Buying a Home at a Foreclosure Auction
Planning on bidding at a foreclosure auction for the first time? Here's how you can prepare.
Foreclosure auctions — conducted on courthouse steps, in convention centers across the country and, increasingly, online — can be intimidating. The trick to avoiding foreclosure auction pitfalls is to do your homework.
1. Understand the process
Many buyers have never attended a foreclosure auction before — either a large auction in which dozens of properties from across a large geographic region will be sold, or a smaller trustee auction. If you’re entertaining the thought of buying a foreclosure, it's smart to attend a few auctions as an observer.
- Observe the buyers. Sometimes auctions are as much about theatrics as they are about business transactions. You may see some buyers dressed in suits standing near the auctioneer in an effort to convince other bidders they’re representing the lender; such posturing may scare other attendees away from a bidding war.
- Find out requirements. Contact the attorney or auctioneer to determine how much money you need to bring to the auction, as this varies from state to state. Many auctions require bidders to bring along a certified check for $5,000, made payable to the auction company. This provides proof to the auction firm of a legitimate intent. The successful bidder will sign his check over to the auction company, while losing bidders simply redeposit their checks.
Some larger auctions will have representatives from several large mortgage lenders in attendance. Bidders also need to be aware that large auction firms, such as Williams & Williams and The National Auction Group, charge either a flat fee or percentage of the sale price for their services.
In some cases, you must bring a percentage of the winning bid price in the form of certified funds, the balance being due in 30 days. You’ll also find states where the entire balance is due the day of the sale.
In most regions, notices about upcoming auctions are published online or in the local paper. Zillow also posts foreclosure auction information on homes, including location, date and time. Be aware that auction dates often change or are postponed, so be sure to confirm specifics with the lender’s attorney or the trustee.
Note that the federal moratorium on evictions and foreclosures on single-family homes has been extended to June 30 — and many states have temporarily banned foreclosures — which may affect inventory in your area.
- Narrow your area. Choose a few neighborhoods to research. Drive by the listed auction properties located within those neighborhoods and observe the area.
- Study the home. You probably won’t be able to get into the home, but you should be able to tell if anyone is living there. If it is occupied, there’s a good chance the home has working plumbing and electricity, but this is not guaranteed. What does the exterior look like? Expect the house needs, at the very least, cosmetic upgrades: new carpet, paint, appliances and kitchen cabinets.
3. Know what you can bid
If you win this property at auction, will you live in the house? Fix it and resell it? Rent it out? Your plans for the property will affect your maximum bid price.
- Compare. Find out what similar properties nearby have sold for in recent months.
- Research. Use Zillow's Foreclosure Estimate to help determine what the home will likely sell for.
- Add it up. Calculate necessary improvements, based on a worst-case scenario (replacing plumbing, electrical, etc.).
Remember that your bid at the auction is absolute; there is no backing out, there is no home inspection waiver. If you think basic repairs for a house will run $15,000, you don't want to end up paying $130,000 at auction if the move-in-ready home next door is listed at $140,000.
Make a set of photo and info sheets for each property — along with your top bid — just to avoid confusion on auction day.
4. Follow expert advice
Here are some tips for making the most of your experience:
- Arrive on time. Most auctions don't last long; if you’re five or 10 minutes late, you may miss the whole thing.
- Settle in quickly. The first few properties offered often sell for less because bidders are trying to figure out pricing patterns. If your dream property is one of the first auctioned, you may be in luck.
- Listen up. You may hear the auctioneer say something like: “This property is sold subject to all liens and encumbrances.” That means the winning bidder is responsible for past-due taxes and liens imposed by contractors or the Internal Revenue Service. Veteran bidders conduct title searches on the properties in which they’re interested.
- Know your limits. Don't get caught in a bidding war. Determine what you’re willing to pay before the auction and don’t bid any higher.
