What are Foreclosure Auctions?
Foreclosure auctions are the public sale of property that a lender has repossessed due to a homeowner's default on their mortgage loan payments. The auction is the last stage in the foreclosure process, and represents the end of the foreclosure. The lender sells the property through an auction to encourage a fair sale where anyone may publicly bid on the property. The proceeds of the sale will be awarded to the lender as a means of covering the debt owed on the unpaid mortgage loan.
Foreclosure Auctions and Sheriff Sales
In different states in the U.S., the laws concerning foreclosure auctions can be quite different. Some states allow lenders to pursue foreclosures only after obtaining the permission of a local court. The process begins when a lender notifies a homeowner of a default and then files a suit in court in order to win the right to pursuer a foreclosure against the homeowner. This is known as a judicial foreclosure. If the court approves the foreclosure, they will schedule a sale date and put the local Sheriff's office in charge of carrying out the auction. Since the Sheriff or a representative of the Sheriff often runs these foreclosure auctions, they are commonly known as Sheriff sales.
In other states, mortgages typically have a Power of Sale clause, allowing the lender to schedule a sale themselves after a default, with no need to obtain a court ruling. In these cases, trustees of the lender preside over the sale of the property, which is then recognized by the local County commission. These are known as nonjudicial foreclosures, and they tend to be more common than judicial foreclosures.
How to Buy at Foreclosure Auction
Buying a property at foreclosure auctions is one of the best ways to find cheap prices on real estate. Foreclosures at auction often sell for anywhere from 10% to 60% below their actual value, simply because they are being sold at an auction to cover a default debt. Often times, the lender only needs to collect a portion of a home's value to get back the money lost on the unpaid loan, and this translates to huge opportunities for savings for the buyer. However, getting the best values means choosing the right properties and bidding at only the best foreclosure auctions. You'll want to do good research on the property you want to buy beforehand, but you'll also want to get familiar with the auction process so that you'll be ready to win your property when the time comes.
How to Prepare
If you've never bought at auction before, it's a great idea to attend a few local foreclosure auctions with no intention to bid. This will allow you to see how the process works firsthand, so that there won't be any surprises when you're ready to buy. It's also very important to take care of your financing before you start bidding at auctions. Most auctions require proof of financing before you're even allowed to bid, so you'll need to have everything in order. Never go above what you want to pay for a property. This is very important. In the heat of the moment, we can often be tempted to not let that property you've invested time in get away. This is a mistake. The best investors know that another great deal is just around the corner, so be sure to wait to get the price you want to pay.
Choosing a Foreclosure to Buy
The best way to get access to a lot of information on upcoming foreclosure auctions is to search for listings with an online Multiple Listings Service (MLS). A foreclosure MLS will allow you to view hundreds or even thousands of local properties that are scheduled for auction, so you can easily narrow down the field by size, location, type, and predicted sale price right away. This can save a great deal of time. Time is your greatest asset when buying foreclosure properties, because auctions happen on a strict schedule, so you'll want to save yourself as much time to learn about the property before the sale as possible.
Visiting and Inspecting the Property
Once you've found a property you like, it's time to schedule a viewing. Get in touch with the Sheriff or trustee of the sale and arrange for a walk-through of the property. Many buyers like to hire a contractor to visit with them. Contractors can make professional assessments of the property's condition, and account for an costs of repairs you might need to spend once you buy the home. Excess repair costs can really do some damage, because they can eat into the savings you stand to gain by buying for a below market price. Also, be sure to have an appraiser give you an estimate of the property's market value. This will be your guide for how much to pay for the property. If the amount you spend on the home plus repairs meets or exceeds the property's market value, there's no reason to buy the home, because you won't earn any value or savings.
Deciding on you Maximum Bid
Before the auction, research the recent local sales prices of homes in the area. Are these prices going up? If they are, your property could have a great chance for getting additional investment value, even more of a reason to buy. Once you've got a good idea of the property's value, it's time to contact a local foreclosure attorney. An attorney can help you by providing title search services. A title search will reveal if any other liens are held against the property. Again, these can eat into your savings, as you may become responsible for paying them. It's essential that a property be free and clear of any other liens before you bid at foreclosure auction.
Now you must decide if you want to bid on the property. First, take the appraised market value of the property. Then subtract all associated costs, including attorney fees, appraisal costs, and any repairs that have been estimated. This number is your 'break even' number. If you pay this, you break even on the value of the home. But remember, foreclosures are all about savings, so we're looking to pay 20%, 30% or more under this price. Calculate different percentage values and write them down. They'll be useful tools at auction so that you'll know exactly how much you're saving as the bid price of the property escalates.
The Day of the Auction
When you attend the auction, make sure you have all of your financing information ready. The auction will be open to the public, and will proceed in a simple manner. As the price for the home rises, be sure to keep an eye on your maximum bid amount. If the property goes above what you're willing to pay, walk away! There are plenty of other deals out there, and the more auction experience you have the better you'll be in the future.
If you win at auction, you'll have to present a down payment or the full value of your bid, depending on the local law and custom, directly after the sale, so be prepared! There will also be some paperwork required, but a foreclosure attorney can help you with this if need be. If you won your home for the savings you wanted, congratulations!
The Period of Redemption
After the foreclosure auction ends, the sale may be subject to a 'period of redemption'. The period of redemption varies in length from state to state, but it is basically a period of time in which the original homeowner can void a foreclosure sale by paying off the full amount of their loan debt, plus any other associated costs and interest. In almost all cases, this period expires without incident; if a homeowner has the money to pay off their debt, they usually do so before a foreclosure sale occurs. But it is important to be aware of the redemption period so there are no surprises. Once the redemption period expires, the property is awarded to the winning bidder permanently.
The Benefits of Foreclosure Auctions
Foreclosure auctions are the simplest, most straightforward way to find significant discounts on all kinds of real estate. They happen every day across the nation, and properties sell for well below what they are worth at almost every auction. They're a grate opportunity, because they allow you to decide the price you want to pay for a home without the extended negotiation of dealing with an agent or bank. You purchase the property directly, and you avoid a lot of red tape!
In terms of investment value, there's just no better opportunities out there. Foreclosures offer instant equity, as well as a huge margin for earning profits as the value of the home increases or if you choose to sell right away! You can even rent your property while you wait for it to grow in value, providing extra income and allowing the property to pay for itself: renting alone can easily meet the monthly mortgage payments in most cases.
Be sure to check out foreclosure auctions in your area before you make your next real estate purchase. They're the best deals in real estate today.
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