How a Typical Foreclosure Auction Takes Place

There are different types of foreclosure auctions, but they all have some common denominators.  (1) Foreclosed property in the form of a house, land and sometimes personal property, like jewelry, cars, or furniture.  (2) A seller.  This may be a bank or other lending institution or the city/county government for back taxes.  (3) A bidder.  These individual can be real estate agencies, other investment brokers, or private citizens.   

The auction begins with the auctioneer reading a variety of legal notices and legal descriptions of the property being sold.  The opening bid is set by the foreclosing lender.   Most usually this bid is equal to the outstanding balance on the loan, the interest accrued, and attorney fees with any other fees connected with the sale.  If no bids are higher than the opening bid set by the lender, then the property will be bought by the attorney carrying out the sale for the lender. 

They will then begin taking bids on the foreclosed property as set by the opening bid from the lender.  If a bidder has not already been pre-qualified by the auctioneer before the auction began, he/she will be asked to give their deposit check to the auctioneer.   Most residential auctions require a deposit check of $5000.  The auctioneer will then ask for the bidding to continue to get a higher price.  This is usually done in increments of $100, $500, or $1000. 

Bidding continues until the auctioneer assesses that the bidding has stopped and the highest price has been bid.  He/she will then announce “going once, going twice, going three times, sold!”  The auction is then ended. 

Foreclosure deeds and purchase papers are drawn between the new purchaser of the property and the mortgage holder.  A grace period to allow the purchaser to line up financing will be given. Most of the time this is thirty days.

Once financial arrangements have been secured, closing will take place and the new owner will officially take title to the property.

The auction of foreclosed property will usually be in front of the home being sold.  However, this auction can be at the county clerks office as well.  Auctions for back taxes are usually held on the courthouse steps.  Check with the sheriff’s department or the auctioneer handling the auction for details on where the auction will be held.  Come early, you will have competition.

How Foreclosure Investing Helps the Community

Foreclosed homes create an opportunity for investors to not only personally profit, but can breathe life back into neighborhoods.  Here’s one scenario:  an investor buys a foreclosed house and then makes necessary repairs and/or updates on the property.  That investor then can either sell the house at a greater profit because he made the repairs, or he uses it for rental property and makes money every month that it is rented.  This helps the surrounding community because the repair/update of the house beautifies the area, helping to raise the value of the other homes there.  A neighborhood where the homes are attractive and occupied is more warm and inviting as a whole.

Investors of foreclosed homes can also help the economy of the community.  Let’s take the same scenario that we started above.  The home the investor purchased is now generating money for the city or county by means of property taxes.  This helps increase the tax base for road repairs, trash services, police and fire services, etc.  The repairs that were completed on the property increased business for the goods and services that were used, such as home building stores and contractors. 

Along with the repair process for the property, think about the foreclosure sale itself.  The investor is required to use the services of title companies, real estate agents, as well as the lending institution itself. 

After the sale of the foreclosed property to the investor, the lending institution will reduce their real estate owned (REO) liability.  They also have the possibility of becoming the financer of a new loan. 

Finally, in this scenario, when the investor sell that property or rents it to someone,  there’s another person(s) or family that is able to enjoy living in that property and who will increase business within that area.  They become invested in the community.  A beautiful neighborhood increases community pride and makes for a healthier community.  A good deal for everyone.

Another thing to consider, particularly if you are in a high tax bracket, is using foreclosed property as a tax shelter.  One way of doing this is the charitable donation of a conservation easement.  You give the development rights to a property conservation organization, such as the Sierra Club.  The organization has the right to develop it, but you still own the land.  However, these type of organization don’t want to develop; this is what they want to prevent.  The development rights have some value and you are entitled to a charitable contribution deduction on your taxes for the value of the donation.  Property taxes would most likely lower, as would the value of the property for estate taxes. 

The land is being used for conservation purposes, you get tax breaks and still own the land.  Good for the environment and your bottom line.

The Four Steps of the Foreclosure Process

Although there general guidelines from the federal government about foreclosures, each states has its own specifics that will apply.  There are two types of foreclosure; judicial foreclosures and non-judicial foreclosures.  Judicial foreclosure will have action from the court, while non-judicial are done outside the realm of the court.  The criteria for a judicial foreclosure is that a home is purchased through a mortgage; the criteria for non-judicial foreclosure is that a home is purchased through a deed of trust. 

Step 1.  Delinquency of payment.
Foreclosure proceedings begin when a homeowner becomes delinquent on payments.  Typically this is usually when the borrower/owner is behind by three payments, but it can begin with one delinquent payment, depending upon the lender. 

Step 2.  Notice of Default or Lis Pendens.
This is known as the pre-foreclosure phase of the process.  The lender will have a trustee record the Notice of Default at the county recorders office.  It’s during this time the borrower still has the opportunity to reinstate the loan or pay it off.  It is also during this period that the bank accelerates the payment, requiring the borrower to pay the mortgage in full; no payments accepted.  There is a period of 3 months before final proceedings begin.

Step 3.  Notice of Sale.
The borrower will receive by registered mail or by the delivery from the Sheriff the Notice of Sale, or Notice to Foreclose.  There will be a sign posted on the property with the Notice of Sale with the time and location of the sale.  The information will be recorded at the county recorder’s office, and published in the local newspaper in the county where the property is located over a period of three weeks.

Step 4.  Foreclosure Auction.
This is called a Trustee Sale, Sale of Foreclosed Property, or, if property is being foreclosed for tax reasons, Tax Lien Sale.  This is a public auction that is historically held on the county courthouse steps, but may be held at another site.  The opening bid is set by the lender of the property.  The amount is most likely is the outstanding balance of the loan plus accrued interest, plus legal fee and any other additional fees the lender want remunerated.  The highest bidder wins and will receive the deed to the property at payment.  If there aren’t any bids higher than the opening bid, then the lender retains the property.

When a borrower becomes delinquent in payments, his best option is to work out an agreement with the lender, then make sure that he/she keeps that agreement.  The longer the delinquency, the fewer options there are for the borrower.