Foreclosure Auction

At the end of a foreclosure, in most cases, the home is sold to a new owner at a public auction. (But in a strict foreclosure, the judge transfers the property directly to the foreclosing lender—a sale doesn't happen.)

Buying a home at a foreclosure auction gives you the opportunity to get a home at a potentially low price. But some risks are involved when purchasing a property at a foreclosure auction.

Here's how foreclosure home auctions work and how you can prepare for one.

How Do Foreclosure Auctions Work?

With judicial foreclosures, the foreclosure auction is often what's called a "sheriff's sale." This means that local law enforcement handles the auction, which happens in the sheriff's office or at the county courthouse, typically on the front steps.

A "trustee's sale" is basically the same as a sheriff's sale, but it is the final step in a nonjudicial foreclosure. The foreclosure trustee handles the foreclosure auction.

And, in some places, a "special master" (a person the court appoints) conducts foreclosure sales.

Sometimes, foreclosure auctions happen on the internet. More and more foreclosure sales are taking place online. Rules vary depending on the site.

You might have to register a certain amount of time before the auction or have to deposit a specific amount. For example, you could have to deposit 10% for each property on which you want to bid. So, in this example, depositing $10,000 would allow you to bid up to $100,000 for a property. And you might have to pay a fee to the auction website when you buy a property. Be sure to research ahead of time to learn how the process works.

The auction might be "absolute" (the highest bid wins) or with a reserve or minimum bid (the property must sell for a minimum set price; otherwise, the home's title goes to the foreclosing lender).

What Happens During a Foreclosure Auction?

The foreclosure auction process differs from place to place. Sometimes, state law governs the timing and bidding process, but not always. In almost all home foreclosure auctions, the foreclosing lender bids first at the auction, usually submitting the bid before the sale starts.

The bid will be a credit bid, which means the lender gets a credit in the amount of the mortgage debt. So, the lender bids the amount it's owed on the loan rather than bidding with cash. The lender may bid the full debt amount of the debt, including foreclosure fees and costs, but it might bid less.

Sometimes, the lender's bid must be at least the property's fair market value. Generally, though, the lender can subtract from the bid:

• the amount of unpaid real estate taxes
• the amounts secured by liens against the property that are senior to the lien being foreclosed, and
• estimated reasonable costs and expenses of holding, marketing, and selling the property (net of income received).

But, the bid doesn't have to exceed the total amount the borrower owes.

After the foreclosing lender bids, third parties, such as investors and the public, may make a higher bid at the foreclosure auction. A third-party bidder has to pay a higher cash price to win a foreclosure auction.

What Happens After the Foreclosure Auction?

After the auction, the winning bidder gets a deed that gets recorded in the land records. The purchaser gets the property in "as is" condition.

The proceeds of the sale are then distributed to pay the sale expenses and to the foreclosing party to pay off the mortgage debt. (However, if the foreclosing lender was the high bidder and gets title to the home, the property is considered "Real Estate Owned" or "REO." Usually, the foreclosing lender is the highest bidder at a foreclosure auction.)

When a foreclosure sale results in surplus funds—say because a third party wins the foreclosure auction by bidding more than the foreclosing lender is owed—those funds go toward paying off junior lienholders in their order of priority. Generally, lien priority follows the rule of first-in-time, first-in-right.

So, the first lienholder to perfect its lien by making the necessary legal filings or automatically in some cases) gets paid before subsequently perfected (or unperfected) liens. The first-in-time, first-in-right rule does have some exceptions, though.

Any surplus funds that remain then get paid to the foreclosed homeowner. However, if property sells at a foreclosure auction for less than the mortgage debt, the lender might be able to get a deficiency judgment against the foreclosed homeowner if permitted by state law.

How to Pay at a Foreclosure Auction

Third parties have to pay with certified funds, like a money order or certified check, sometimes for a percentage of the property price at the time of the sale. Requirements vary on how much you have to put down and when you have to pay the full amount. Sometimes, the winning bidder has to put down a certain amount, like $10,000, immediately after the sale, and the balance is due within a limited time.

Alternatively, you might have to pay at least the amount of the opening bid with some additional time to get the rest of the balance. Or you might have to pay the total amount of the winning bid at the sale.

If you don't make the full payment of the bid amount when due, the next highest bidder who timely tenders the total amount of that bidder's bid is deemed the successful bidder.

How to Prepare for a Foreclosure Auction

If you plan on going to a sale in person, contact the party holding the foreclosure auction to find out how much money you need to bring to the auction. Be sure to have your funds ready before bidding.

It's also a good idea to attend a couple of foreclosure auctions in advance of the one for the property you're interested in bidding on. You can learn the procedures, observe the bidders, and find out the process requirements.

No Right to Inspect the Property Before a Foreclosure Auction

Also, keep in mind that prospective buyers don't get to inspect the property before a foreclosure auction. Because the property still belongs to the borrower (the homeowner) until the sale is completed, a pre-sale inspection of the interior isn't allowed.

You can drive by the property to take a look, but don't trespass. If the exterior is in good condition, the interior might be okay as well. Also, you can look online for basic information about the home, like how many bedrooms and square footage it has.

You should also get title work to determine the priority of the lien being foreclosed.

Buying a Home at a Foreclosure Auction Is Risky

Buying a foreclosed home is risky. Homeowners sometimes intentionally damage the property before the sale, or a financially-distressed homeowner might have put off doing repairs or routine upkeep—perhaps for years. You could end up with a house that needs expensive work and renovation.

If you decide to bid on a property at a foreclosure auction, be prepared to take on a property that might need significant maintenance.

Because of the risky nature of buying a home at a foreclosure auction, these sales usually have a limited number of potential bidders. In fact, at many foreclosure auctions, the only bidder is the foreclosing lender.

How to Find a Foreclosure Auction

If you're a homeowner facing foreclosure, you'll probably get a notice of the sale as part of the foreclosure procedures. If you're thinking about buying a property at a foreclosure auction, you can check the newspaper notices in print or look online.

Websites such as auction.com and foreclosure.com list upcoming foreclosure auctions. Zillow also posts information about foreclosure sales. And many counties have a list of properties going to foreclosure auction online.

Foreclosure auctions are often postponed or canceled, so be sure to confirm the details before the scheduled sale.

Getting Help With a Foreclosure Auction

If you have questions about buying a property through a foreclosure at auction or need help with the process, consider working with an experienced real estate agent or talking to a qualified real estate attorney.

If you're a homeowner facing a foreclosure and have further questions about the process, speak to a local foreclosure lawyer. To learn about different alternatives to a foreclosure, like a modification or short sale, talk to a HUD-approved housing counselor who can help you at no cost.