The Foreclosure Auction Process

The Beginning

If the mortgagor fails to abide by any of the terms of the mortgage, the lending institution may bring foreclosure action. Usually foreclosures are the result of delinquent payments. Lenders may attempt to work out another option for payments by the debtor since they prefer not to foreclose. If the debtor sees that he cannot fulfill the commitment to meet the financial obligation, he will attempt to sell the property. Failure of the owner to obtain a sale will result in the need for the lender to foreclose.

Foreclosure newsletters or services compile lists of properties under foreclosure from various sources and are valuable sources of information for those interested in buying foreclosed properties. A disadvantage of many of these lists is that they usually only post properties available to the general public whereas as an investor, you’ll want to know about foreclosures before everyone else. When evaluating foreclosure listing service, make sure they include pre-foreclosure information as well.

Foreclosure Auction Process

Once the property is under foreclosure, it is placed under auction which can either be a judicial sale or a private sale, such as a trustee’s auction. The auction is conducted and overseen by a sheriff, judge, independent trustee or a court referee. The sheriff auctions the foreclosed property either at the site of the property or at the court house in an attempt to obtain market price. The lender and any prospective buyers will attend the auction. If no bids are made above the indebtedness, the mortgagee will always bid for the property at the balance due on the mortgage, less penalties and legal fees. If a bid is made by a third party for a higher amount than the mortgagee’s bid, the mortgagor will receive the amount above the existing costs. A foreclosure sale does not dismiss property tax liens that may be against the property. This is one reason lenders like to escrow for taxes if they are carrying a mortgage with a large loan to value ratio. Once the foreclosure by judicial sale takes place, the court confirms the price to ascertain that it was fair. If the price was extremely low, the court has the power to set the sale aside. The successful bidder will receive a sheriff’s deed, which will convey whatever title the debtor held, exclusive of the debt. This deed carries no warranties, but title insurance may be purchased by the buyer.

Pros and Cons of Buying at a Foreclosure Auction

A key advantage of buying a property at a foreclosure auction is that secondary liens and encumbrances are nulled. For example, if the auction is on a first mortgage, any second mortgage including a home equity loan is canceled. In addition, the lender may be willing to sell the mortgage at a substantial discount. Since the mortgage itself may be less than the value of the property, the potential profit is magnified. On the other hand, buying at the foreclosure auction requires cash equivalent to the sale price. Though some foreclosure auctions require immediate cash, additional time from 24 hours to 30 days can be negotiated by the successful bidder.