Buying foreclosure homes at auction can be one of the most frustrating things that you do as an investor. It can also be very lucrative. The foreclosure laws are very different in each state. We’ve purchased most of our foreclosure homes in Florida, which is a “lien theory” state…meaning that there is a “mortgage” that places a lien on the property, so it goes through the court system (judicial process). In states such as California, Missouri, and North Carolina, they state is known as a “deed theory” state where the borrower signs a “Deed of Trust” that technically transfers ownership of the property to a “trustee” (usually a law firm that represents the lender) until such time as the loan is paid off. Deed Theory foreclosures are “non-judicial”, meaning that the courts don’t get involved. Deed Theory foreclosures are much, much quicker that lien theory foreclosures.
Most of our purchases through foreclosure auctions have been in Florida. Most of the counties in Florida use an on-line system that is actually quite smooth. The problem with any auction is that, unlike HGTV show auctions, you are bidding against many, many investors…and the lender themselves.
Lenders are granted “auction credit” for the amount of their loan plus fees plus interest. They then place a bid in with the entity that is holding the auction. The auction takes place and if no one outbids the lender, the property goes back to the lender. If someone bids higher, they get the property. In this day and age, I’ve been seeing lenders bid more than the property is worth on a consistent basis. This means that most of the properties that we have seen go up for auction end up going back to the lender.
Auctions are difficult places to buy property as so many people tend to bid. Many of them bid much higher than they should bid leaving reasonable bidders (like yourself) on the sidelines. You’ve spent tons of time preparing your bid. You’ve visited the home, estimated repair costs, pulled your comparables and still, more often than not, you don’t get the property. Unfortunately, this is the life of an auction bidder.
Buying properties at auction can be a scary and frustrating venture, but every now and then you strike gold.