This is exactly why people should stay away from foreclosures. The banks have all the control, and the buyers have none. Most banks have no idea about the condition of they house they are trying to sell. Most times they are not even located in the same state as the house. You might think that your offer was reasonable based on the condition of the house, but if the bank is not aware of that condition(meaning they have not visually inspected it), they will consider it a low ball offer and look for a higher offer. I've seen situations where people were only a few days away from closing on a foreclosure, the bank receives an offer for only a $1000 dollars more and they will accept that one, and their current offer gets tossed in the trash. Foreclosures are not the great deals everybody thinks they. Good luck with your purchase.
Yes, they can do this. I am betting this is a bank owned property and you bid way under the price figuring they would take anything to "get rid of" the property. A lot of people are doing this and getting the same answer that you have. There is no "run around" when the bank sells the property, they want to sell the property.
As others have noted, you said that you "put in a bid" and I would presume that if they didn't give you an acceptance and you were under contract, the bank can do whatever it wants. Many banks want to put the properties out on auctions figuring that maybe this will cause some type of frenzy amoung the bidders (after all, this is the bresd & butter of such sites as eBay). But to get right to your answer...yes, they can do this as long as you were not under contract to purchase the property.
Your answer is when you said 'bid'. Since it was not an accepted offer that was put into a bind agreement then the bank truly can do as they wish, similar to that when an owner gets a 'bid' but doesn't accept it.
Unfortunately the logic that you have isn't what the bank has and like other agents have contributed the bank sometimes do things that don't make sense, but it is there property.
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I don't practice Real Estate in NJ, but by Arizona Standards here is what I would suggest. Here in AZ, if the bank owns the property they can do with it what they wish. However, did they accept your offer? If you have an accepted offer then you have some leverage and you need to consult with your realtor. If your offer was not accepted or countered then here's the 1st step I would take.
If they have decided to auction the property, ask them who the auctioneer is and where and when the auction will take place or have your Realtor ask them. Once you determine where the auction will be held, ask them if Realtors are welcome and rewarded a commission. This way your current realtor will be paid for their time to advise and represent you, otherwise, speak to a real estate attorney and gather some advice there before the auction. If you can get the auction companies phone number, get the information from them as to the auction conditions and any documentation you may need to sign before hand to review. You'll need to know what they are going to expect from you if your bid is accepted. Some Auctions demand payment in full within 24 hours, others allow your lender to take the time to gather up the property information in order to execute your finances and fund the mortgage. The main thing is to get that auctioneers information and start working from there.
Good Luck and I hope this helps!