How do foreclosure auctions work?

Asked by Britt Grotheet, Wed Sep 18, 2013

We are very familiar with a home that is being advertised for auction at $480k (we have reason to believe this is around what is owed on the property)..
We have had the home appraised and had a number of contractors out to look at the home and the value today if it were on the open market is believed to be $230-250k. We would be willing to pay up to $250k at auction.
Does the advertised price mean that the opening bid will have to be $480k or higher?
If that is the case it would be pointless for us to go to the auction. one in their right mind would pay $480k form this house/ what will happen to it?

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Judith Neigh…, , Annapolis, MD
Thu Sep 19, 2013
Auctions are 98% of the time a formality process bank needs to do before they buy back the home. These auctions are cancelled the day advertised becuase bank purchased back. ^-9 months later, after bank gets clear title, you will be able to purchase when listed for sale. Good Luck.
1 vote
I have a question about your comment that 9mo later we could buy it as an REO property....coincentally, in the same neighborhood as the foreclosure home we are interested in, there is a home that was foreclosed on on Aust 21, 2012. 5 months later on Jan 28th 2013 the court ratified the foreclosure. the home is listed on the MD state SDAT website as being owned by the bank. It has been 7 months now since the it was ratified and the house is still not listed as an REO property and the original owners (the ones that were foreclosed on) are still living there. I am not interested in purchasing the home or what the deal is with the homeowners still living there.....but I am curious about the whole process. It has actually been over a year since the bank took possession of the house.
Is that just an unusual case?
Flag Thu Sep 19, 2013
Richard Tayl…, Agent, Annapolis, MD
Wed Sep 18, 2013
If you are talking about the county foreclosure sale, keep in mind that the bank can bid up to what they are owed (less auction fees) and not be out any additional money (since the proceeds go to them. Thus if there is $480K owed on the house they are not likely to let it go for $250K since that guarantees them a $200K+ loss. They can take title to it and either sell it as is or make repairs in the hopes of getting more of their losses back.

If the bank is selling a house at auction that they have already foreclosed on (and thus own), then keep in mind that most real estate auctions are not absolute auctions, meaning there is a "secret" or reserve bid amount that the seller has determined will be his minimum, regardless of the highest actual bid and they are not required to sell it to the highest bidder.

If you are an experienced real estate investor then you might get some good deals at auctions, but you don't have some of the protections available to you if you buy a foreclosed property that is listed with a real estate broker by the bank. Foremost among these is the fact your agent can (and should) have an inspection "walk away" clause that allows you to unilaterally void the contract if the results of the inspection are worse than what you are willing to accept.

You should at least go to see the auction process; the only way to learn is to see it in action!
1 vote
Britt, Short sales can be frustrating. I don't recommend going the auction route unless you are very experienced investors. Keep working with your agent and look at listed foreclosures and short sales. It sounds like the listing agent for the last short sale was not experienced and you are somewhat at their mercy. Having a second lien can throw a real monkey wrench in the works, but if someone has smoothed the way, they normally get $-3K-$4K out of the short sale as opposed to nothing if the house goes to foreclosure. If you no longer have an agent and want to chat, contact me.
Flag Fri Sep 20, 2013
Continuing... As of yesterday we are past the contract date. We are sorry things didn't work out with you guys but we have a better cash offer and we will be moving on. We were in complete shock!
Now 5 months have passed and that "better, cash offer" has fallen through and the home has yet another foreclosure date. We were contacted as to whether we would still be interested but we would be starting all over again and we found the seller and his team so difficult to work with the first time around that we can't do it again.
Now that you have the background....we do have some knowledge about what the bank would accept for this property. BUT does any of that history matter?
Flag Thu Sep 19, 2013
Thanks Richard! We are not experienced investors or real estate tycoons in any way shape or form! Just a crazy couple, not afraid of a major rehab project if the outcome means our forever home. That said... This house was listed as a short sale. We had a contract on it. The seller accepted our offer and we waited 5 months to hear anything back. Finally we got a response from the 1st lein holder. We went back and forth for about 2 weeks and came to an agreement from the first lein holder. We were then told by the sellers attorney that she was still waiting for confirmation from the 2nd but that she thought we may need to come up about $4000. Our agent who had a lot of experience representing short sellers found it strange the the attorney hadn't already gotten a number from the 2nd that they would accept. Another 2 weeks go by and we hear nothing from the sellers agent or attorney. UNTIL... We get a "dear John" letter from the sellers agent saying...oops! Sorry as of yesterday we
Flag Thu Sep 19, 2013
Good response Richard.
Flag Thu Sep 19, 2013
The Roskelly…, Agent, Gambrills, MD
Tue Sep 24, 2013
Hi Britt,

Foreclosure auctions are a great (but really laborious and time consuming) way to buy a home. You'll have to prepare careful comps. and not go over that price even if you get caught up in the frenzy of bidding.

The auctioneer usually charges a fee that you, the buyer pay.

They generally want a cash or certified check deposit of $10,000 up to 10% of the property price paid the day of the auction. This usually rules out most owner occupant buyers.

You'll need to be in tune with any description of the property as well to include anything that says "subject" too (an IRS lien, a 2nd mortgage, etc.) as you inherit that "subject to" on anything you purchase.

Much more info. but you can contact auction houses directly for their procedures and requirements.

Also, if the opening bid is $480k then that is the least they will take UNLESS it doesn't get any bidders and the bank is willing, on the spot, to reduce the price. The most likely outcome with a variance this large is that the bank will proceed with foreclosure and sell it themselves on the open market at fair market value.

As noted below, many auctions are cancelled before they make it to the courthouse steps if (i) the default is cured by the current owner (ii) the owner files bankruptcy that includes the house and I'm sure there are other reasons as well.
0 votes
Mo Davis, Agent, Clinton, MD
Wed Sep 18, 2013
Hi Brittany,

Sometimes the bank will list the property at a pre-auction price. If they receive an acceptable offer, they may accept. If they don't, they would likely proceed with the auction. But they may or may not reduce the starting bid from the current price.
0 votes
Monique- forgive me for being dense but just to make sure I understand.... We could show up at the courthouse steps and speak to a representative from the bank, let them know our price and see if they will take it? If they don't like our offer they move on with the auction?
Flag Wed Sep 18, 2013
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