I’ve been buying properties at the foreclosure auction since 2010. The foreclosure auction is not to be confused with the online auctions such as auction.com, xome.com or hudsonandmarshall.com. Those online auctions are typically already foreclosed on, and most come with some form of title insurance.
The foreclosure auction is for diehard real estate investors who are prepared to freeze their butt off on the courthouse steps, while getting nasty looks from people passing by (look people, either the bank is going to get it or an investor is. I guarantee you an investor is going to work with you more than the bank will), standing there with hundreds of thousands of dollars of cashier’s checks in their pocket, just hoping that their property (that they have not been able to step foot inside of) does not postpone until the next week. Sometimes you can stand out in the cold until noon just to be told that the property postponed until next week. If you consider investing a sport, the foreclosure auction is like the MMA without the punch in the gut.
The auction is very exciting and is sometimes considered the black market of investing. I’ve had some good stories, and some horror stories that I would never want to relive again, like a two year lawsuit due to misinformation about a deed position.
There are many realtors who only work the foreclosure auction, yet they rarely tell you all the scary details, such as:
You almost never get to go inside: When I share this with most people, they are done after this first detail. The idea that you are spending hundreds of thousands of dollars on a home that could be completely trashed or worse yet – gutted, scares most people off.
You’re responsible for clearing up any water bills, HOA dues, UCC filings, and mechanics liens. In the State of Washington, municipal liens, such as water bills, sewer bills, and sometimes garbage bills, follow the property and therefore are required to be paid off after the auction. Other bills such as power and gas follow the occupant, so those do not have to be paid off by the winning bidder at the auction.
There is no title insurance: I learned this one the hard way. When a buyer purchases a home that is on the market for sale, the purchase and sale agreement states that the seller must convey a clear title to the buyer. A title company is hired to ensure that the sellers liens are paid off, and the buyer receives a title policy ensuring there are no liens. If the title company made a mistake, the buyer could file a claim and be compensated.
This is not something that a buyer receives when buying at the auction. The sale is as is, meaning neither the bank or the trustee are guaranteeing that the note that is being auctioned is the only one, and they are not saying it is in first position either.
You have to pay cash, or get a hard money loan with extremely high (12%) interest rates. The foreclosure auction does not allow financing. It is a requirement that you bring cashier’s checks in your name in order to bid.
So you don’t have $500,000 cash in the bank to bid on your dream home? The other option is using hard money lenders.
The term hard money, also know on wikipedia as “last resort money” comes at a cost, a cost of 4 origination points and 12% interest. Hard money is only able to be lent out to investors who will not owner occupy the property due to the usury rules.
It’s as is, once you buy it it’s yours and there’s no going back. When you are the successful bidder at the auction, you are rewarded with a piece of paper, or sometimes you have to take a photo of that piece of paper with your cell phone. There is also no going back, so once you hand the trustee your cashier’s checks, the property is yours no matter what you find out later.
You have to break in to get in. So you’ve drained your bank account, beat out all of the other bidders at the auction, received a piece of paper saying you were the winning bidder, and you get a set of brand new keys, right?!
Not exactly how it happens. Once you retrieve your handwritten piece of paper saying you won, you now get to go to the property and if it’s vacant you get to break in…. literally.
The more sophisticated investors call a locksmith, we just drill the locks and keep a new set on us at all times.
Well, for starters you have to figure out if the occupant is the former owner or a tenant. The laws are different for each.
A former owner is allowed up to 20 days to move out before the new owner can start the eviction process. They are not required to pay rent, and they can pretty much take whatever they want from the house. Mark my words, be nice to the previous owner.
A tenant on the other hand is a more sticky subject. If they have a valid lease that was not signed during the time the property was in foreclosure, then the lease stands and you have to honor it. If there is no lease, they are considered an implied month to month tenant. The state law allows the tenant 60 days occupancy and they have to pay fair market rent.
Federal law allows a tenant 90 days, and it could be argued that they do not have to pay rent. I’ve literally had four different attorneys give me different answers on what a tenant rights are after foreclosure, so best seek out your own attorney to deal with this one.
FHA requires the owner to own the property for 91 days before they can accept an FHA offer. This is one of the most frustrating financing rules, and it actually applies to all flipped properties. The intent of the rule is to slow down flippers to ensure that a proper rehab is done, yet all it really does is prohibit the investor to sell to FHA buyers in the first 90 days.
So after hearing about all of this scary stuff, you’re probably wondering why we would attend the foreclosure auction every Friday and actively bid on properties for our clients.
Honestly, for the clients that can stomach the risks, the upside reward is the discount that may come with the new property.
I’ve purchased properties that were bought for $290,000 and needed paint and appliances that sold for $465,000. Many homes were swept clean and the previous owner left manuals and keys.
Due to our experience of buying at the auction, we only buy newer properties without basements, in good areas and only if the ending bid meets our equity guidelines. If you stay within those guidelines, you’ll do fine.