How to Buy a Home at Auction



Original Post Date: April 26, 2010

Q. I am curious about buying a foreclosure home at auction. I don’t want to spend more than $500,000. What’s involved? Can you find a good deal at one?

–Columbia, Md.

A. You can pick up a deal at an auction—if you do a lot of sleuthing in advance, and can keep your emotions in check. But realize that seasoned investors often cherry-pick most of the best properties and try to make a deal with the owner before the property hits the courthouse steps. You should find a good buyer broker who’s experienced with foreclosures and do the same.

Still, some bargains do make it to the block. But before you bid on any, I suggest visiting a few sheriff’s sales to familiarize yourself with the process and players. You can find such sales listed in the classified section of your local newspaper. In Maryland, sale notices must be published in a newspaper for three successive weeks, with the last ad occurring no more than seven days prior to the sale. Or, you can subscribe for a fee to one of the numerous foreclosure Web sites like RealtyTrac, which currently lists 105 homes priced at less than $500,000 headed for sheriff sales in your area.

When you’ve targeted a few prospects, look up their addresses on Web sites like Zillow to see what home values are in the neighborhood; since you’ll have to pay more in costs and repairs than you would in a regular sale, you don’t want to pay more than 70% of market value. Although you probably won’t be able to get inside any of the properties, at least drive by to assess their conditions.

Check courthouse records to see what liens have been filed against these properties, and who has initiated the foreclosures. Usually, it’s the first lien holder, but not always, since in your state junior lien holders—with the exception of the tax lien holders—are wiped out in the sale. If a second lien holder is initiating the sale, you may have to pay off a whopping first lien, in addition to the auction price.

Understand that after all this research, the properties you want may never make it to the block. In Maryland, as in many other states, homeowners have up until one business day before the auction to stop the sale by paying all missed fees and mortgage payments.

If any of your target properties do get auctioned, set a firm limit to what you’ll bid on each home, and don’t let other bidders (who might even be straw men working for the sellers) push you beyond it. And if you’re successful, understand that you are buying the property “as is,” that you will be paying all closing costs, and that you won’t get the keys immediately. In Maryland, courts must ratify all sales, a process that takes at least a month. You’ll then be given an additional 30 days to settle and to start proceedings to evict the old owner, if necessary. Backing out of the deal at any point after the hammer comes down is possible but expensive: You’ll have to forfeit your deposit, and the property will be resold at your expense.