers along. The offer was almost a full price offer of what the property was listed for. There was very little difference between the offer and the asking price. Therefore why would BOA not counter and why would BOA or the listing agent not inform the buyers after waiting three months and numerous calls of being strung along that the property was being auctioned off. Bad business and yes the house is in need of repair therefore the offer was in line with what other homes sold for after repairs. Be careful bidders this home had a lien attached.
By Woodworker1988,  Fri Aug 12 2011, 17:01
If I use an agent do they make sure that there are no other liens against the property other then the mortgage and is there any insurance that can be purchased to cover the buyer in case home owner decides to make a shamble
of everything. Len 8/12/11
By M T Friese,  Sun Sep 18 2011, 23:48
Mary Lynn: It is common to have a trustee sale go through even though there are pending short sales on the same property worth tens of thousands more.

The banks lately are quite dysfunctional and lose much money by not coordinating trustee sales and short sales.
By Joe Uahinui,  Tue Nov 29 2011, 14:23
what a sham be fair and stop ripping the people off you money hungry sharks get real or get out.
By Catherine Casper,  Thu Apr 26 2012, 09:48
I live across the street from this property. The inside was NOT damaged by the previous owners. The previous owners were renting out the property. It was damaged by the vandals who were breaking in after the property was abandoned and sleeping in there. I really wish people knew the facts before opening their mouths.
By Looking2buy,  Tue May 8 2012, 20:08
the property is worth about 40,000 lots of mold insideand water damage and about 5 truck loads of trash left inside
By Looking2buy,  Tue May 8 2012, 20:12
mold and water damage is bad
By Matie,  Thu Jun 7 2012, 03:58
No need to use an agent on auction, only thing you need to now is approximate price. All bidded homes you can find here http://www.indexpost.com/ All states free foreclosure search
By dmcquaid3,  Thu Sep 13 2012, 20:05
If I'm an investor, looking for a shell to fix up in the 21218 area, can somebody give me a 1,2,3 step procedure, to finding an auction, where to go to prepare for the auction and whatever other information you think might be helpful, my email is dmcquaid3@gmail.com, 202-360-6209.

Dave
By Joanne Bernardini,  Sat Nov 3 2012, 07:23
This is a very informative article! I will be forwarding it to clients interested in this!
By Ann Newburn,  Mon Nov 5 2012, 17:22
Hi All

I am looking for an experienced agent to help me buy properties up to $600k.

I am a cash buyer. How many could you find me?

Please email me for my criteria.

Thank you
Ann
By yogitasingh,  Tue Jan 8 2013, 15:38
Thanks to all who warned prospective buyers of all the damage on the property!
By rocio_corz,  Sun Jan 20 2013, 18:49
Is this house still for sale?
By Betsy C.,  Thu Feb 28 2013, 15:32
Yes..extremely helpful to know the condition which you simply cannot tell from the exterior or these scanty foreclosure listings.
By saltglass,  Thu Mar 14 2013, 19:52
It should also be mentioned that many properties along A1A in Juno have major problems from corroded cast iron pipes. They were inferior in the beginning and recent plumbers were allowed to replace with thin wall cast iron that only lasts a few years. Ceiling and walls need to be ripped out of many units!
By sccheng,  Mon Mar 18 2013, 20:51
they'll screw you over!
By cthacker3,  Mon Apr 1 2013, 08:34
I WENT AND STILL GOING THRU THIS BIDDING PROCESS, THE REALTOR WILL STING YOU ALONG FOR MORE MONIES, THEN THEY TELL YOU, SORRY ,THEY SOLD THE PROPERTY TO A INVESTOR. SOMEBODY IS SURELY GETTING RICH OFF ALL THESE FORECLOSURES AND IT'S NOT THE HONEST HOME BUYER. I THINK THIS SHOULD BE CHECKED BY THE BANKS OR WHOEVER.
By portercoteaparty,  Sun Apr 7 2013, 20:46
What I want to know is "WHY" is this home not in the Properties with this logo are eligible for HomePath Renovation Mortgage.

HomePath Renovation Mortgage allows a buyer to purchase a property that requires light to moderate renovation. The one loan amount includes both the funds for the purchase and renovation — up to 35% of the as completed value, no more than $35,000. Available for owner occupants and investors.

This home sure sounds like it qualifies for that!!
By Patricia Duggins,  Wed Apr 17 2013, 12:00
I think the agents are buying these homes or committing to these homes and running the bids up to make a good profit
By Voices Member,  Mon May 13 2013, 12:42
Prior to placing a bid, always spend a good amount of time setting a limit.

David, http://www.commonwealthfootankle.net
By bradmcoy,  Tue Jun 18 2013, 06:58
You will NOTICE the "new/inexperienced or crooked" real estate agents will always say, " The home has multiple offers." That is a joke, especially when the home is listed for a few weeks or in some cases 6+ months. Avoid those "agents"
By irlandaperez10,  Thu Jun 20 2013, 01:24
help I ned to buy a mobil home I have 40.000 cashHi All

I am looking for an experienced agent to help me buy properties .

I am a cash buyer. How many could you find me?

Please email me for my criteria.

Thank you Djcarmenyankee@hotmail.com
By Philly Best,  Sat Aug 10 2013, 15:08
This house looks like it's going to be a good price
http://www.yurovskydental.com
By e_hines2003,  Sun Aug 25 2013, 18:22
the invester and bank found the way to steal home away from home owner I be glad wen
they get caugt behind wut there doing
By Philly Best,  Mon Aug 26 2013, 20:14
You should always consult with a Real estate lawyer before buying Foreclosures
http://www.lawyernortheastphiladelphia.com
By Juan Carlos Chavez,  Sun Dec 15 2013, 21:34
HELLO I RENT THIS PRPIEDAD 19911 NW 3rd PL,MIAMI FL 33169 FROM OCTOBER 15 IN THE AMOUNT OF $ 800.00 TO CONTRACT SIGNED BY THE owner FOR A YEAR I CLEAN HOUSE, REPAIR MASTER CLOSET INSTALL INTERIM SINK IN THE KITCHEN,the owner; INSTALL A NEW TOILET IN THE BATHROOM 1 TOTALLY MISSING FOR REPAIR THE BINS ARE eXPOSED to shawer HER 2ND ROOF REPAIR HAD SOME bATHROOM FLOOR SLAB LEAKS BROKE IN SEVERAL PLACES AND fELL MISUEGRA NOT REPAIR TIME FOR A LADY OLIVE HARRIOTT NEVER TOLD ME TO YOUR HOME he was FORCLOUSER BUT SUDDENLY ON ME TAKE AND USE ANY CASE IN COURT FOR 13-36462 CA-01 take Me FRI MY FAMILY AND I HAVE A LEASE FOR A YEAR hE wAS THE VICTIM OF A VERY USUAL TODAY! CON!! !!! PLEASE HELP!!
juancarlos_64@yahoo.com
By mentorph,  Thu May 1 2014, 18:47
I don't know who Catherine Casper is, but she doesn't live across the street from this property because I do---I have lived in my house for over 40 years. She lives in Illinois. Believe me when I say that the house on Dogwood Dr. NE in New Salisbury, IN, This house is a mess! I knew the last 5 families that lived in the house. The last two families destroyed the house. If the price is correctly listed, it is about $20,000 more than the last family paid for it and about $50,000 overpriced! My god, squirrels have made a home in the living room.
By jackbailey106,  Sun May 18 2014, 11:53
Is this still for sale?
By maycei,  Thu May 29 2014, 05:00
I want this house, how do I buy it and get info on it
By Tim Powell,  Sun Jun 1 2014, 07:30
Indeed the banks are buying these homes some or should i say most of the time they fix them up and double the price in most cases ..you need someone inside these con-do complexes to get the inside scoop ,keep your eye on the prize.you need money to make money and the banks can do this all day long.

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Liens not cleared by the auction are the buyer's responsibility. If you buy a property at a foreclosure auction, you may end up forking out more than just the winning bid amount to own the property free and clear. That's because some debts attached to the ...

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