Confused by Foreclosure Auctions?
Almost every homeowner knows how a foreclosure works. Your house is the collateral for your mortgage loan. If you don’t pay your monthly mortgage (usually for anywhere from 3 to 6 months), your lender may repossess your home.
Once the bank has repossessed your home, they will try to sell it quickly to recoup their investment. Listing the home would take too long. It would also require additional work such as marketing, working with a Realtor, going through inspections and negotiations, and more. So instead, the lender will usually sell the house at a foreclosure auction.
A foreclosure auction might be a good option for you if you are interested in buying a home quickly and possibly for less money than its value. But if you’ve never attended a foreclosure auction, or any kind of auction, you might feel a little bit intimidated. Our guide can help you navigate the auction by explaining how foreclosure auctions work.
What happens during a foreclosure auction?
A foreclosure auction is very similar to most other auctions. The home will be announced, and bidders can place their bid amounts. In the end, the highest bid wins the house. It may seem like an uncomplicated process, but as with anything in real estate, there are some details you need to be aware of.
Live Versus Online Foreclosure Auctions
The main difference between a live foreclosure auction and an online auction is how the winner is determined.
Live Foreclosure Auction
A live foreclosure auction is usually a big event. There may be hundreds of homes being sold. It is usually held at a county building, such as the courthouse. One property will be auctioned off at a time. Bidders will raise their paddles (usually numbered) to raise the bid price.
The bidding continues until no more bids are being made. The last bidder is the winner and the auctioneer will move on to the next house.
Online Foreclosure Auction
An online auction usually takes place over days or even weeks. Each bidder will keep raising the price. Once the auction ends, the highest offer is the winner.
During an online auction, bidders will generally monitor the price and increase the bid slowly. Many times, there is a flurry of activity at the very end, as bidders race to offer a higher price.
One key thing to remember here is that your competition at a foreclosure auction will be very different. Since many potential buyers aren’t comfortable with how foreclosure auctions work, you might not be up against a large number of buyers. However, investors who are looking to make quick money will often attend foreclosure auctions.
Bidding Systems
When people ask how online auctions work, one of their main concerns tends to be the bidding system. Every auction is different, so you will have to do your research ahead of time if you want to be prepared.
- Absolute Auction: the highest bid wins.
- Minimum Bid Auction: the seller places a minimum amount that they will accept. If no one bids over that price, the property does not get sold.
- Reserve Auction: the seller reserves the right to reject the highest bid.
How to Pay at a Foreclosure Auction
You will have to have your finances in order before the auction. Laws vary from state to state, but almost every state will require you to pay immediately when you purchase a house at auction, or within a very short time period.
In general, foreclosure auctions will only accept cash, money orders, or cashier’s checks. Very few lenders will approve a loan for a foreclosure, and even fewer auctions will be willing to wait for financing to come through.
Make sure you have all of your money ready and have proof of funds before bidding on a house at a foreclosure auction.
Preparing for a Foreclosure Auction
Once you find an auction and prepare your finances, it may seem as though everything else will fall into place automatically. But there’s more you should know about how foreclosure auctions work for success with your purchase.
Research the Homes
When you buy a home the traditional way, you will spend time looking over the home and have a professional inspection done. There will also be an appraisal to ensure that the home is worth the price you are paying. With a foreclosure auction, you are buying the home mostly sight unseen and without the benefit of an inspection or appraisal.
You can, however, drive to the property and at least see the outside. Many times, the exterior of a home will give you a clue to the interior. There are no guarantees, but if the homeowner is maintaining the house on the outside, there is a good chance that the inside will be properly kept up, too.
Register to Bid
Before you can take part in a foreclosure auction, you have to register. As part of the registration process, you will have to give a credit card number. This is used as a guarantee that if you make a winning bid you will follow through with the purchase. If not, they will charge you a set amount or percentage. Check the foreclosure auction rules to be sure.
After the Auction
If you have won a house at a foreclosure auction, congratulations! There are a few more steps to follow before you take possession of your new home.
Arrange for Payments
Check with the auction company to find out their exact payment process. You will generally have a very short time period to pay the winning bid amount. For the most part, the entire amount is due immediately or within 24 hours, so have your money ready to go.
Secure Title Insurance
Title insurance will protect your investment if there are any other claims on the property, such as liens. If a homeowner has lost their house because they weren’t paying their mortgage, it is likely that other bills, such as HOA fees, went unpaid, as well. So they may have liens on the property. A title search may not catch every claim, so invest in title insurance, too, just in case.
Attain the Certificate of Title
Until you have this document, the house is not legally yours. It typically takes about ten days. Unless the homeowner files an objection or pays off the mortgage on their own, the certificate of title is merely a formality.
How to Find a Foreclosure Auction
Now that you are comfortable with how foreclosure auctions work, the first thing you should do is find a real estate auction. You can find announcements for foreclosure auctions in newspapers, on public records databases, and on websites such as foreclosure.com. If you are working with a real estate agent, they can also point you towards local resources.
Buying a home at auction is risky. You might get an amazing deal on a well-kept house. Or, despite your best efforts, you could end up with a house that needs costly repairs and renovations. There is no way to be certain until you turn the doorknob and enter your new home.
Even though you have a better understanding of how foreclosure auctions help, you might still have plenty of questions. Your real estate agent can answer them for you. No Realtor? Let UpNest, which is owned by parent company Realtor.com, help you. Our free service will pair you up with 3-5 local agents, who will submit competitive proposals. The right real estate agent will help you with your foreclosure auction and work with you to find the perfect home.
How do bank foreclosure auctions work?
When you’re in a foreclosure auction, the lender is not allowed to profit from the auction. Often, these properties are sold at a loss; if there is a profit, it is supposed to go to the foreclosed homeowner after the mortgage and any other liens are paid.
Is it risky buying a house at auction?
When you buy a property at auction, there’s always the risk that there is something hidden in the legal pack that could cost you a lot of money to put right. Covenants or loopholes can make the purchase much more complex or even risk not completing, which can have massive financial implications for you.