The sheriff’s auction occurs all too frequently nowadays as more homeowners lose their property to foreclosure. However, the sheriff’s auction is an excellent chance for a first time homeowner or a property investor to procure residential property well below its market rate.
Bidding on foreclosed property at a sheriff’s auction also benefits a lender as it manages to retrieve a percentage of its investment in the defaulted loan. However, because the properties are selling at prices anywhere from 50% or less than market value, the competition is fierce.
Successfully bidding on foreclosed property requires thoughtful planning and then fast action. Here are five tips to buy a foreclosed home at a sheriff’s auction.
Understand the process
A sheriff’s auction is also known as the second stage of foreclosure and results from a homeowner defaulting on a mortgage loan. Once the property owner defaults, the lender seizes the property and tries to liquidate the debt. It takes legal action to initiate a court order. The court order tells the sheriff’s department to set up a public auction. A public “Notice of Sale” announcing the auction is published in the local newspaper under Legal Notices. The date of the sale and basic information about the property, including the address, is included in this classified advertisement. If there is a legal newspaper, this notice is often advertised in that publication.
One the day of the auction, the lender will set a minimum bid. Bidders post their offerings and the highest bidder is selected. At this time, the winning bidder has the right to buy the foreclosed home and is required to post what is called “hand money,” usually a cash deposit on the property. However, the actual purchase occurs a short time later. The winning bidder must provide the amount due, often in cash or certified check, and then sign documents transferring ownership.
Be aware of state law
To successfully buy a home through a sheriff’s auction, bidders must be knowledgeable about the legal procedure. Every state has statutes governing the foreclosure process, including sheriff’s sales, if applicable. State legislatures post their statutes online for public access. This organization provides a summary of foreclosure laws in all 50 states. Bidders interested in auctions of foreclosed property must be sure their state allows for “non-judicial foreclosure,” which indicates a sheriff’s auction can occur.
Being informed is the first step in buying a home through a sheriff’s auction. However, interested parties must have the funds needed to close the deal, and often within ten days of the sheriff’s auction. Without the money, the offer to buy is dead. Make arrangements well before the auction. Interested bidders will pursue funding according to what is best for them. This could include a signature loan, a personal loan from friend or family or funds from savings. Some buyers of foreclosed homes form a partnership and share the costs.
The “As-Is” predicament
One of the disadvantages of a sheriff’s sale is the “as is” clause of the auction. Bidders cannot make a detailed inspection of a home prior to the auction. Most buyers would never place a bid on an item without first inspecting it for condition. With foreclosed properties, this is even more crucial since financially strapped homeowners may have neglected maintenance on their residence. The maxim of “let the buyer beware” applies here.
However, an interested bidder can do a drive-by viewing for a general sense of the external condition of the home. Look for red flags that indicate problems. These range from general nastiness and foul odors, to a crumbling foundation, rotten wood and peeling paint.
Additional information can also be looked up in the local property appraiser’s office. These public records will state the age of the home, square footage, number of rooms, type of heating and air conditioning systems, type of flooring, the most recent market and appraised value and if property taxes are paid or delinquent.
Keep in mind the deep discount of an auction sale. The costs of repairing minor problems will be insignificant compared to the bonus sale price.
Act in confidence
Lastly, be prepared. There could be anywhere from 30 days to several months between the Notice of Sale and the day of the auction. Use this time to familiarize yourself with state rules and regulations, line up your money and check the property. When the auction commences, make your bid in confidence. Whether your intention is to live in the home or use it for investment purposes, your strategic planning can garner a huge pay off.