Chasing Down the Foreclosure Part 2 – Auctions

See part 1 for houses that are in default or pre-foreclosures.

See part 3 for REO

Going to Auction. 

You may have heard a story on someone who bought a $400,000 house on the courthouse steps for $80,000. While not impossible, this is highly, highly unlikely.

This is how it usually goes. The notice is filed saying there will be an auction date for 123 Main Street on May 1st. You go to the courthouse steps, and the official who is auctioning the property announces that the auction has been postponed to a yet to be determined date.

But you are determined to buy 123 Main Street, so you make the next, and the next, and the next auction date. So finally it comes up for auction and you are sure to steal it because you are the only one there. www.SouthernOregonHomeValues.com says the property is worth $300,000. The opening bid on the property is $375,000. Where’s the deal?  Essentially the bank that is in first position on the property has a bid in for at least what they are owed. And by default, it usually wins, because if the house had a loan on it for way less, the previous owners would have sold it instead of letting it foreclose, and pocketed the cash.

Another pitfall is they will actually auction off the 2nd note on a property. So lets say someone has a property with a $250,000 first and an $80,000 second on it. They may auction what you think is the property, but it is actually just the $80,000 second. So you think you bought the house for $80,000 just to find out that in order to get the house, you have to clear the first too. So you either sink another $250,000 into the house, or hope that somehow you can get the borrower to pay the note that you now own. 

So let’s say now that 123 Main is your dream house, and they are auctioning it for $275,000 and you think it is worth $300,000. So you go ahead an make the bid. This is a whole new set of pitfalls. First, you need cash. 2nd, you get the house as-is with no inspections. So if the foundation is no good, too bad. 3rd, you don’t get a title report and title insurance. So there might be other judgements or the title may not be clean and someone could possibly lay claim to ownership.

To me, buying a house on the courthouse steps is Graduate level investor stuff. The risks are huge, and the investor really needs to be able to afford to be wrong every once in awhile. I cannot recommend to anyone who doesn’t do that kind of investing full time to get involved.

Like on Part 1, I don’t specialize in this kind of property sale. It involves a lot of leg work on a lot of properties that never make it to the courthouse steps, or aren’t a good deal when they do. I would not have time to take care of my clients in the market for houses that were actually for sale, or my clients who are wanting to sell their houses. If I stood to gain $100,000 a year from it, it could be worth the full time job. But not for a small percentage (no compensation is actually offered on the courthouse steps) that my client would pay me for assistance, and the risk involved, it is not worthwhile.