Buying at the Auction
You need cash (or a good line of credit) and you need to know what properties are going to be auctioned. These are often listed in local newspapers but there is a catch: they are listed usually by legal description only. It doesn’t include the street address. If you are willing to do the research, you can go to the county record office and determine the street address.
With the address you can locate and inspect the property. This is a must. The public notice doesn’t provide a clue as to the condition of the property. If the property is occupied, you may or may not be able to get in and look at it. If you successfully buy an occupied property you may incur an expensive and time consuming eviction process.
At the auction you must be prepared to pay in cash the total amount of your bid. You may be able to get by with 10% of the amount with the remainder due within thirty days. The foreclosing lender will be there to bid the full amount of the mortgage due plus any back interest and penalties.
Before making any bid, find out what the rules are for the auction. For example, find out if you can get your down payment back if you are unable to come up with the rest of the money. You may not be able to get a refund at an auction.
Another possibility is that if you can’t come up with the money after you make an offer and the property eventually sells for less than your offer, you’ll have to make up the difference.
You also need to determine what mortgage is being foreclosed. There may be other mortgages ahead of the foreclosing mortgage. Suppose the owner of a second mortgage is foreclosing. Her mortgage is $20,000 and the property is worth $90,000. You bid $20,000. Your bid is accepted and you get title to the property. It’s quite a deal until you find out about the first mortgage for $70,000. You’ve got a $90,000 home for $90,000. Some deal!
You may be able to get a copy of the mortgage from a title insurance company; however, it may not be apparent from reading the mortgage that it’s a second or third mortgage.
You could ask the lender and you will probably get an answer. But is it a true answer?
To protect yourself, you could pay for a title search. A title search investigates and analyzes past and current documents concerning ownership. This could be expensive, especially if you are examining several properties.
Buying at auction can be risky. You have the opportunity to find a real bargain, but you can also run into a number of problems. It’s not a good idea to try this unless you have a great deal of knowledge about the process and the money to overcome any of the problems that can arise.
The Best Choice – Buying a REO
REOs or real estate owned foreclosures require little down payment and offer excellent terms for below market values. These are the properties that lenders have gotten title through the foreclosure process.
At the auction, the property does not get an offer sufficient to cover the outstanding loan and foreclosure costs, so the lender is forced to buy it to try to sell it for those costs.
Lenders don’t want REOs. They are evidence of failure and indicate that the lender doesn’t really know its business. The REOs earn no interest, and lenders are in business to earn interest.
How can you profit from an REO? There are three areas where you can make out: price, interest rate, and size of down payment.
The price will generally be below market value. The lender wants to sell the property and transform it back into a mortgage that it is earning interest. States often regulate how far below market value lenders can go in their asking prices for REOs.
The lender can offer you an interest rate that is below the current market interest rate. It is an incentive to you and the interest still produces earnings for the lender.
You can also get a much lower down payment requirement from the lender. In some cases, it may be possible to acquire the property with no down payment.
Even though lenders want to sell their REOs, they often go about selling them in a restricted and secretive manner. They do this for two reasons.
If word gets out that the lender has a large supply of REOs, it could indicate that their business practices are flawed. Investors and depositors would start looking for other places to put money.
And if house hunters became aware of the possible deals that were available, the lender could loose opportunities to make new mortgages at normal market rates and terms, and requiring larger down payments.
Most REOs are single family home and condos in good condition. The lender usually takes good care of them in order to sell the property. There are some small percentage of inferior properties.
Usually, REOs have clear titles. The lender normally satisfies all liens and judgements against the property, except for tax liens.