So, you want to bid at a foreclosure auction?

The concept of bidding is not a new one. It’s been around for ages. However, in modern times it has grown considerably. Most people around the world are familiar with eBay and its system of bidding. Real estate, however, takes it to all new levels that are more competitive and require considerably more knowledge and preparation. There is no other testing ground better to test your preparation and knowledge then a foreclosure auction. As a matter of reputation, foreclosure auctions are seen as an easy way to get a lot of house for less money. Typically, a foreclosed home comes from circumstances that cause a home owner to be unable to keep up the mortgage payments, thus making the bank auction off the property to recoup the costs. The reasons are many, but in general they are the result of homeowners death, divorce, unexpected job loss, medical issues, or a combination of any of these reasons. Things have been changing in recent years, but we will stick to the basics for this article. 

So what exactly is a foreclosure

As mentioned earlier, foreclosures can happen for several reasons, but the result is that the owner was unable to make their mortgage payments for several months. After what’s called a redemption period, a bank will put the home into the hands of a trustee as appointed by the bank to care for and upkeep the home until it can then move onto the auction block.

So then, what is a foreclosure auction

These days about 40% of homes that have been foreclosed on end up going to auction. Like many auctions, foreclosure auctions allow many pre qualified buyers to bid on the property. Such auctions can be conducted in person, or online. There may be a minimum bid or none at all.

How the word gets out

Auctions typically will advertise in many different ways. These can range anywhere from very useful auction websites, to newspapers, to real estate brokers themselves, and even real estate lawyers. Most often, though, you will find a mix of all of these resources working together in some fashion or another to get interest built for their listings.

Knowledge and preparation is key

Situations vary from place to place and state to state. Laws, and the regulations guiding those laws can be different in both small and large ways. This is why it’s very important for you to take the time to do your due diligence by researching these laws and regulations for each area and property you have interest in bidding on. Even the departments at the state government that are in charge of titling, contracts, and other related items can have different names and locations. Developing a list of contacts and their locations is a good first step to knowing the bidding process.

Making a timeline

The next step is to make a timeline and list what you will need to have handy whenever you go forward with bidding. For example, you may likely need a deposit. This is typically a refundable fee that is necessary to register and go forward with the bidding process; it’s a way of proving that you are capable of following through with the purchase. Another factor to your timeline is when the payments will be due in full. Not all auctions require you writing a check on the spot. And last, but certainly not the least, is the auctioneer’s fee. Typically, this can run around 5%, though the bank may pay this fee.

Getting to know the property

This part of your timeline seems pretty obvious, but it can actually be one of the most complex aspects of property bidding. Starting with the contact list that you first develop; you’ll want to find out everything you can about this property. Have there been any issues with taxes paid on the property previously? Were any of the home improvements done with proper permits? Are there any past dues with the homeowner’s association? What kind of zoning laws are in place for that area?

These factors can make a large difference in the value of the property you are interested in. Property values can fluctuate based on the zoning alone, as having farm animals nearby may not be desirable to future tenants or buyers. Additionally, unpaid taxes or dues will likely be your responsibility to address.

Given that access to the home before the auction, quality pictures in the online ad, and especially a home inspection are things that may not be available, it may be wise to allow for a buffer of funds to pay for unexpected repairs or fees. Using a title search tool, you may be able to find out if the property was foreclosed on due to the nonpayment of tax assessments. In that case to be a lien on the property until that debt is taken care of. You can find such title searches either at the county courthouse or by visiting the local County assessor’s website.

Plan your budget

Well before you enter into an auction, you should have a good understanding of how much money you’re going to need to be a successful bidder. For starters, the opening bid is likely only the amount of money owed on the property. However, it can be set lower in interest just to attract bidders. Whatever the case may be there are a few things you should think about.

First, in most locations a bank isn’t allowed to make any money on the foreclosure auction. Whatever extra money comes in from the bid goes directly to the previous homeowner. Also, the auctioneer could set a hidden reserve if the bank has requested that amount in order to let the property be auctioned. If the bid doesn’t cover the reserve, the bank does not have to sell the property, no matter how high the bid.

And just as importantly, you should research sale prices of homes in the area to get a good idea of the price range for nearby homes. Understanding your savings compared to other homes in the area can help you budget for those additional expenses that may pop up, such as a $6000 foundation, a $25,000 roof, $15,000 with the plumbing, up to $75,000 in cosmetics, or several thousands in electrical repair replacement panels.

Stepping up to the big boys

It should come as no surprise that you will be there bidding against real estate agents and investors that have been doing this for some time. You don’t have to be nervous, though. With the right preparation and strategy, you can be just as effective as them.

For starters, sign up for email alerts on properties that you are interested in. Being one of the first to know can be a tremendous advantage in digging up information on the properties you’re interested in. You can also give you more time to get your financing ready and in order. Getting prequalified at a bank allows you to walk into the auction with confidence knowing your budget range, and knowing that you’ll have the cash to back it up.  You’ll also be able to register early so you can pay your deposit, which is also refundable. This will also give you updates that only registered bidders.

Speaking of getting your finances ready, you’ll want to use a formula to understand the funding you’ll need to pre-qualified. A good rule of thumb is to consider the market value times whatever percentage of marketability you’ve researched, minus repairs. So if a property is selling for $200,000, but your research shows that it only sells about $180,000, while needing another $30,000 in repairs, then your ceiling forbids should only be $150,000.

Participating in auctions can be very exciting, especially considering the numbers you’re working with. You may feel pressure or a rush of excitement at just being a part of the auction. Try to put those things aside and keep your emotions in check. You don’t always Have To rush to put in a competing bid. Learn to wait and keep an eye on the other bidders. There’s not a lot of bidding activity, it may be that these other bidders know something that you don’t. Other times, bidders may simply be taking advantage of your eagerness to drive up the price higher than what you can afford.

Protect yourself

Never forget to purchase title insurance. Though you may have done all your homework, title insurance is a good way to make sure that no other person or company has a lien on that property. It’s also a good idea not to put any work into the property until you’ve received a certificate of title. The previous homeowner could be trying to contest the sale, in which case you would lose all the money you have invested in improvements.

Lastly, but just as importantly, don’t give up. Auctions are highly competitive, and you can’t win them all. Perseverance and patience does pay off in the end, and if you keep at it you will only get more and more savvy. Happy bidding!

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