Auctions: Part 3 - What Happens at Foreclosure Auctions

Continuing to dispell myths about real estate auctions, this post talks about What Happens At Foreclosure Auctions....

Leading up to a foreclosure auction, someone who has a lien against the property has exercised their right to foreclose. Guided by state laws and contractual obligations, the lienholder has taken all required steps to hold the auction, including posting the notice in the newspapers in the PUBLIC NOTICE section.

The day of the auction, the auctioneer steps to the courthouse steps, reads a particular script, describes the property and opens bidding. The lienholder often presents a bid in advance, or may send someone to physically present the bid. The auctioneer will announce that bid, which is typically what they are owed, inclusive of late, legal and collection fees. In today's market, it is usually an amount that is higher than the market value. The bank wins the auction, as no one else is foolish enough to bid higher than that, and the property is sold.

It's rather anti-climatic, and buyers who had hoped to buy that property for an amount that is under the current market value are shocked to see that the property is selling well ABOVE the current value.

While there are exceptions, this is what is happening in large numbers at today's foreclosure auctions. Remember, that in the overwhelming amount of cases, if someone can not pay their mortgage, if they have equity in their home they will be able to sell it and/or refinance it into a loan that they CAN pay. So, with few exceptions, most homes that are going to foreclosure are because there simply is no equity left in the property, and homeowners are "upside down" with the debt against the home.

Foreclosure auctions can be great opportunities for acquiring properties below market; but the well educated and well studied investors devote a great deal of time into being able to identify those prime opportunities, and they all show up to compete at the auction. Even then, you may get a "good deal" but it is still representative of fair market value considering that it is a distress sale, and with any distress sale comes some red tape and some level of risk.

In today's market, there are "deals-a-plenty" with less risk involved. I do not recommend that many people purchase at foreclosure auctions.

Despite that, should you decide you wish to, I recommend that you hire consultants to help you, and consult the trustee to learn the required terms of sale. Your team should include a real estate agent who is knowledgeable in the area and with auctions and a real estate attorney who can help you understand the risks involved in these types of sales, including any possible right of redemption the current homeowner might have after the sale. (Yes, that's right, in some cases, the person that lost the home to foreclosure may be able to get the property back - it's called a right of redemption - and the laws vary from state to state.) The real estate agent can assist you with determining an appropropriate value, and help you plan for whatever disposition or long term hold goals you may have (meaning evaluate opportunities to "fix and flip" and/or hold the property as a rental). All costs to conduct due diligence (inspections, appraisals, price opinions, title searches, etc.) are your responsibility.

In the next post, we'll talk about what I call "retail auctions", where privately hired auctioneers are hired to conduct auctions on site or in ballrooms or convention centers, or perhaps an alternative site.