If you’re interested in investing in Real Estate, the local listing service isn’t the only option. Real estate auctions are growing in popularity. Experienced investors often buy property this way, and technology has simplified the process to made it less intimidating to new investors—if you do your homework.
WHAT TYPES OF PROPERTIES ARE SOLD AT AUCTION?
While virtually any type of property or asset can be sold at auction, most home auctions—and the type you’ve probably heard the most about, thanks to the housing crisis—are foreclosures. Depending on the state, a trustee assigned by the lender or an officer of the court conducts a foreclosure sale to recover the balance of a loan from a borrower who’s defaulted on their mortgage payments. According to RealtyTrac, as of January 2018, there were close to 570,899 homes in some stage of foreclosure in the United States.
There are two types of real estate auctions: live (in-person) and online. The latter is becoming more and more prevalent as people grow more comfortable with making major purchases online.
No matter which route you choose, remember that buying real estate can be complicated. Companies like Auction.com are making the process more efficient and transparent, but in most cases, there are still long contracts, escrow, disclosure documents and other paperwork required by law.
BUYING FORECLOSURE PROPERTIES AT IN-PERSON AUCTIONS
The phrase “real estate auction” often suggests the stereotypical image of a small group of investors around an auctioneer on the county courthouse steps. Almost all foreclosure auctions are conducted live in front of (or in a room inside of) county courthouses. Many states only require a publicly accessible space, like a hotel ballroom or room in a convention center. In some of these larger venues, hundreds of foreclosure properties might be auctioned in one day.
Some large counties in Florida conduct foreclosure sales online; Wayne County Mich., the county in which Detroit is located, conducts online tax lien sales (where the government seizes a home due to unpaid taxes). The laws vary from state to state, so be sure to check out the specific rules governing your state.
Live foreclosure auctions are free to attend to ensure that a home being foreclosed upon receives the highest possible recovery for the bank or lender and the smallest deficiency for the borrower. Anyone can attend. If you want to bid, though, you’ll need to register. In most cases, you’ll have to show that you’re in possession of enough funds to pay for the property in full. (There are only a few states that allow an auction day deposit and payment in full the following day).
Here are the basic steps for participating in a live foreclosure auction:
FIND AND TRACK FORECLOSURE AUCTIONS
Consult an online resource like AllAuctionSales to find foreclosure auctions in the area or areas in which you want to buy. Foreclosure sales data is usually available from the county courthouse, or from the third-party foreclosure sales agent, often called a “trustee.” You can also work with a local real estate agent or broker to identify these properties, but you should know in advance that, by law, there is no agent commission on these sales.
DO YOUR RESEARCH
Be sure you read and understand all documents and transaction details prior to the auction. It wouldn’t be a bad idea to seek independent advice from a real estate attorney or a knowledgeable real estate agent.
Research the resale value of the property, how much the borrower owes on the mortgage, and whether there are any liens against the property. This last point is especially important. If you’re the winning bidder, you may have to pay off these liens. It’s worth hiring a title company or real estate attorney to run title searches on properties you’re interested in bidding on.
DRIVE BY THE PROPERTY, IF POSSIBLE
This will let you see the home’s condition—from the outside. Homes in the foreclosure process are usually occupied by the owner who’s being foreclosed upon or a renter. Trespassing on the property is a criminal offense.
When you bid on a foreclosure, you’re bidding on the property “as-is.” You won’t know what condition you’ll find inside once you take possession. Unexpected repairs could cost you thousands of dollars, so take that into account when figuring out what you can comfortably bid. There’s a saying among investors that’s a good rule of thumb: “How it looks on the outside is what it’s going to look like on the inside.”
GET YOUR FINANCING IN ORDER
Most foreclosure auctions accept cash, bank money order or cashier’s checks for payment. In nearly every state, you’ll have to pay in full immediately following the auction of the property; a few states allow you to pay a percentage at auction and the rest within a certain time frame.
County foreclosure auctions often require advance deposits. The deposit amount varies across counties, but generally runs from 5% to 10% of the expected final bid amount of the property.
CONFIRM ALL AUCTION DETAILS, EVEN ON THE DAY OF THE AUCTION
It’s very common for foreclosure auctions to be postponed or even canceled. Sometimes an auction is canceled because the borrower comes up with the money to pay the lender the amount they owed, obtains a loan modification or sells the property as a short sale. Auctions might be postponed for a multitude of reasons. The bank or lender might not be able to compile the proper documentation in time, or the owner might request more time to complete a short sale.
ATTEND THE AUCTION AND BID
Check in at least one hour before the auction’s start. Get an Auction Bidder Card and raise it when the auctioneer announces a price that you’re prepared to accept as your winning bid.
If you win the auction, your payment is generally due immediately or the following business day. Once you’ve paid in full, you’ll complete a certificate of sale or an execution of sale receipt, deed upon sale and IRS Form 8300, subject to state-specific laws.
WAIT FOR YOUR CERTIFICATE OF TITLE
While you’ll get your certificate of sale immediately, the actual certificate of title may take as much as 10 days to complete. During that time, the original owner may file an objection to the sale and pay the amount owed in full to retain their rights to the property. Don’t do any work on the property until you receive the certificate of title.