The Interesting Process of a Real Estate Auction

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Many people are familiar with the concept of a foreclosure auction. In most people’s minds, such an auction works like so: A property that has been seized by a bank due to delinquent payments is offered up for sale and sold to the highest bidder.

While that can be part of the process in some cases, the whole series of events leading up to a real estate auction is usually a little more complicated.

Here’s a quick guide to how real estate auctions occur:

When a mortgage holder misses a payment, the lender flags the borrower’s account and watches for future missing or late payments. If the borrower continues to miss payments, the lender will eventually consider the account delinquent enough to begin foreclosure proceedings.

Foreclosure processes vary from state to state. But by and large, most states’ foreclosure laws involve filing a notice of intent, and then creating public newspaper announcements that the property will be sold on a given date.

Most states allow bidding to begin before the actual sale day. Many states make these pre-auction days available for first time homebuyers to put bids on the property. If the mortgage lender receives a bid high enough to meet their requirements, it is typically accepted, and the property never even gets to the auction block.

But, if no sufficiently high bid is received, the lender will go ahead with the auction as planned. Many states allow the seller to specify a minimum price, also known as a reserve. If this price is not met, the mortgage lender may keep possession of the property until a better offer comes along.

In several states, there’s a waiting period before the high bidder at a courthouse auction can take possession of a property. In this time, liens and other tax obligations are settled. Some states even allow a foreclosed borrower to repurchase the home for a price equal to the highest bid.

Homes sold at auction frequently sell for less than market price. This makes auctions a favorite destination for real investors and speculators.

Although you may be able to grab a good piece of real estate at well below market value, buying an auction home does not come without disadvantages and risks. For one, the total bid price is due in cash at the time the bid is declared the winner.

This means you won’t have time to secure a mortgage if you win the auction: you must have the amount available in liquid assets at the time of auction. For most people, this makes a courthouse auction financially inaccessible. Even at a steep discount from market price, few people have the cash on hand to lay down for a home.

Next, you may not be able to move in (or prepare the home for renters or resale) right away. Frequently, previous owners will still be living in the home, and it may take a significant amount of legal effort to evict them. Also, you may be forced to repair or refurbish the interior of the home.

It’s sadly not uncommon for frustrated owners facing foreclosure to damage the home as it approaches auction day. You may even have heard stories about homeowners removing all of the copper pipes in a home. It may sound bizarre, but all that copper frequently has a high scrap value. Stripping the home of copper and other valuable parts isn’t legal, but it still happens, and can mean pricey repairs for the next homeowner.

If you’re considering an auction purchase, see if you can access the home first. Sometimes you can, and sometimes you can’t. Seeing the home, though, will give you much more information to go on.

Also, find out if the previous owner or a tenant is currently occupying the home. Either situation can be messy, but a tenant, at least, is less likely to intentionally damage the home out of frustration. And always remember, auction homes are usually sold as is. You may have no legal recourse if the home you receive is in much worse condition that you expected. For this reason, auction homes are often not for the faint of heart.

Published or Updated: April 3, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Great article. I would have also added that most states have now passed laws which created a waiting period (preforeclosure) before the banks are allowed to file any document in relation to foreclosure. During this period they are also required to notify property owners of HUD approved counseling agencies who are able to able to help them review their options and get help.

    http://www.foreclosurecourt.org

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