Step-by-Step Basics for Winning a House at a Foreclosure Auction

In today’s online landscape, the concept of bidding at an auction has become pretty normalized. Even if you’ve never personally bid on an item on eBay, you likely understand the basics. But in the real estate market, auctions are a little more mystified, especially when it comes to the world of foreclosure auctions. So, let’s lift the curtain, shall we?

We spoke with top real estate agents and an expert auctioneer in an effort to not only clear up the questions surrounding foreclosure auctions but also see if there’s a way to capitalize on the process. Buying a foreclosed home at auction can be a great way to get an excellent deal on a house, but foreclosures can also be riddled with hassles and problems. That’s why it’s important to get a full picture of what’s involved in a foreclosure auction before moving forward.

Understanding the foreclosure auction process

What is a foreclosed home?

A foreclosed home is a property that has been seized by the bank because the owner failed to make their mortgage payments. Homes go into foreclosure for a variety of reasons, including job loss, medical issues, or divorce. When a homeowner fails to pay for several months, the bank will serve a notice of default and enter into foreclosure proceedings.

The foreclosure process varies from state to state, but there is always a redemption period in which homeowners have the right to retain ownership by satisfying all payments and interest. If they do not, the property moves into the hands of a bank-appointed trustee and may then move onto the auction block.

What is a foreclosure auction?

Approximately 40% of foreclosed properties go up for auction. Much like a traditional auction, a foreclosure auction allows potential buyers to bid on the bank-seized property. These auctions can be conducted in person (either at the actual site or in a public building) or online. There may or may not be a minimum bid or reserve (more on this to follow).

How are foreclosure auctions advertised?

You can find out about real estate foreclosure auctions through a number of sources, including:

• Auctioneer’s websites (this is your best source!)
• Newspapers
• Real estate brokers
• Real estate lawyers

What it takes to succeed in the foreclosure auction market, step by step

Get a feel for how real estate auctions work in your area

Laws and regulations governing auctions vary state by state. For that reason, auction-goers should look up the auctioning entity — whether it’s an auction house or real estate brokerage firm — on that state’s department of licensing website. Each state’s department name is slightly different, but a quick search of “auctioneer licensing in [state]” will bring up the governing body in your state.

Bottom line: you’re looking for verification that the auctioneer is qualified, licensed, and has no outstanding complaints. This is especially important when focusing on foreclosure auctions, due to the extra level of care needed when dealing with the state regulations of redemption periods.

Debbie Shuler, an expert real estate auctioneer at Cliff Shuler Auctioneers & Liquidators with more than forty years of experience in Florida, cautions bidders to do their due diligence in terms of research. She says, “Under the laws of real estate, auction is one of the services that can be performed by a real estate brokerage firm. However, that doesn’t mean they know what they are doing — so check them out.”

Understand the requirements before getting involved

Each auctioneer has a different set of rules, and you’ll need to read them carefully. Look for the following:

• Deposit fee. This refundable fee is required to register and will go toward your earnest money if you win. It proves you are serious about the bidding process.
• Payment timing. Check when earnest money and full payment will be due.
• Auctioneer’s fee. Often auction houses charge a percentage of the final sale prices (around 5%). For foreclosures, the bank may pay this fee.

Research your options

First you’ll need to know what auctions are coming up, so watch those auction advertising outlets mentioned above. By looking ahead, you’ll be able to have adequate time to research the home before it’s time to bid.

Shuler says, “Do your research on the property. Talk to the building department, zoning officials, tax assessor, etc. from the county. Know and understand what you are buying, what’s included, and what the subdivision may require, along with the county and the city.” Some things that you may want to ask include:

• Have improvements been properly permitted? If not, how can that be rectified?
• Are there any back taxes or tax liens on the property?
• Are there any HOA fees or assessments due?
• What are the HOA bylaws and CC&Rs?
• What are the zoning laws? (This is important if you plan to make additions to the property)

You may or may not be able to walk through the foreclosed home before bidding, and online pictures can be sparse or nonexistent. In addition, there’s no guarantee that you’ll be able to have a home inspection done on a foreclosure auction property. For that reason, you’ll want to prepare financially for probable repairs and updates. Maureen Connolly, a real estate agent in New York with 17 years experience, says that it’s best to bid locally when possible, so that you can at least do a drive-by of the property to visually assess it from the road. Keep in mind that (despite what reality TV may lead you to believe) walking onto the property and peering into windows is not legal unless otherwise specified on the listing.

A title search is also a good idea. A home may move into foreclosure due to failure to pay tax assessments in addition to mortgage payments. In that case, there will be a tax lien placed on the property until the debt is settled. To conduct a title search, you can either visit the county courthouse in person or search the local county assessor website.

Figure out your budget

Before you go into an auction, you’ll need to know how much you can and should bid. Many times the opening bid represents the amount owed on the property (a minimum bid auction); other times, it’s set much lower in an effort to attract bidders (an absolute auction). Either way, there are three things to keep in mind.

• A bank is not allowed to make money on a foreclosure auction. Anything gained on the auction after tax liens are satisfied will revert to the previous homeowner.
• An auctioneer may set a hidden reserve if a bank has a minimum that they will accept for the property. If the reserve is not met, the seller (bank trustee) has no obligation to sell the property — even to the highest bidder.
• Good deals have limits. Research recently sold comparable homes in the area to know what constitutes a wise purchase in the property’s neighborhood and set a threshold for your top bid. A top-performing real estate agent can help.

You’ll also want to give yourself a generous budget to account for probable repairs and updates. If someone hasn’t been able to make their mortgage payments, there are probably other home maintenance tasks that have fallen by the wayside.

Connolly says that her buyers have seen major repairs come up after foreclosure auctions, such as the need to replace plumbing and electrical systems. Since you may not be able to get an inspection, give yourself a buffer for the following items, making your best estimate based on your locale and the size of the home:

• Foundation: $1,800 – $6,500
• Roof: $4,000 – $25,000
• Plumbing: $2,000 – $15,000
• Electrical: $7.79 per foot to rewire + $1,200 – $2,500 for panel
• Cosmetic: $18,000 – $75,000 (varies widely based on size and finishes)

Bid like an auction pro

In a foreclosure auction, you may end up bidding against established real estate investors. They have a strategy for getting a profitable deal at auction, and so should you!

• Sign up for email alerts. Time is your friend when it comes to foreclosure property research, so make sure you hear about potential auctions as early as possible.
• Get your financing in order. If you’re getting a mortgage, be sure to go through the pre-approval process. If you’re paying cash, have your proof of funds ready. (Note: many in-person auctions require a cash purchase. Check the rules.)
• Register early. Yes, you’ll need to pay your deposit at this time, but the deposit is refundable. You’ll want access to any and all updates that registered bidders get.
• Develop a formula. A suggested rule of thumb is market value, times percentage of marketability, minus cost of repairs. Meaning, if comparable sales of a well-kept house in the neighborhood go for $100,000, but this property is only worth 80% of that price in its present condition, and it will take $20,000 to make repairs, then your maximum bid should be $60,000.
• Keep emotions in check. Don’t let the excitement of the auction pressure you to go above your maximum bid. Start low and be savvy.
• Purchase title insurance. Yes, you’ve done your research, but title insurance protects you just in case there were hidden liens on the property.
• Wait for the certificate of title. If you win an auction, do not make any improvements until you have the title in hand. The prior owners may contest the sale, so you don’t want to invest money until the title is in your name.
• Bid again. If you lose your first auction — or your first couple auctions — don’t be disheartened. Chalk each experience up to the learning process and jump back in when you’re ready.

Buying a foreclosed home at auction can be risky, but it can also present an opportunity to get a good deal. Do your homework, and enlist the help of professionals when necessary. A real estate lawyer is an excellent resource, as is an expert real estate agent in your area.

Because of the nuances in auction regulations, local knowledge of real estate auction procedures is imperative when embarking on this kind of adventure, especially for the first time, so don’t hesitate to consult a local expert. Happy bidding!

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