The Basics of Buying Foreclosures At Auction
When considering buying real estate as an investment vehicle, it is important to know that there are other options beyond your local multiple listing service. One options that is experiencing considerable growth, particularly people who are trying to get the most bang for their buck, is the real estate auction. Technology has leveled the playing field to a certain degree, as new investors are less intimidated by the process and have access to a wealth of information. So while experienced investors are already aware of and using the real estate auction option, it is important that you take advantage of the technology and do your homework.
What Types of Properties Are Sold At Real Estate Auctions?
Any type of property can be sold at an auction, but the most popular type in recent years has been homes that have been foreclosed. This is due in large part to the housing crisis a few years back,
Free Foreclosure Tutorial
Leave your email to Get the eBook
Send Me Free Tutorial
I promise cloud will disappear if you click through the button above
making foreclosures the most talked about available auction asset. The foreclosure laws
vary from province to province, but generally the lender or an officer of the court assigns a trustee
to act on behalf of the province to recover the remaining balance of the loan at the foreclosure sale. Usually, the home goes up for auction because of the owner has failed to make their mortgage payments on the property. In US, the number of homes submitted to the foreclosure process exceeded 850,000 based on Realty Trac data reported in March 2015. Of these 850,000 homes, about 42 percent were going on the auction block.
Also known as “distressed properties” in foreclosure glossary, home foreclosures are not the only asset you can buy at a real estate auction. Homes that are not “distressed,” including luxury homes and even newly constructed homes have joined the available properties on the auction block. Commercial properties such as hotels, and office and apartment buildings also make the list.
You will have the choice of two different types of auctions. The first is the traditional live or in-person auction and the second is the more modern and technological online auction. Online auctions have become more popular as people are becoming more comfortable with technology and purchasing assets online.
Regardless which type you choose, you need to keep in mind that despite the technology, real estate buying can be a complicated process. There are companies such as Bidwin.Org that are making the legal complications somewhat easier to manage, but there are still the matters of long contracts, escrow arrangements, and disclosure documents that are a part of the legal process.
Buying Foreclosed Properties At A Live Auction
The image that often accompanies the phrase “real estate auction” is a small group of people on the county courthouse stairs maneuvering for position around the auctioneer. There is some reality to the image, as most real estate auctions are conducted either in front of the county courthouse or inside in a designated room. Province requirements for auction sites vary, with many provinces simply requiring an area that is accessible to the public, such as a convention center or large hotel meeting area. The number of foreclosure properties auctioned in a single day can reach into the hundreds at these larger auction sites.
As for the online auctions, Florida in US is one state that conducts auctions online. A county in Michigan, Wayne County, uses the Internet to conduct online tax lien sales. This is where the government seizes the home of a homeowner who has failed to pay their taxes. Laws vary from province to province, so be sure to check the legal requirements and options for the province where you will be attending the auction.
All live auctions are available to all members of the public at no charge. The reason of this is to attempt to get the highest possible bid for the foreclosed property, maximizing the recovery value for the bank or lender, and minimizing the impact on the foreclosed owner. While entry to the auction is free, you will usually have to register to participate in the bidding process. During the registration process you will have to have proof that you are able to pay for the properties you bid on in full. There are a select few provinces that allow the winner of the bid to place a deposit down immediately and pay the balance in full the following day.
Here are the basic steps to participate in a live auction:
- Spend the time to find out where the real estate auctions are in your area, and continue following them. You can use an online resource such as Realty Trac (or Bidwin.Org in Canada) to locate real estate auctions in your area. The county in which the auctions are being held will usually have the necessary foreclosure data online or at the county’s courthouse. The trustee, a third party sales foreclosure agent, is also another possible source of information. Work with your local real estate agent or broker to get as much information as you can on the properties you are interested in buying. By law, there is no agent or broker commission on these auction sales.
- Be sure to do your homework. This will require you to read due diligence documentation and transaction details before the auction. Not only read, but be sure you understand the contents of the documents.
- Check to see if there are any liens on the property, the amount the current homeowner owes on the mortgage, and the market value of the property. Any liens that currently exist against the property is a critical point. Should you win the bid, you may be required to pay off the existing liens, adding to the total cost of the property. One way to discover whether a property has a lien on it is to hire a title company or real estate lawyer to conduct a search on all properties you are interested in bidding on.
- Take a drive to see the property in person. This will give you the ability to physically see the property from the outside. Be sure to only make a casual outside observation. Do not attempt to drop in on the owner or trespass on the property, as it is a criminal offense.
- Remember you are bidding on the foreclosed property as a legal “as-is” condition. Looking on the outside will give you some idea, but you will not know what is on the inside of the property until you take ownership. You may find thousands of dollars of needed repairs waiting to be done. Draw up a rough estimate of the repair costs and include that amount in the total amount you have to bid for the property. But if you have done step 4, you can apply a rule of real estate auction thumb: What it looks like on the outside is what it is going to look like on the inside.” A home that looks in disrepair on the outside is likely to be the same on the inside, while a home that has few exterior flaws will likely have little repair work to be performed on the inside.
- Be sure your finances are in bidding order. You will be expected to pay for your property in full upon making the winning bid. Most auctions will accept cash, a money order drawn on a bank, or a cashier’s check as a form of payment. As mentioned earlier, there are a few provinces that will allow you to pay a certain percentage of the amount immediately and defer the balance to a later time.
- Expect to be required to pay an advanced deposit at county foreclosure auctions. The amount can be between 5 and 15 percent of the expected final bid of the property. This is one reason why doing your homework is important.
- Take the time to confirm all of the details of the auction, even on the day of the auction. Though an auction may seem like a sure thing, there are a number of reasons things can cause the auction to be postponed, or even cancelled. The owner of a foreclosed property may have paid the delinquency, forcing it off the auction block. The owner may also be able to renegotiate the terms of the loan. Banks and lenders can also be part of the reason for an auction postponement, such as not completing the required paperwork on time.
- This is obvious, but attend the auction and get involved in the bidding process. Arrive at least one hour before the auction begins. Get your Auction Bidder Card and pay attention to the bidding action. When a price is announced by the auctioneer that you are prepared to pay for the property, raise your card and be prepared to accept the winning bod.
- Upon paying the amount in full, you will be required to complete either a certificate of sale or an execution of sale receipt. You will also receive a deed and an IRS form depending on the laws of your province.
- Wait to receive the certificate of sale in the mail. The certificate of sale you receive at the auction is temporary – you may have to wait as long as 10 days to receive the official version. It is possible the owner objected to the sale of their property and paid the delinquency in full, negating the sale and therefore retaining the rights to their property. Until you have the official version in hand, do not make any improvements on the property.
Buying Property On An Online Auction
Online bidding is much like you would expect. Instead of going to a location to bed the bidding comes to your home via the Internet. Because of this, be sure you have a quality Internet connection and computer. One advantage over on-site bidding is that you can attend an auction any time of the day or night, making it more convenient for you.
Beyond foreclosures, online auctions have a number of other properties available to bid on: short sales, non-distressed, bank-owned homes known as REO’s, and commercial properties and notes.
The basic steps to participate in an online auction mirror a live auction, with a few exceptions.
- Find a property up for sale on the online site. Online auctions allow you to bid on properties from virtually every location in the country. You are not limited to bidding on a single property, so you have more opportunities to walk away with a property you wanted.
- Be sure to do your homework. Yes, this is identical to the live auction because it is essential before you begin to serious think about entering any auction. Because the auction is taking place on the Internet, the property page is likely to have tons of information that is useful to you. This information will likely include maps of the property, any existing liens, and the estimated market value. Though most of this information should be considered to be reliable, it is best that you do additional homework to confirm the information you have is the best. One difference between a live auction and an online auction is that if you seek professional advice from a real estate agent or broker you will encounter a broker co-op, allowing the real estate agent to get paid for their services. This is not saying you should avoid using one, but keep in mind that the information will cost you money.
- Carefully examine the property page. Some properties that are listed will have a section called “buyer’s premium.” This is a fee charged by the auction house for hosting the sale. The charge is generally about 5 percent of your winning bid. In many cases, the property does not list a “buyer’s premium” because the bank or lending institution has agreed beforehand to pick up the costs from any proceeds they receive as a result of the sale.
- If the property is local and you are able to do so, visit the property. You should bring your contractor with you if an open house is being held by the real estate broker. This will give you the opportunity to examine the inside and assess any damage and the cost to repair the damage.
- Like a live auction, you will have to register for the auction. Because the auction is online, you will have to use your credit card to submit your refundable deposit. This step ensures the auction house that you are a serious bidder.
- Have your financing ready to go. Even though the auction is online you will still have to have a number of documents when you offer the winning bid. These are:
- Proof of funds – This can also be a financial arrangement to pay the winning bid. The online auction site is not likely to provide financing arrangements. You may want to check and see if the property you are bidding on has a listing on one of these types of websites.
- Entity documentation – This is not a concern unless you are bidding under the name of a business, such as an LLC, limited partnership, or trust.
- Earnest money deposit – Generally, this is an amount that is 5 percent of the total winning bid, due one business day after the end of the auction.
Now if you are the winner, prepare for the process to move very quickly. For example, when dealing with bidwin.org you will be contacted by the contracting department within two hours after the auction is closed. They will explain the online purchase and sale agreement to you in detail. This document provides the total purchase price and the deadlines you need to meet to submit your payment and paperwork. You need to meet these deadlines with the escrow to avoid losing your earnest money deposit.
It is a safe idea to purchase title insurance. The issue is that of undiscovered liens which will transfer to you once you have taken ownership of the property. Other potential legal matters such as quick deeds or special warranty deeds will transfer from the bank or lender to you upon ownership. Title insurance will provide a level of protection from these legal complications and be purchased either through the escrow or another source after the closing process is completed.
Though in most cases a real estate agent or broker is not essential, they can be a very valuable source of help and information. There are times when you will immediately receive the title free and clear at closing. This is one of those situations where having a real estate agent or broker available can be very useful.
If you are looking at a fun, exciting, and financially beneficial way to get your investment feet wet, real estate auctions are a great way to do it. But as has been stated many times, be sure to do your homework, otherwise you may find yourself wondering why you began in the first place.