If a homeowner defaults on his mortgage long enough, the lender may send the home to auction. This final step in the foreclosure process sells the home to the highest bidder. The process takes a long time and is risky for buyers, but it can work out for everyone in the end.
Just how does it work? Keep reading to find out.
Defaulting on the Loan
Lenders typically start the foreclosure process after a homeowner misses payments for three to four months. At that point, the lender files a Notice of Default with the county. This lets everyone know the home may go into foreclosure.
The homeowner still has time to redeem himself and make good on the payments. The owner can work with the lender up until the day of the sale. Never count on a home auction until it actually hits the auction block.
If the homeowner doesn’t make good on the loan, they stay in the home, but the bank moves ahead with the foreclosure process. It can take up to 12 months to get the home to the auction. This leaves the homeowner in the home for that time, unless he or she already vacated it.
Even if the homeowner lives in the home, the home probably won’t be properly maintained and repaired. Homeowners can’t afford it and won’t invest money in a home they can’t keep. Remember this as you bid on homes at auction.
What to Watch For
You’ll have to do your due diligence when looking thinking of bidding on a home. Typically, you can’t see the inside of the home before the auction. Even if you can, you can’t bring an inspector or appraiser with you at this time. You must rely on your own expertise to determine the home’s condition and potential value.
We recommend that you do your research, though. Look at homes in the area. How much are they worth? Also, look at the home’s public records. Are there liens on the home aside from the defaulted mortgage? Those liens become your problem if you buy the home. Figure the amounts into your bid so that you have enough to cover them should you win.
Talk with a contractor about the cost to fix up the home. Again, you’ll only know what you see and can determine for yourself, but you’ll have a good estimate. Keep these factors in mind as you bid on the home. You need cash for more than the home itself if you want this to be successful.
You May Need Cash
Next, find out the bank’s requirements. Do you need cash on the spot? Trustee sales require this, but not all sales do. If you can have financing, how long do you have to finalize it? Typically, you only have enough time for the title work and appraisal. Banks want the entire process completed in a couple of weeks. Take the time to get your pre-approval and all conditions cleared before you bid.
If you need cash, find out how much you need. Some auctions require a down payment when you register. Others require full payment on the spot if you win the bid. Know the rules ahead of time to avoid any delays.
The Types of Home Auctions
You may come across one of several types of home auctions:
- Reserve auction – The bank sets a specific price they want for the home. If no bids hit that price, no one wins.
- Absolute auction – The highest bidder, no matter the bid, wins the auction.
- Minimum bid auction – The lender sets the starting bid. No one can bid below that amount.
Is it Smart to Bid at a Home Auction?
You can get a great deal on a home at an auction, if you know what you’re doing. Many auctions only allow bids from a licensed realtor. It’s not a bad idea to enlist the help of one to get you through the process.
With the right steps and right advice, you can get a good deal on a home auction. But, if you end up with a home in complete disrepair and don’t have the cash to fix it, where does that leave you? Do your due diligence and find out as much about the home as you can. With that information and knowing the type of auction that it is, you can decide if it’s right for you.Click to See the Latest Mortgage Rates»