How foreclosure auctions work.

How foreclosure auctions work.

When borrowers default on their mortgage payments, they stand to risk losing their home to the mortgage lender. In the event that this happens, the property is of little use to the lender. They must resell it as quickly as possible and to the highest bidder. This usually results in an auction being held to sell one or more properties.

Sealed Auctions

Because of the work done by Government Agencies over the past twenty years to encourage home-ownership for all, they now find themselves with a regular stream of foreclosure properties. This is due to the policy taken to guaranty mortgages at preferential rates to people on marginal incomes. Many of the properties are sold in a sealed auction where no one other than the auctioneer sees all of the bids. Individuals must make an informed judgment about the minimum the agency will accept for the property and a strategic guess about what others will bid.

HUD Auctions

The US Department of Housing and Urban Development (HUD) conducts an electronic sealed-bid auction through a country-wide network of real estate brokers. Anyone can bid in these auctions, however people intending to become owner-occupiers are given preference over developers, landlords and investors. Bidders must also make a deposit of “earnest money” to help validate their bid. Earnest money is $500 for properties with a value of less than $50,000 and $1000 for properties over this value.

A HUD auction is conducted over a 10 day period and all bids are classed as arriving at the same time for the first five days. If there are acceptable bids in the first five days the property will be sold to the highest bidder. If the bids received in the first five days are unacceptable, bidders can re-bid each day thereafter and a decision will be made at the end of each day whether bids are acceptable and a sale is declared. If the 10 days elapses and no owner-occupier bid meets the requirement, all other bids will be considered and the acceptable bid level may be dropped.

Open Auctions

Open auctions where an auctioneer will take bids from an assembled audience are still fairly common. In an open auction you know what all of the other bids are and you are able to judge when to join the bidding and if you want to dip out if things are getting too rich. These auctions have an energy all of their own and they can become quite addictive.

County Court Auctions

The classic foreclosure open auction takes place on the Courtroom Steps. You will be expected, in many instances, to demonstrate proof of your ability to pay. This generally entails bringing with you a certified check or money order to the value of 10% of the amount you intend to bid. It is necessary to show your check to the auctioneer or referee prior to the auction to demonstrate your sincerity; however this should be done with care to avoid advertising your intentions to your competitors.

Needless to say, all your research should be complete prior to the auction to ensure that you understand the condition of the property, the work necessary to bring it up to market value and the condition of the title. Buying at auction without this essential homework could leave you holding a lemon.

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