Buying Foreclosed Homes at Auction, Part III

If home ownership has been out of your reach, there's an option you should consider: bid at an auction for a home that is being foreclosed upon. You can find a great house for a fraction of what it sold for initially or what it would sell for if sold through a real estate agent.

In Parts One and Two of this series on buying your dream home via a foreclosure auction, I discussed how to find the right property and then the steps you need to take to find out whatever information you can about the property.

This article, Part Three in the series, focuses on the financial. Pay special attention to this part. This is the part that will make or break you. Part four picks up on the courthouse steps where most sales occur. It's all about what you need to know about the actual sale process.

Part Four is entitled:

Make Money Buying Foreclosed Homes at Auctions, Part IV. At the Courthouse---Before and After the Sale

***

I've been a journalist most of my life, but for the last two years, I've been working in the foreclosure department of a real estate auction firm. For years, I asked many, many questions, and now I'm on the other side, answering lots of questions. I'm absolutely amazed time and time again by how many people will bid on a property at auction without knowing how the real estate auction process works...particularly the money end of it. It would be the understatement of the century to say failing to know how much a property costs is a critical error.

Many myths surround the financial end of buying at auction. Even those who research the properties, as I've detailed in Parts 1 & 2 of this series, often think that the deposit amount listed is the price of the home. These people are going to the auction and bidding on the home, and when they find out the deposit amount is just that---an initial deposit, not the purchase price---they're already legally committed.

The first part of the financials of dealing with auction involve figuring out EXACTLY what the house is going to cost you, so you know what your maximum bid can be. It's a dicey thing to figure out the cost, to be sure.

What is the house worth officially?

---Do a "real property search? Maryland has this information available free on the Web. That site is found through the Dept. of Assessments and Taxation. You type in the address of the property. You will see what it sold for last and when. You will also see the tax assessment values. Do a search from your state through the tax assessment division. If you can't find it, contact the county government offices, specifically land records. Tell the person exactly what you are doing, and

ask for that person's assistant. This is no time to get timid! Most people will give you great tips. No one wants to see someone make a financial mistake.

Now, that assessment shows what the house sold for the last time. It doesn't show you about any second mortgage issues or the like. It will give you a projected tax assessment for years to come. We all know that these are not all that realistic. If you live in a home now, do a bit of a comparison. Look up your current assessment. Is it higher than what you know you can sell your home for? Take that into consideration when figuring the value of your home.

Scope out the Neighborhood. If the home is in an up and coming area, that adds to the value of the home. Good schools and you have kids? Again, it gets rated higher.

What will the house cost you?

Lots of factors go into this: final auction price of the house, unpaid liens/taxes, lawyer fees, title fees, etc. Those are the obvious costs. There may also be hidden costs such as repairs.

You can't know many of the variables, but put together as many items as you can to get a real idea as to the bottom line on the house you want to bid on. This will be your final bid price, the legal fees, any liens that aren't covered specifically, repairs to make it livable.

Let's go into a bunch of different financial topics. By the end of the article you should be drawing a "big-picture" on how to determine what you can afford to (should) bid.

----You can't inspect/walk on the property you are looking to buy. WHAT! So how are you supposed to know if this house would be right for you as a living space or as an investment. How do you know what sort of repairs must be made? Well, you don't and you won't. You have no legal right to inspect that property physically even AFTER you have bid on the property and you were the winning bidder. It becomes yours ONLY after the sale winds its way through the court system some 45 days later.

So, whatever is wrong with the home becomes your problem. The theory many people have, and with good reason, is that if a person has gotten behind on the mortgage, the odds are high he is also forgoing regular home maintenance. This is one of those hidden costs (i.e., replacing batteries in smoke alarms, furnace filters, painting, caulking, etc.).

---First, is your final bid. (This is the amount you come to after working out all of these variables. It's your drop-dead price cap for bidding on the house. This is the BASE number you deal with when figuring out how much that house will cost you.

Other Financial Issues

---I'm the highest bidder, so I win the house. No, no you don't. There are few "absolute" auctions in real estate nowadays. Absolute basically refers to the concept of "the highest bidder wins." As the bank is the foreclosing party, it retains the right to reject a winning bid. In that case, the bank bids higher (generally the price it was willing to sell the home for) and buys the home back.

---A word about deposits. You will be asked to make a deposit at the time of the sale. There was a time when it could be assumed that the deposit was approximately 10 percent of the amount the bank expects the house to bring at auction. With over-extended mortgages, this is not necessarily the case anymore. Many homes today have debt attached to them that is over and above what the house would sell for on the market.

Read the ads regarding deposits. In many ads, it will say something to the effect that you must bring the deposit up to within 10 percent of the total bid price within "x" number of days. Basically that means if you won a home for $150,000, and the bank was asking $10,000 deposit, per the advertisement with legal particulars, you would have to bring the deposit up to $15,000 within "x" amount of days (per the ad).

Tangible Extra Costs. These are the things you must add on to your final bid price (along with the intangibles estimates) to figure out the true cost of the foreclosed auction price.

---Legal Fees. Again, read the ad. The fees will be spelled out. It's not a lot, but it should be added into the price you can bid on the home.

---Interest. From the time you win the bid at auction, you start accruing interest on the amount owed. The exact amount will be spelled out.

---Liens, second mortgages. Always ask the attorney if there is a second mortgage. Before you bid, go to the county or city courthouse and take a look at the land records to be sure that there are no liens on that property. If there are tax liens, liens by contractors on the property, those have first claim. What that means is that you may have to pay to get a clear title on the property. Also check to be sure another mortgage has not been taken out on the property. That's often mentioned in the newspaper ad. (All of the legalities must be stated in that ad.) Most people don't read all of that fine print. They should.

---Unpaid utilities, water and the like. The ad usually spells this out and a cap is put on the amount the new owner may be liable for, but you need to verify all of this. I rented a home to someone who ran up a grand in heat/air and another grand from the county water department. Water ran $15 every three months there. This woman let pipes burst in the basement and the water flowed. She never intended to pay the bill. These people wanted their money, so they looked to me. I didn't end up paying, arguing that I had signed no contract on it, and they were the fools who kept extending the deadbeat credit. But if it could happen to me, it could happen to you. It may cost you money or it may just cost you a major headache. Either way, know in advance what you are liable for.

Intangible Extra Costs.

This is touchier. You are making guess-timates at best.

---Repairs. If the person has gotten behind on the mortgage, you can bet all of the typical homeowner has gone to pot. There will be lots of small expenditures---light bulbs, landscaping and the like. Know, however, it could get MUCH larger. I looked at a house at foreclosure I really wanted. When it sold, my dad saw them carting out drywall. It seems pipes had burst in the basement, flooding ensued, and the drywall had rotted out. That's a BIG expenditure. And it could happen. (That's why it's important to get all of the Intel you can on the place. Otherwise, you are taking a risk. If you are willing to take a risk, know that you may have to budget for some remodeling.)

Miscellaneous Financial Considerations.

---Appraisals. If you will need financing, you'll need an appraisal. You'll have to find a bank large enough that a foreclosed home mortgage is not a big deal. Again, remember, you can't go on the property. All the appraiser can do is a "dry by."

---Insurance. This is a touchy one. Again, you're not allowed onto the property, but in that interim period while you cannot take possession, that house may go vacant and then it may be vandalized at worst or fall prey to basic homeowner stuff in the interim. You can, and should, get a bare bones insurance policy to cover at least the amount you bid on the property. Once you settle, replace it with a real insurance policy. Work with the lending bank for recommendations. You'll be told this doesn't happen. That just means you are working with a firm that has no idea how to deal with foreclosures.

---Moving out the former owners. This is rare, but I get asked this on a regular basis. People will call and tell me they've won a house at auction, so how long do the former owners have to move. Well, the auctioneer ONLY auctions the home. When you own the home legally, there may still be people living there. You will have to take legal steps to have them move. In the two years I've worked in the field, I've never seen it happen, but it CAN happen. The purpose of this article is to give you every financial scenario you need to think through.

The next article, Part IV, will guide you to that next step---you on the courthouse steps making the bid. You're just steps away from buying your dream home!