Lesson
Two
Buying at the Foreclosure Auction
Highest
Profits and Risks
Caveat emptor
Buying directly at the
legal foreclosure sale is a risky and dangerous business. It is strictly
"caveat emptor, let the buyer beware."
Where & when?
Foreclosed properties are sold at a public auction under the direction of the
court in the county where the property is located. In many states the
Sheriff's sale is literally held
on the court house steps, usually at 9am. In other states a court
appointed trustee handles the sale. Sales are often announced 4
to 6 weeks in advance. In some states, information on the sale may be
available 6 months to a year before the event. This gives you ample time to
research the property, the particulars of the loan and any other factors that
may effect the property's value to you.
Buying property at the auction can be the most financially
rewarding way to buy investment properties.
However it can also be the most financially
disastrous for the uneducated or unwary investor. When a property is
being publicly auctioned to the highest
bidder, the process is moving very quickly and it is easy to get caught up in
the competitive sprit or miss something. Too often properties are purchased
for much more than their value because of "auction fever," the tendency to get
caught up in the heat of the moment and over-bid. A "whoops" won't cut it. You
will pay up or lose your deposit.
Going to the
Auction
It is prudent to prepare for the auction by
phoning ahead to make certain that the sale, or your target property, hasn't been postponed.
Foreclosure sales are commonly postponed for
many valid reasons, some because owners are trying to save the property,
others because the lender needs more time for proper processing.
You
will need to keep track of the properties you are interested in.
They are tracked using
a Trustee Sale Number (TSN). The number is generated when a property enters
foreclosure and is used from then on by the interested parties. Whenever you want
information regarding a foreclosure property you will need the TSN.
.
Typically
trustees who process a foreclosure limit the information they will give out regarding a property
to: the date,
time and location of a sale, and perhaps a bid if it is available, or a
postponement date and reason if the sale postpones.
Bids are usually available shortly before the sale, this can range from the day before
up to the actual time of sale. When a bid is available, there is a good
probability the property will be going to sale instead of being postponed. Be aware
that published bid amounts may differ from the actual bid amount at the sale.
Sometimes they will be slightly higher to cover actual costs and sometimes the
lender will reduce a bid making a property an attractive purchase.
Make sure you
understand all the requirements for purchasing properties, including: amount
of deposit needed, when the balance is due and what form of final payment is
required.
Who's the boss?
Posting companies often handle
the publication and posting of foreclosure notices. The county sheriff, a
trustee or a
posting company will act as the
auctioneer at the sale site, which in many states in on the county courthouse
steps. The day's agenda usually starts with the announcement
of cancellations,
then postponements, followed by properties that will be sold. Again, everything
will be
referenced by the TSN.
Arrive at the auction early. Register yourself as
a bidder if necessary, but do not announce your intentions to anyone there.
The auctioneer may ask if anyone wants to qualify, either before all
properties are announced or before individual properties are announced. To qualify, you will need to show the auctioneer
cash or cashier's checks sufficient to cover any bids you will be making.
The large cash outlay required to buy at auction is the biggest deterrent for
most buyers. Certified checks and sometimes cash for at least 10% of the purchase price
will likely be required to bid on properties.
Some states allow a successful bidder 30 to 90
days to pay the balance of their purchase price. In some other states it's a
matter of a few days days or even, as in Florida, a few hours and in some
others, immediately. Remember, the bidder must must pay for the property in
full by the proscribed time or risk losing their cash deposit.
Some
Trustees require that checks be made out to them. However, you can usually
have a
cashier's check made payable to yourself. If you are a successful bidder, you
can endorse them payable to the Trustee. Most auction investors have large checks
to cover most of the expected bid, with smaller checks to cover possible increases in
the bidding.
You really do not want to have one large check to
cover every possible contingency because once you sign your check over, you will not have
the surplus funds available for a while. When bidding and qualifying, keep in
mind that anyone around you is a prospective competitive bidder. If you allow them to
know
the maximum amount you can bid to, you have weakened your position. The same
holds true for notes or numbers you have written down to refer to during the
bidding. Keep your cards covered and your plans to yourself.
In contrast to most states,
where the trustee is usually the hired gun of the lender, Colorado has an
impartial, accountable, "public trustee" appointed by the Governor for each
county, who handles power of sale foreclosures on request. The public trustee
may take only the compensation set by law.
Bidding
The auctioneer will ask
if anyone would like to bid when they start auctioning a property.
Really pay attention because properties are sold very quickly, sometimes
within minutes. Listen carefully for your objective to be announced. If it is a
property you are interested in, your bid should be a dollar over the opening
bid; which will be the final judgment amount.
The property will not sell until the third call and some
bidders like to
wait and see if anyone else is showing an interest. Wait to see if
other bidders are going to jump in, if no one does, put in your "dollar over" bid
just before the third call. If other bidders are interested in the same
property, bids will usually go up in hundred dollar increments.
The highest you should ever bid is your pre-determined maximum that would
still guarantee profitability. Do not exceed that number.
Who bids?
A lawyer
will usually attend to bid on the property for the lender. There are also
likely to be other investors, onlookers and even just curiosity seekers
observing the proceedings; perhaps for future participation. Occasionally, a
junior lien holder will appear trying to salvage what they can from their
claim. The property owner may also show up to bid on their own property.
However, that is pretty rare.
You too may, and perhaps should, go to the sales
and observe the process as often as you can before going to actually bid on a
property. It's certainly a good idea to know as much as you can about the
property and the auction process to help prevent mistakes at an important
moment.
Do your homework.
Failure
to research a property correctly leads to all kinds of problems, not the least
of which is paying to much. However, other serious dangers loom as well.
Important concerns must always include other liens or
judgments. If you are the successful bidder, you replace the property owner's
position in the property. Any problems clouding the title become your problems
the moment you are the successful bidder. Those will include other mortgages, mechanics liens (unpaid building trades
contractors) and taxes.
The first lien holder can nullify all other liens
if he's the successful bidder. Junior lien holders must buy out senior lien
positions and be high bidder to get clear title to the property.
The first mortgage holder may not be the only one
foreclosing on a property. If a third lien holder forecloses, the process will
not wipe out the first and second lien holders. Buying that position at the
auction means you will have to buy the other liens as well.
The only way to be sure which mortgage holder is
foreclosing, and what other liens affect the property, is with a full title
search. The cost of the search thorough a title insurance company is likely to
be a few hundred dollars. However, you may be able to do it yourself with help
from a friendly clerk at the county register's office. The potential loss from
buying a property without knowing about every lien that exists is staggering.
There may be land
use problems with a property. Issues like zoning or environmental problems
could seriously effect value; although such problems are unlikely for
residential property unless it is located on or near commercial or industrial
property.
Who wins?
About
80% of the time the successful bidder is the lender who holds the first
mortgage. Upon payment, the successful bidder receives a deed, the type of
which depends on who is conducting the sale and state law. If you are
attending a Sheriff's sale you will likely get a Sheriff's Deed. The
deed makes you the new owner of the property, subject to unpaid taxes and
superior liens, if any. Record it immediately and buy liability and causality
insurance even faster.
There usually isn't much competition for
properties sold at auction. In fact, there are occasions when no one shows up
to bid, perhaps due to a personal emergency or even incompetence. As you can imagine, that
will create wonderful opportunities for the diligent investor. However, when the lender's
representative fails to appear or bid on the property, it may be a clue that
there are some serious problems with the property that you may have missed. If the
lender doesn't want it, are you really sure that you do?
Why buy?
The
biggest advantage to buying properties at an auction sale is the chance for a
really great deal and the high profits that would result. If there is a large
difference between the market value of a property and its final judgment
amount at auction, you can really win big. That happens often enough for us to
devote this much effort to teaching you how to participate.
However, as we have learned earlier, when
an owner has a significant amount of equity, someone like me or you should
have, and probably would have, bought the property prior to the foreclosure.
Ten steps to auction buying success:
-
Locate loans in default
by reading legal notices or the use of other tools that can be learned on
RHOL.
-
Research properties
prior to the sale date. Contact the local assessor and ask for a copy of the
assessor's work sheet for preliminary information on each property. Check
with the municipal building inspection department for zoning issues, any complaints or
other records.
-
Do a title search to learn about possible clouds on
title that may be superior to that of the foreclosing lender. Verify legal
descriptions with the common property description.
-
Check property tax amounts and status.
-
Concentrate
on only realistic opportunities
by evaluating and narrowing down
which selections to pursue.
-
Determine the market value
of the property, fix-up costs, potential rent and/or
sales price and profits
-
Determine
your highest bid price and
stick to it
-
Attend the auction and
participate only if the price is right.
-
Record your deed, buy insurance and
file a legal action to quiet title and
perfect the deed, if necessary.
-
Repair and resell
or rent as quickly as
possible.
When you win
If you are the successful
bidder, you will need to sign checks over to the Sheriff or Trustee. After all
sales are complete, the auctioneer will write you a receipt, ask how title is
to be held and you'll be done. The Trustee can record the Sheriff or Trustee's Deed for
you or they will send you the deed along with any excess funds from your
checks.
Sales are sometimes invalidated fpr legal reasons.
When that happens, you will
receive all of your funds back. Don't expect to have everything done until a
couple of weeks after
the sale.
Who's home?
If the
property is vacant when you buy it, you should change locks and see to
utilities immediately. If not, you will likely have to treat the occupants as
tenants under the state landlord tenant law, whether or not they have a rental
agreement or have ever paid rent.
If you are going to have your first experience at
being a landlord, you should take - or at east review - our
csu Evictions
e-course so that you understand and anticipate the time and costs involved.
Tenants will also interfere with plans to repair and quickly rent or sell the
property for a profit.
If you intend to keep the property as a rental,
it is our experience that it is always be best to send notice a to terminate the
tenancy of the existing occupants immediately, even if you might eventually
allow them to stay. If, after an application and screening process, you find
that they meet your requirements, create a new tenancy with a written lease
laying out all of your conditions and requirements for maintenance, repair and
the access you will need for upgrading the property and enhancing your
investment.
The good: Investors can
sometimes buy well below market values. That
leaves some room for error and still produces an excellent return on investment.
The bad: There is no financing. You will need access to lots of cash. Foreclosure auctions are frequently
postponed, wasting your time and effort. It is sometimes
impossiblee to inspect the property unless it can be
arranged with the occupant, if any, or the lender.
You should always have a title search performed;
which can be an unrecoverable expense if your purchase is
unsuccessful.. A Sheriff's deed must be legally
perfected to remove any clouds on the title so that the property can be resold
with the customary Warranty Deed..
The ugly: Foreclosure will
not eliminate property taxes or senior liens, and the purchaser will be
obligated to those debts. Additionally, an IRS lien can remain on the
property for up to 120 days after a foreclosure sale. The property's physical
condition is not well known, and generally an interior inspection of the
property is not possible before the auction. In addition, foreclosure sales
are exempt from state disclosure laws.
 
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