How to Buy a House at a Foreclosure Auction
Eight steps to finding a bargain
By RealtyTrac | Published: 2/03/2008
5) Research the title and look for other liens. Check the title of the property through a local real estate agent or title company. If you have the winning bid, you may be subject to other liens in some cases. A lien is a legal filing by someone owed money by the owner of the property. Usually the debt has to be paid off before the owner can sell the property.
If the loan in default is the senior lien, then any other liens will typically be cleared out for the highest bidder at the auction (confirm this with a local real estate attorney or the trustee). If the loan in default is a junior lien, then the highest bidder will hold the note to that lien, subject to any senior liens against the property. Determine if it's the senior lien and also factor in estimated repair costs and the estimated market value to determine your maximum bid for the auction.
6) Determine your bid amount. Based on all the factors used to determine the potential bargain -- and your financial capability -- you'll need to determine how much you can and should bid at the auction.A reasonable purchase amount at auction is at least 20 percent below full market value. Other factors to consider are the rate of real estate appreciation in the area and the potential for increasing the property's value by making repairs and improvements.
If you're in a state that requires you to bring the full bid amount in cash or cashier's check to the auction, secure financing in advance. You won't even be qualified to bid if you don't meet that requirement. If you don't have that type of cash lying around, you have a couple options.
- If you own a home, you might be able to take out a home equity line of credit, which is a cash loan.
- If you can't secure a cash loan, try to buy a pre-foreclosure or buy a bank-owned property, both cases where you can usually obtain a regular mortgage loan secured by the property being purchased.
If you don't need to bring the full bid amount to the auction:
- Set a firm ceiling for your bid.
- Avoid getting caught up in the heady auction atmosphere and overbidding, which can result in little or no bargain for you.
- Be sure you can pay the remainder of the bid within the time frame stipulated by state law, or you can lose the deposit you made at the auction.
- Call the trustee the day before or the day of the auction to check one last time if the auction has been canceled or postponed. If an auction is postponed, the trustee should provide the new auction date.
- Arrive at the auction location early and locate the auctioneer as quickly as possible.
- Take as many cues from the other participants as you can, but don't let them dictate how much you bid. You may encounter investors who attend many auctions every month and who don't necessarily appreciate new competition.
- Make sure you get the necessary documents from the auctioneer to verify that you are the winning bidder.
- Clarify with the auctioneer and a real estate attorney what further steps need to be made before you take ownership and possession of the property. In some states, ownership can be transferred immediately or within a few days. In other states, you may need to wait a month or more for the sale to be confirmed by a court. Some states have redemption periods for the owner, in which case the owner can buy the property back from you if they pay the full amount paid at the auction, plus applicable fees. Avoid spending money on repairs or improvements during the redemption period.
- Find out if you will be responsible for evicting the current owners. If eviction is necessary, contact a local real estate attorney or the county sheriff for the proper procedure.
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