Foreclosure Auction Strategies: What to Know Before You Go
The current subprime mortgage meltdown has resulted in the biggest wave of foreclosure home auctions in 30 years, which means that property investors and those looking to buy homes at a low cost could not have found a better time to buy.
It's best to know what you're getting into before you go to the auction, though. Even though the price on these homes generally stays lower than their market value, it's very likely that you'll face some aggressive bidding from likeminded investors and buyers. Here's what you need to go before heading to the auction:
- Find and file properties. Develop a system for keeping up on foreclosure home auctions you may be interested in (I.e. a spreadsheet), complete with property details, because you will probably want to comparison-shop several of them. Have a drive-by look at the homes to have a look at its condition and the neighborhood. You may even have a casual meet-up with the homeowner, which might result in a last-minute deal between the two of you.
- Confirm auction status, location and bidding procedure. This can vary from state to state. In areas hard-hit by foreclosures, there may be all sorts of irregularities, like backlogs of properties to be auctioned, or foreclosure home auctions being delayed without notice or reposting. Try to deal with the bank's trustee when possible, and remember that the homeowner is usually given a month or so for last-minute remedies for the debt. Find out where the auction will be held (usually the same public place, and usually monthly), and be sure as to whether you're bidding on a tax foreclosure or mortgage foreclosure. State laws may vary; some states require a cashier's check for the full amount at auction, while others ask for 10% up front with the balance due within a set time period.
- Research potential bargains. What is owed on the property? Are there any liens against it? Is it a bank auction, where the bank will be looking to satisfy the entire debt on the note? Or will it be a tax auction, with the county only wanting to satisfy the backlog of tax debt? All this information will be available beforehand, either through a foreclosure auction listing service or through a title company.
- Determine your bid amount. Obviously, in states that require cash-in-full at the auction, this is going to be a lot more important. Remember that a "good bargain" is going to be something like 20% below market value on a given property. Be ready to line up financing if needed; you may be able to take out a home-equity loan or line of credit if you're already a homeowner (be careful on that one!). The last thing you want at a foreclosure auction is to become overleveraged before you even close the deal, which can wind up being no deal at all for you.
- Bid at the auction. Contact the trustee if possible and verify the time and place; if there's a last-minute delay, have the trustee notify you of the new date. Locate the auctioneer as quickly as possible, and watch your fellow bidders for cues. Don't be intimidated by longtime, pro-level investors who may be there, and don't get so caught up in the moment that you overbid!
- Take ownership! Find out beforehand what paperwork might be needed for you to take ownership after a winning bid (again, a real estate attorney may help on this). State-by-state, it may vary from a few days to a month for this to clear, and the homeowner may have a redemption period where he can line up financing to pay off the winning bidder. Refrain from doing any repairs on the property until things are entirely cleared up. It may fall on you to evict whoever's in the house; talk to your local sheriff's office or real estate attorney on this one.