KW Default Solutions
Two kinds of auctions
A courthouse auction is the foreclosure sale itself. It is usually held on the courthouse steps or at another set location, in person or sometimes online. The lender has not taken the home back yet.
An online auction happens on a website such as Auction.com, Hubzu, Xome or HUD's site. Many of these homes were already taken back by the lender, or by HUD, after no one bought at the courthouse. Rules differ by site, so read the terms for each one.
How a courthouse sale gets there
The path depends on your state.
In a non-judicial state, the lender's trustee records a Notice of Default. If the loan is not brought current, a Notice of Trustee's Sale follows, and the trustee runs the sale. This is the faster route. In our training, it could take as little as about 90 days.
In a judicial state, the lender files a lawsuit and records a lis pendens, which is a public notice that the property is in a court case. After a judgment, the sheriff runs the sale. In our training, this took 6 to 12 months or more.
The opening bid is usually the unpaid loan balance plus fees. It tells you what is owed. It does not tell you what the house is worth.
The money part
Courthouse sales are close to cash only. Buyers bring certified funds, usually cashier's checks. Financing and personal checks are not accepted. The trustee at the sale does not make change, so buyers often ask the bank for several checks in set amounts, such as $50,000 or $100,000.
Payment is due at the sale or within 24 to 48 hours, depending on the state. If the buyer misses it, the deposit is gone and there may be more penalties. Check the sale notice for the exact rule in your county.
Why it is not always a bargain
The lien being foreclosed may not be the first mortgage. Joe Iuliucci, one of our trainers, tells of a client who skipped the title check and found out the HOA, not the first lender, was the one foreclosing. He also tells of buying a property with an IRS lien bigger than the purchase price. What debt stays with a house is a question for a title company or real estate attorney, before the bid.
You may be buying a house with someone living in it. The deed does not move anyone out. Joe has seen it take around 126 days in Clark County, Nevada, and as long as 600 days in Los Angeles County. He has watched buyers there go to court 10 or 12 times to get people out. Your county may be very different, so check it.
Fees can add up. Online auctions may add a buyer premium on top of the bid. Check that sale's buyer premium, fees and due dates in the auction terms. In our training, HUD homes did not charge one.
You often cannot see inside. Many of these homes are occupied, so you may only see the outside. A bid is a bet on what you cannot see.
The wrong 128 Main Street
Joe tells a story from a trustee sale in New York on September 11, 2001. The world was falling apart that day, and the sale went ahead anyway. He and his investor partner bought 11 properties.
Before the sale, Joe had two hours to look at six homes for his partner. All were occupied and far apart, so he saw only the outside. At the last one, call it 128 Main Street, he ran quick numbers on the phone and sent them over. At the sale he went back and forth with another bidder and won.
Then they drove to the house. His partner parked well down the street. The address was 128, but there was a 128A and a 128B, and the receipt from the trustee said 128B. It was not the house Joe had looked at.
It turned out well. The house they bought was about eight months old, and the one Joe looked at was about 15 years old. His partner sold it back to the person living there, one of his quickest deals. It could just as easily have gone the other way.
The point is simple: confirm the exact property, not just the street number, before you bid.
Habits that protect your buyer
- Check the postponement list the morning of the sale. Many sales are postponed or canceled, sometimes at the last minute.
- Set a top bid ahead of time and do not chase past it.
- If you are new, watch a sale before you bid in one.
- Bring a partner for support and logistics.
- Have a title company or attorney look at the liens before the sale, not after.
Where agents fit
Investors who buy at auction often need someone to do the legwork. That can mean checking the outside of homes, running numbers on the day, and helping sell or lease the home afterward. Many online auction companies let you register as an agent, so check each site's rules. Ask your broker how fees and licensing rules apply before you take this kind of work on.
HUD gives owner-occupant buyers the first bidding window, in our training about 10 days, and then opens the home to investors. If your buyer will live in the home, that matters.
Before you bid
- Confirm the exact address, unit and parcel number against the sale notice.
- Find out which lien is being foreclosed and what stays with the property.
- Know if the home is occupied and how long removal usually takes in your county.
- Have certified funds ready, and know when payment is due.
- Add any buyer premium and fees to your numbers.
- Write down your top bid.
This week, pick one upcoming sale in your county and watch it from the back of the room. Do not bid. Just see how it runs.
Questions? Ask our team through the KWDS contact form.
KW Default Solutions is a resource for licensed agents who are new to distressed-property work. This article is general education, not legal or tax advice. Requirements vary by state and county.