What Happens at a Foreclosure Auction?

by Xin Lu on 14 November 2012 1 comment
Photo: BurnAway

Foreclosures have declined recently, but many houses are still being auctioned on courthouse steps across the country. Recently I attended one of these auctions; here is a run down of what happened and what I learned. (See also: The Process for Purchasing a House With Cash)

Finding a Foreclosure Auction Near You

Generally the list of houses up for auction are posted at an official building in each county, and many listings are also accessible online through listing services such as LPS Agency Sales and Posting. These auctions are also called trustee's sales because the trustee of the mortgage is making the property available.

The auction we attended was for Solano County in California, which covers about a dozen cities. We arrived at the Vallejo City Hall a few minutes before the scheduled auction. The auctions happen on the front steps of city hall twice a day. When we arrived, the auctioneer was sitting on the ground filling out forms. A few more people filed in and waited quietly.

The Auction Process

The auctioneer stood up and asked if everyone was ready, and then she started the auction by reading out all the listings that were canceled or postponed. Many houses get taken off the auction block because the banks have worked out a short sale or decided to modify the loan, and cancelations can happen as late as the date of the auction. After she rattled off a dozen numbers and addresses, she finally got to the actual houses for sale.

The first house was a 2,000 sq ft property in Vallejo, and the opening bid was $147,000.

Bidding Requirements

Before bidding, the qualified bidders stepped up to show the auctioneer their money. Basically, you can only bid if you can show that you have cashiers checks that can cover the amount of the bid. The bidders all have hundreds of thousands of dollars in cashiers checks in their pockets. A few people went up with their envelopes and then the bidding began.

The Bidding

The first bid was for a penny over the opening bid, then bids of $100 and $500 came in from two or three bidders. Finally the house was sold to a bidder for $158,000. After it was sold, the winner and the auctioneer stepped to the side to fill out forms, and the buyer gave the auctioneer a number of cashiers checks adding up to at least the bid amount. Any overage would be refunded later. The whole process took about 10 minutes.

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For Buyers With Cash, Savings Are Substantial

During one of the breaks we talked to the winner of the first house. He told us that usually buyers can get 25% to 30% off the market price at auction. For example, the property he purchased for $158,000 was probably worth around $200,000. However, the risk is that buyers can't inspect the inside of the houses they buy, and they are responsible for any liens such as back taxes or unpaid utilities. Buyers also need cash to close the transaction right on the spot. For these reasons, buyers are mostly professional investors or work for bigger companies.

After they purchase these houses, they often have to deal with the unpleasant business of evicting the former owners and making any necessary repairs. Currently many investors are renting out houses after they buy them. They are planning to sell after the housing market recovers further. The bidder we spoke to works for a company, and he said that he buys one or two houses per day.

Too Many Houses, Too Few Buyers?

In the end only a few houses sold. Many listings went back to the bank because the starting bid was much higher than the current market price. The investors had all done their research, so they did not bid on those properties. The houses that go back to the lender eventually will end up on the open market or will be sold to other investors in batches.

It is definitely possible to make money on these properties if you do your research and a lot of legwork in attending auctions in your area. I felt like it was actually much more transparent than buying a house from a realtor because everyone knows the bids, and there isn't a lot of competition. The deal also closes right away, so it is a much more efficient process. However, it is definitely not the way to buy a house for those who need a loan or those unprepared to make substantial repairs on their new, formerly foreclosed property.

Have you thought about purchasing a house at a foreclosure auction?

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Guest's picture

Great read for people that are going thru this or just want insight as to what happens at the auctions.