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Foreclosure Auctions

Foreclosure auctions are a popular method of obtaining property for pennies on the dollar.

A housing crisis increases the number of foreclosure auctions. [©Jupiter Images, 2009]
©Jupiter Images, 2009
A housing crisis increases the number of foreclosure auctions.

Foreclosure Auctions

Banks and government agencies often sell seized property in foreclosure auctions, and during a foreclosure crisis, these auctions provide homebuyers with the opportunity to buy a wide variety of real estate at deeply discounted prices. During economic downturns, foreclosure auctions are more common. According to a New York Times article, the California-based auction house Real Estate Disposition Corporation hosted 300 foreclosure auctions in 2008 and expected to host 400 in 2009.

Purchasing a home at a foreclosure auction can be a risky endeavor. The highest bidder could potentially end up with a home that has not been inspected, or has liens or a title owing property taxes. Bidders should not rely solely on photographs of the available properties, but see the home in person prior to the auction.

Finding Foreclosed Properties

Auction properties are available from both private banks and government agencies. Homebuyers can find foreclosed homes that are scheduled to be sold at auction by searching through online databases. RealtyTrac offers subscribers daily updated information about auction properties as well as e-mail alerts when new properties become available. This option is ideal for investors who track multiple properties simultaneously. Government agencies, such as the Internal Revenue Service (IRS), list information about their foreclosure auctions on their Web sites. County clerks also have information about local foreclosure auctions, including dates, times and locations.

The Foreclosure Auction Process

Foreclosure auctions are sometimes cancelled or postponed with little public notice. It is recommended that potential buyers contact the trustee of a property to confirm the property's availability prior to the scheduled auction date. Each state's laws vary regarding what is required of bidders, and potential bidders should be aware of local real estate laws regarding auctioned property. States may require bidders to bring the entire amount they are willing to bid, or as little as five percent as a down payment.

The policies also vary by auction house and agency. Auction houses may offer open houses so interested parties can inspect the property prior to the auction. As another option, the IRS allows mail-in bids. To become familiar with local laws and auction policies, RealtyTrac recommends observing at least one foreclose auction before participating in one.

During the auction, each property is assigned a starting bid, which typically covers the outstanding amount owed to the bank or agency as well as any additional fees that have been incurred during the foreclosure. If no one offers the opening bid, the lender takes possession.

Taking Possession of the Property

The actual price of the bidding can be misleading, as the highest bidder also takes responsibility for tax liens on the property. Once bidding is complete, the highest bidder must make arrangements to take possession of the property. Again, the process varies by state, and the winner may need to wait a designated amount of time before taking ownership. After a home has been sold at a foreclosure auction, most states allow a redemption period during which the owner can reclaim the property by paying the outstanding mortgage and additional costs incurred during the foreclosure, according to the U.S. Department of Housing and Urban Development.

Advice on Foreclosure Auctions

A good deal of research must be done by the potential buyer prior to the auction. Even if the home is not available for inspection, the buyer should drive by the property to evaluate the neighborhood. In order to get a bargain on the home, the buyer must determine the estimated market value, the amount owed on the home and all liens against the property. All of this is public information that is available from the county clerk. If the opening bid is close to the amount of the estimated value, the buyer could lose money after paying the premium to the auction house, outstanding property taxes and liens that were not wiped out during the foreclosure process.

Prior to bidding on property, buyers should have a predetermined amount they are willing to spend. This is mandatory at auctions that require the full amount paid up front, and highly recommended at auctions that require only a portion of the final amount. In many states, if the highest bidder cannot produce the full amount within a determined number of days, the down payment is forfeited. Many auctions do not accept personal checks, credit cards or letters of guarantees from lenders. The IRS recommends bidders bring cashier's checks made out to themselves as well as cash to cover the difference between the cashier's check and the winning bid.

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