When a borrower fails to make his loan payments, the lender can attempt to recover as much of the loan as possible using the Deed of Trust. One or more people, named as “trustees” in the Deed, are empowered to sell the foreclosed property for the highest bid. Because these trustees have a fiduciary duty to the borrower, their goal is to get as much for the sale as possible. In order to get a great deal on a house or apartment at a foreclosure auction the way Ed Henry did, you have to do your homework.
- Know the kind of auction you are participating in. Foreclosure auctions hosted by a large bank or government can be intimidating. They usually involve dozens of properties in a geographic area and are often attended by experienced investors and real estate professionals. The firm running the auction will take a “buyer’s premium.” That sum is added on to the total accepted bid. Homes sold at these large professionally run auctions are usually up to date on property taxes and fees and have free-and-clear liens. Trustee auctions (sometimes called sheriff’s sales) might seem less overwhelming, but they require that you do much more homework to avoid expensive pitfalls.
- Make a practice run. Before you go to an auction to buy, go to an auction to watch. Search websites that compile foreclosures or check with auctioneers or real estate agents for upcoming events. By law, all foreclosures must be advertised in local newspapers. Read these notices carefully. They will give you detailed legal information about the property, date and time of the auction.
- Do your house homework. Research the area and the home. This can be tricky because in most foreclosure situations you cannot get inside the home. Remember, the original homeowner is the owner until the title changes hands. So, just letting yourself in the front door is considered trespassing. Instead, find out all you can from public records and online searches. Check multiple-listing services and online sites like Zillow.com to see if you can find information about the last purchase price and features of the home. Finally, drive by the property and assess the neighborhood and home’s curb appeal. Does the exterior need repair? Is the yard well-maintained? There’s a saying among real estate investors: “The way it looks on the outside is the way it will look on the inside.” If there is an open house, show up with a contractor you trust. Pay special attention to mechanical systems like heating or plumbing that are expensive to repair or replace.
- Get your finances in order. You have to be prepared to act fast if you are the winning bid. Make sure you have a certified check that meets the requirements for the minimum bid. (And here’s a tip: that amount, which is published in the foreclosure notice, usually represents about 10% of the outstanding balance owed to the lender. So you can make a pretty good guess about what the auctioneer will be trying to get for the minimum on the property.) If you are not prepared to do an all-cash transaction, make sure you are pre-qualified by a reputable lender for the amount you intend to finance.
- Keep your options open. If you are attending a large auction with multiple properties, don’t be too attached to a single house. Find several that you would be happy to live in and bring detailed information and pictures of each one so you can keep track when the bidding becomes fast-paced.
- Don’t be surprised if there’s not a chance to bid. Especially at the large auctions, the lender will make the leading bid – and it will be for the amount that they are owed. In most cases the house has lost value and no one will be interested in bidding over the lender’s bid. If you really love the house, you can circle back to the lender, post-auction, and make an offer. Remember, it’s a foreclosed property and the bank is on the way to adding the home to its inventory. They may be interested in your offer outside of the auction. At a Trustee auction, the outstanding balance on the loan is not disclosed. But remember that handy tip about the minimum bid (see Tip No. 4), and you will be able to make a pretty good guess at what they are aiming for.