How do foreclosure auctions work?
When you talk about foreclosures, most people automatically assume you’re referring to bank owned properties. But not all foreclosures are owned by banks. Sometimes, a homeowner is unable to negotiate a settlement with the lender, so the property goes to auction in an effort to pay off the liens. As an investor, you can go to these auctions to buy foreclosures and quite possibly walk away with some excellent deals. In this post, I’ll explain how it works.
Types of Foreclosure Auctions
There are three types of foreclosure auctions:
Auction with Reservation
This type of auction is fairly rare. It allows the seller to reject any offer for any reason. Most people going into foreclosure are no position to reject offers, so you’re unlikely to see one of these.
Absolute Auction
In this type of auction, the seller must accept the highest bid. So, if you’re the only bidder and you offer one dollar, they have to accept. I’ve never seen a foreclosure auctioned this way, but you’ll occasionally see furniture or other personal items auctioned via the Absolute method, where no one cares how little people pay.
Minimum Bid Auction
Most foreclosures are auctioned using the Minimum Bid style. The seller defines a minimum bid, usually the total balance of the mortgages and other fees on the property. The auction opens with the minimum bid and the price goes up from there. Whoever bids the most wins.
Making Your Bid on the Foreclosure
The bidding procedure for foreclosure auctions varies. In all of the auctions I’ve been to, you simply called out your bid, kind of like what you see on television. From what I understand, some auctions prefer to use a written bid, where all of the attendees write down their highest offer and the highest bidder wins.
Most of the time, you’ll have to verify your ability to close before you are allowed to bid on the auction. No one wants to go through the auction process over again. You’re also required to bring certified funds for a 10%, nonrefundable deposit. I’ve been told some auctions even require the full purchase price in certified funds.
Closing on Your Real Estate Investment
Once you win the auction, you are generally given 30 days to close. So, you might want to have the preliminary paperwork for financing lined up before you go to auction, just in case something happens. Most of the time, however, 30 days is plenty of time for a mortgage broker to arrange financing and for you to close on the property.
A word of warning though. If you’re unable to close within 30 days, you can lose your 10% deposit. Most of the time, the authorities are more than happy to grant you an extension, if you show a justifiable delay. But if you’re unlucky enough to be rejected for financing or delay too long, they may take your deposit and auction the property again.