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Beware of Hidden Costs

By | Published: Jul 28, 2010 | 46 Comments

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 property — called liens — survive the auction and carry over to the new owner.

Foreclosure auctions provide some fantastic opportunities to purchase a property well below its market value as long as you're familiar with the ground rules. One of those ground rules is to never bid on a property unless you've researched the title and are aware of any liens that you will have to pay off if you are the winning bidder. Although most liens are cleared by the auction, that's not always the case, according to national real estate speaker and author T.J. Marrs.

"Although it may vary from state to state, for the most part all liens except property tax liens are cleared by the foreclosure process," he said. "Other than the property tax lien, the first mortgage lender is likely to receive first funds produced from the auction. Any remaining funds would then go to the second lien holder, third lien holder, and so on. Even the IRS is secondary to existing senior lien holders."

The order of the liens is determined by the date those liens were recorded. If a second lien holder forecloses on the property, the first lien will typically survive the auction and the winning bidder will need to pay off that first lien amount to own the house with a clear title. A clear title is needed to resell the property. Furthermore, the winning bidder could be foreclosed on if the first lien amount remains unpaid after the foreclosure auction.

Researching the Title

The majority of foreclosure auctions are conducted by the lien holder in the first mortgage position, but you need to check if that's the case for any property that interests you. And you need to check if the property has any current property tax liens recorded against it since those also survive the auction. You can find any liens recorded against a property at the local recorder's office or through a local real estate agent. This research will allow you to determine the current state of the title and the position of the lien that will be up for auction.

You should enlist the help of a local real estate agent or real estate attorney if you're not comfortable researching and interpreting the title information yourself. You can also ask the trustee in charge of the auction if the lien being foreclosed is in the first position or if it is "subject to" other liens.

If you're interested in an auction property with property tax liens or other liens that will survive the auction, either avoid the auction altogether by working out a deal with the owner in default or make sure you account for those other liens in your bidding. To determine your maximum bid, Marrs recommends subtracting the amount of any liens that will survive the auction from 70 percent of the property's market value to come up with your maximum bid amount. Here's an example for a property with a market value of $200,000 and a property tax lien of $1,500:

  $140,000 (70 percent of market value)
- $1,500 (property tax lien amount)
= $138,500 Maximum Bid

But if that same property had an additional lien of $50,000 not cleared by the foreclosure auction, your maximum bid would be a lot lower:

  $140,000 (70 percent of market value)
- $1,500 (property tax lien amount)
- $50,000 (surviving lien amount)
= $88,500 Maximum Bid

You should be willing to invest the time and money it takes to assure once and for all that the property you are bidding on is worth what you think it is. Any investment you make in research is miniscule compared to the potential risk of assuming unknown liens on a foreclosure property.


By Fran Rokicki,  Thu Sep 9 2010, 17:31
Find a good real estate attorney who is educated in foreclosures. Having the correct advice throughout the transaction, will benefit you, many times at the finale.
By Michael Hobbs,  Fri Jun 24 2011, 04:26
Great points here.
Recently, one of our clients, Cherry Picker Investments, had a client who purchased a property and DID NOT complete all of their research. The net result, a property bought at a foreclosure auction also had an $8,000 tax lien levied that was now the responsibility of the auction buyer. Needless to say, that oversight was a direct reduction in their net profit calculation. Fortunately, there was a happy ending for our client's client, the property was in much better interior condition than assumed and the rehab budget was less than budgeted. They were able to sell the property for more than originally forecasted based on the 'subject to completion' appraisal. Nonetheless, foreclosure investing / buying is not for the faint of heart.

It is wise counsel to engage experienced professionals from the start and build a good team who help each other cover their blindspots, while dotting the I's and crossing the T's of foreclosure investing.
By Sharon,  Mon Jul 11 2011, 21:51
Foreclosure properties can become a nightmare! Liens, condition, bank hold-ups etc. -- buyer beware
By Caleb Zuniga,  Wed Sep 7 2011, 17:05
Apt advice. I don't buy and sell homes, but I do buy and sell land and it is critical to a good deal to make sure that the property is free and clear.- http://www.yourownacre.com
By man.scrap@yahoo.com,  Mon Sep 26 2011, 11:39
So how do you get "free and clear' when buying a foreclosure?
By Dava,  Wed Dec 28 2011, 09:02
This is the best article I've read on this site. Most of them touch on important issues in a superficial way at best.

I've also found that the terms "foreclosure property" and the like are used very loosely. Not to pick on Sharon above, but her comment is a good example. A property in "pre-foreclosure" might be on the market as a short sale. In that case, the bank will be involved. But in a trustee's sale or auction, bidders don't have to deal with the bank although the bank/trustee can delay auctions and they will typically set a minimum bid.

The bottom line: Do your homework on the process and each propery.
By Annie Allerdice,  Sun Jan 22 2012, 21:22
I am currently looking at two short sales in a condo complex that have been on the market for more than 300 days. One is for cash only the other is bank financed. I asked the broker for all the hidden fees and was told there was another bid on the property did I want to go higher. And, to that I laughed.
with so many homes in pre foreclosure why would anyone want to out bid someone on a site sitting for 303 days?
By David Brown,  Sat Feb 11 2012, 15:03
WE are going lower much lower!!!!!
By Rose,  Mon Feb 13 2012, 23:36
If you're buying a foreclosure home that is held by the bank rather than bidding at auction, make sure your offer is actually put through to the bank by asking the real estate agent representing you to get the official bank assigned number of the offer submitted. The bank's' agent for the home I purchased kept telling my agent that there were other, higher bids on the home to get me to come up in price. My offer wasn't even being submitted to the bank. On my own, I dropped out of the process and then called the banker's real estate office back as an unknown, new interested party. I asked if the home was still on the market and if it had any bids on it. The receptionist replied that the one interested party (me) had dropped out. I then confronted the banker's realtor through my agent and made sure we got the official offer paperwork number from the bank to ensure my offer actually went through to the bank this time around. The bank accepted my offer and I purchased the home - there had been no other bidders. Don't fall for the "there's another bidder on the property, do you want to bid higher" ploy without doing your homework as this is often a ploy to get more money out of a buyer. Additionally, make sure your offer is actually going to the bank's internal representative and not just sitting being held up by a real estate agent pulling out all of the stops to try and get their set target price for the home in order to look good to the bank.
By Lh,  Fri Mar 9 2012, 16:24
Thank you, Rose!
By Bumb Deal,  Fri Mar 23 2012, 06:55
Bank owned Foreclosures can be a real Bumb Deal for the buyer! Banks by law are not required to make any disclosures regarding the condition of the property. Believe me when I say IT IS BUYER BEWARE! A perfect example of this is the REO property located a 2138 Paseo Donito, Alpine, CA 91901. The roof leaks & needs to be replaced & there is mold & water damage on both the first & second floors due to the leaking roof. There are 2 private road maintenance argeements tied to the property. There are a number of access easements across the property. Alpine Fire is owed $4,500.00 for hazard abatement work done by them. None of this was or will be disclosed by the BANK! BUYER BEWARE!
By Regina McGlashen,  Tue Mar 27 2012, 13:01
By Gina Mcglashen, Tue Mar 27 2012, 12:58
I am bewildered by the fact you must pay to even have access to see these properties.Many pre-foreclosures are listed on real estate mls listings, but then you must join or pay to see them.Not many places where you have to pay to see the item being sold or get info on it .If the banks are so anxious to sell these properties they need to have them listed with as much info as possible.
having to pay someone just to look at the homes offered by a bank or agency is so dumb they act like there list is just so great and it is not there is so much info missing and if you try and put a bid in you have to find god and ask to and find the person that is taking care of that property, I joined and spent the money and after not being able to put bids in on 3 locations i closed my membership and was disgusted with the service and the site very poor.
By Matie,  Thu Jun 7 2012, 04:00
One of the biggest data of U.S. real estate agents http://www.indexpost.com/agents/ - Search by state, city, area etc
By Mary Kay,  Tue Jun 19 2012, 21:18
I am another 'house hunter' who is baffled when my search for the MLS# dead-ends into a PAYMENT demand before going any further !! I have cash money to spend on a home...but, NO THANKS !! Yet another time someone is requiring my bank numbers and credit card numbers. They want e-mail adresses and phone numbers, too! All I want to do is look for property to buy. I have an agent and just want to do my research .MLS# can sometimes be found on another real estate site.. I like hgtvfrontdoorrealestate.com
By Michele Taylor,  Sun Dec 2 2012, 14:29
Mary Kay, your website address is not valid, do you have another?
By Maytmyer,  Sun Dec 30 2012, 16:42
Mary Kay, I'm in the same situation, have cash in hand yet cannot research properties in foreclosure or short sale. Have contacted three agents by email on their sites. Their sites ask if I am pre-approved, I check 'no'. Consequently, only one called me. Their sites do not have anywhere to indicate ' I have cash'. I called each of the three and left messages. Only one out of three returned my call and spoke with me at length about my ability to pay cash and spoke to me at length about properties in which I am interested. I liked her and am using her services. I realize time is money and realtors need pre-qualified buyers, but business must be good if realtors do not take a few minutes to return calls from potential buyers!
By target7,  Wed Mar 13 2013, 12:34
Same here, had cash in hand. Tried to email the agent through 3 different services. Even went to her website and emailed from there. Never returned emails. Called the number....you guessed it, have an offer, need to hurry. Never thought to tell her I had cash in hand. Didn't know it made a difference. I do now! Their loss.
By roxannell,  Fri May 17 2013, 14:50
Trying to buy a property that is in foreclosure. We have been in it and know the damage;very bad. When we put a bid to the finance company, we were then told they had to wait 120 days because there was an IRS lien. When 120 days(Aug) comes and we contact them again; how do we know if they actually have other bids? They told us they thought our bid was a bit lower than they wanted....by 15,000. This finance company doesn't sound like they have it together.....We would just like an honest opportunity to get the place since we have friends in the area, Any suggestions?
By Steven,  Fri May 17 2013, 15:36
I would check into the layers of HOA as well, espcially in areas like Hunters Creek. May not be the first HOA but the second in many cases.

By Paul Scheufler,  Sun May 26 2013, 11:58
Buying foreclosures, short sales other financially distressed property is very different than buying other real estate. There are many pitfalls. Buyers thinking about this should work with an agent who is certified to work with these types of properties. Do not work with the sellers agent. Get your own agent. I recommend using an agent who has the SFR certification, which is backed by the National Association of Realtors. Otherwise you could be working with an agent who is outside their comfort area. I also suggest working with an attorney who is experienced with financially distressed property. When your hard earned cash is on the line it makes sense to work with experts instead of amateurs. Feel free to email for recommendations.
By Stefan,  Thu Jun 6 2013, 07:01
On already Foreclosed Properties specifically: Is the reason for "Cash Only" that the property may not qualify for financing? Are there other reasons? Are there ways around this?

We are looking to buy, and while not specifically seeking foreclosures, they are certainly an option. Experienced renovator. I have found one particular bank-owned home that we are interested in but it is advertised as "Cash Only". It has been sitting a while.

With pre-qualification, substantial down payment, perfect credit and 15 year mortgage payment history, etc., might the bank even consider our requests to negotiate?

Thanks all,
By meiqun5466,  Tue Jul 2 2013, 23:07
Auf der Suche nach einem Hotel sind wir auf Eure Seite gestoßen. Wirklich sehr schön gestaltete Seite. Viel Erfolg weiterhin
By Gaea Singer,  Tue Jul 16 2013, 15:37
Hi, this looks like a friendly site, I have been here before.

I am from out of state looking to buy my first home. Should I pre-qual in the state of my current residence? If I want a farm, should I pre-qual with a specialty organization? What do you recommend?

Thank you.
By Bob,  Wed Aug 14 2013, 19:47
You should always hire a real estate lawyer
By abudhabidee@hotmail.com,  Sat Oct 5 2013, 12:18
All the above comments are very valuable, informative. I have experienced some of the problems. Have learnt a lot. Thank you. Denise
By Donna,  Thu Oct 31 2013, 20:17
This building is TROUBLE, I would advise everyone to leave it alone. Anyone buying this building is asking for lots of headache.
By Ginny Egan Ranella,  Tue Nov 5 2013, 02:31
What building Donna?
By Hannu,  Sun Jan 12 2014, 02:35
I'm from Finland and looking for a condo from PBC,FL, and must say the US system is a nightmare comparing to ours. Doesn't make any sense there can be hidden costs. It is weird that buyer is responsible to try to find out of these hidden costs. Our law demands the seller or agent must inform is there some lien forwarded to the buyer, or is it "free of burden" as we say.And if you buy with the clause "sells with free of burden", it's the sellers resposnibility to take care of the possible liens from electricity company, HOA fees, etc. Also, all info needed you can get from the local court so easily. The prices in US are very tempting at the moment, though, so that's the reason so interested in the US market. But how to find a trustful professional who really know how to dig up those hidden costs and pitfalls, and do it with reasonable fees?
I totally agree what some people told here about you have to pay to get more info about the property you want to check/buy. That makes me ask: "Do you really want to sell?"
By Mcenteejohn,  Mon Feb 10 2014, 06:17
Seems to me the auction co. should not auction the property without conveying clear tittle and should be held liable for any liens.
By Jarrett Garcia,  Wed Mar 5 2014, 16:25
so is it possible to get a house that cost this low without any liens or other problems?
By deebreezie123,  Mon Mar 31 2014, 19:35
Does anyone have any information on the "short sale" situation in Mesa, AZ
By OlgaART7,  Sun May 25 2014, 07:45
Our agent doesn't even want to hear about foreclosures. He insists that we should keep researching the real estate market, and stay away from foreclosures and auctions. Any idea why he avoids it other than more work for him researching the title? Thanks!
By Robbie Sharrett,  Sun Jul 6 2014, 06:42
If you are thinking about buying a foreclosed home, which is owned by the lender, through an online auction BEWARE of the power of the sponsoring auction company to bid AGAINST you. Read all the terms and conditions of the agreement you are asked to acknowledge online. Some internet real estate auction companies will state they have the authority to be one of the bidders. You don't know how many bidders there are - it could be you against the auction company. Part of the auction company's job is to get the highest bid for the client(in this case, the bank who believes an internet auction is the best way for them to dispose of the real estate they have foreclosed on). If a bank is trying to reach a certain price point (reserve) and they do not reach the reserve during the first online auction, sometimes a bank will contract with the auction company for consecutive auctions over a period of time - if the first or second internet auction does not get the reserve, maybe the third or fourth auction will reach the reserve. In some situations perhaps the reserve amount is still a good deal for the property, but be aware the reserve may be reached by participants in the auction other than the actual bidders who want to own the property - the auction company may be participating in the online bidding.
By joejoe,  Tue Jul 15 2014, 09:28
Hannu- If you know what property you want to buy, use the internet to find a local LAWYER. Negotiate his fee up front. The lawyer can do any real estate transaction. If you haven't selected a property yet, then use a realtor.
By Luke Andrasz,  Wed Jul 16 2014, 16:04
Thank You Rose!! I am in that exact situation.
By juan arevalo,  Fri Aug 8 2014, 22:37
Rent is very expensive and so I'm planning to buy a cheap foreclosure house that we can call a home. I'm looking for a 4br with 2 or 3 baths. I'm not positive to get one successfully based on what I've been reading on the above comments. It seems that buying a foreclosure home is a nightmare despite of so may distressed houses. Is there any better way with less hustle of procuring a foreclosed home? Thanks for any ideas that you may share.
By Pat,  Sun Nov 23 2014, 12:11
One can check at the local court house, usually in the basement archives if there are liens on a home, how much is owed and to whom...I became friendly with this task when my husband and I were landlords in Atlanta.
By Rioverde_man,  Thu Dec 11 2014, 22:23
for those of you fortunate enough to be able to write a check (ie: you’re a cash buyer for a foreclosure) know that in the RE game you’re a rare bird. Most younger agents will ask if “ your pre-approved” or “pre-qualified” for a mortgage under the assumption someone would NEED a mortgage to buy the subject property. Since you do not need one - tell the idiot agent that you are “pre-qualified” if they ask. Then once they’ve called you back tell them you’re going to pay cash instead of getting a loan. That should get them on the stick. Cash buyers are rare but are a LOT less work for the RE agents involved. Often you can get a better deal for an all-cash purchase, too. Sometimes by 10 or 15 percent of the total (cheaper) because the lender and the agents do not have to worry about your “qualifying” for a new loan! The problem is that you’ve just hit younger, inexperienced agents who don’t even think in terms of a buyer paying cash for an entire house. Not many people can or do. Consider yourself very fortunate to be able to do so. Living without a house payment is very nice. I’ve done it myself for years! Oh, BTW: escrows close faster with cash. Escrow and closing costs can be less costly by tens of thousands in loan origination fees and such, and it’s just easier all the way around. Just make sure you know the property and the cost of any rehab required and that your offer takes those things into consideration. If it needs new HVAC, and you figure it’s going to cost $15,000 to install it - then try offering $20k less than you otherwise might. Or $18k less. Work like that always costs more than you think it will. Always!
By cabinrepair,  Sun Jan 25 2015, 14:18
Talk with a good RE Attorney and let he/she go over the property as quick as you decide you are serious about the property. What you'll spend for their experience will pale in comparison to some buried lien that wrecks your profit estimates in the end.

By Mark Saunders,  Thu Feb 5 2015, 09:55
do all your home works fees will add up quick
By Vlrest2010,  Sat Aug 8 2015, 14:24
What about a foreclosure through Veterans Administration? Anyone have thoughts or experience with them? My husband and I were in process of purchasing a foreclosed home owned by the VA that ultimately ended in us canceling the sale. We used our real estate agent and the VA used a property management agent. We were never sure if the problems we had stemmed from the Veterans office or the agent they used but the sale ended due to the issues related with the home inspection. They promised and failed twice to turn on the utilities for the home inspector, as our contract stated they would. They agreed to the home inspector but gave us only 48 hours after the contract was signed to get an inspector and only 7 days after that to opt out pending the results of the inspection. The property agent representing the VA, would state the utilities were on but when we'd arrive at location, the utilities were still off and water meter still unhooked. We canceled and rescheduled appointments twice in that tight timeframe. At one point it almost seemed as though they intended for us to fail at getting the inspection in time and to be locked into the sale without one. Right from the start, buyers had to agree to pay for the title, search & survey, but they insisted on a closing within 3 weeks, which was unreasonable since local surveyors were backed up by two months. Right out of the gate they wanted a written statement from our lawyer that closing would be no less than 30 days. They were very demanding on specific times of day to provide our signatures; once 4 pm, another day by 5 pm, which resulted in my husband missing work just to meet the short notice timeframe. We did everything they wanted but they couldn't even provide the utilities for the inspection. FAIL. This was a learning experience for us. We've been buyers and sellers many times over the years, but this was our first experience with the Veterans Administration as was it the first for a foreclosure. They tried hard to keep the price high too, even once coming down as little as $500 in a counteroffer. This is surprising after reading how most foreclosed homes sell well below market value and are quickly to unload them off their financial plate. We know now how a foreclosure, or short sale can definitely be a different kind of beast.
By Sylvia.manning,  Sun Aug 16 2015, 19:56
My husband and I have purchased two properties from the VA and the process has been pretty simple. The listing states the property sells as is, but we were given 14 days after our bid was accepted to do any inspections that we wanted, during that tine we could withdraw our offer without any issues. This process has been pretty much like buying from HUD and bank owned properties that we have purchased that were foreclosed.
By 4edithnu@gmail.com,  Tue Aug 25 2015, 05:17
How do you get a list of foreclosures from VA and HUD California homes? What about FHA? Should for I pay a fee for the lists? Thank you in advance for any help.
By Aaron,  Sun Nov 29 2015, 07:29
I just need clarification; say the first mortgagee is foreclosing; what happens to the second & third mortgagees. Are they getting wiped out or one need to get a release from them as well ??!!
By Bob,  Mon Jan 25 2016, 14:30
This is very informative information. Thanks for the post, I found these tips very insightful.

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Eviction of former owners or tenants is the buyer's responsibility. Even if you've conducted thorough research on a foreclosure property and successfully placed the winning bid at the public auction, it doesn't necessarily mean you can move into the property ...


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