As Thomas Jefferson wisely noted, "with great risk comes great reward." This certainly holds true in the real estate auction world. Auctions offer the opportunity to secure properties at lower prices, thanks to a more exclusive pool of buyers who possess the necessary expertise and resources. Despite the risks involved, the potential rewards can be substantial. Whether you're new to auctions or a seasoned investor, these effective strategies to mitigate your risks and maximize your returns in the real estate auction market warrant review.
Risky Business
As you know, most auctions don't provide an opportunity to walk onto the property- yet alone inspect the inside, receive disclosures, or get a title exam- so due diligence is challenging.
We live in a digital age. Use online county records to review deeds, mortgages and property transfers. You are buying whatever property is described in the legal description in that mortgage or deed. It doesn’t matter what the listed address is, or the assessor’s parcel number that’s on document. It’s only what’s in the legal description on the mortgage or deed that is included.
For sheriff sales, you are buying the property subject to existing liens, and encumbrances. If you are the winning bidder and later discover an unrecorded lien, a junior lien or an unexpected squatter that moved into the property; it’s yours to remedy. Again, use public records, or your professional network, to investigate not only the property records, but also the owner(s) for civil suits that may point to liens. If there are title issues discovered during the deed confirmation process after the sale, in most cases the sale is voided, and you lose the property.
Find ways to gain access to previous sale listings, if they exist, to scan for condition and preexisting issues (this is a great time to have a real estate agent as a friend!).
You may need to evict the previous homeowners, tenants, squatters, etc. If that’s the case, you’ll be responsible for taking legal action to evict them from the premises. This means you need to be acutely aware of local rules on eviction. A cash offer to entice tenants out of the property may be the least expensive and efficient way to gain control over the property. If you can, visit the property and inspect the home from the outside to look for signs of occupancy. Also, you may not just be handed the keys to the property. Depending on the auction type, and the specific rules, you may have to call a locksmith.
You’ll need cash so you're not in contempt of court. All sales are final. A large deposit, or sometimes even payment in full, is due immediately upon a winning bid. Here's where a relationship with an established lending institution, like Spring Valley comes in handy. Since our niche is real estate investing, we are set up for fast closing to get you the cash you need to replenish your capital to get you moving to the next phase of the investment.
You may encounter right of redemption laws if the property is in a state that grants redemption. Meaning, homeowners may be able to repurchase their property even after its sale at auction. They can reclaim their home for a period of time after the sale by paying what they owe on their mortgage or property taxes.
In Ohio, the previous owner has until the confirmation of sale to redeem.
In Kentucky, the previous owner has up to 6 months after the sale to redeem if the winning bid is less than 2/3 of the appraised value.
In Indiana, there is no right of redemption.
Make sure you know the law of the land where you are bidding. If a homeowner exercises the right of redemption, the lender will compensate the buyer for their legal losses and utilities, but not any money that has been put into the property for repairs. Sometimes you can reach out to the previous owners and discuss their future plans. In states like KY (if winning bid is under 2/3 of the appraised value), this means the property is held up until the redemption period is over... No eviction, no wholesaling and proceed with extreme caution when renovating.
Once Again, the Pandemic Changed the Landscape
Before the pandemic, in-person auction was the mechanism for localized auctions. The onset of COVID-19 and social distancing restrictions made these traditional auctions unfeasible, leading to a surge in popularity of online auctions. After realizing the benefits of online auctions, to both the auctioneers and bidders, most judicated auctions have moved, or are moving, to permanent online auctions.
Another key change driven by COVID-19 is the year + long foreclosure moratorium, which limited the supply of foreclosed properties on the market during that period and the years following. We are just beginning to see foreclosures inching back to pre-pandemic levels.
Types of Real Estate Auctions
Judicial Auctions
Foreclosure Auctions
Sheriff sale auctions are public auctions where the proceeds from the auctions are used to repay these debts, with any excess proceeds going first to other junior debts on the property, and then to the owner.
Delinquent Tax Sale & Tax Lien Certificate Auctions
These types of auctions are nearly similar to sheriff sales. The biggest difference is they typically wipe out all other liens so can be a little safer.
Criminality Auctions
These sales are few and far between, so we won't mention them again, but forfeited properties seized by the Justice Department are available for sale through the General Services Administration website and US Department of Treasury for federal tax delinquencies.
Where to Find Judicial Auctions
The Sheriff is generally the elected county official that enforces the laws behind the judicial auctions. They typically serve as officers of the county courts, which is where their responsibility for court-ordered sales comes from.
Judicial sales are found online at the county level. For online auctions, there is a 3rd party site used by the county. Simply Google 'your county sheriff's office' or 'your county + real estate auctions'.
There is always the old fashion way as well. County newspapers still publish auctions each week.
Court Ordered Auction by Private Selling Officer (Judicial in nature, but different regulations than those auctions held at the county level, so we'll give these their own category)
A Private Selling Officer (PSO) is an appointed officer of the court who is ordered to sell foreclosed real property for the court in a judicial sale instead of the county Sheriff. PSOs are real estate professionals who hold both a real estate license and an auctioneer’s license. Unlike the county Sheriff’s auction, PSOs can pay a commission to real estate agents who participate in their auctions. Additionally, PSOs are authorized to hold open houses on vacant properties and issue deeds to auction winners immediately after payment is received. Ohio is a forerunner for these types of auctions. Check with your state to see if PSO sales exists in your area.
Where to Find These Court Ordered Auctions
PSOs are authorized to list properties with their real estate brokerage, allowing the properties to be listed in the MLS and online with cooperating real estate firms and other websites such as Zillow, Realtor.com, LoopNet.com, and many others. PSO are required to disclose the nature of the sale in the marketing remarks, so end-users should be able to easily distinguish these sales from other real estate agent sales.
REO Sale Auctions
Auction of Bank Owned Properties AFTER Foreclosure
When a property goes up for auction at a Sheriff sale but doesn’t get sold, or is purchased back by the bank, the property goes back to the lender and becomes what is known as real estate owned, REO property.
REO auctions can vary quite a bit, with the bank and auctioneer often determining the rules. Having said that, REO auctions still have a degree of state regulation. Sometimes you might find the rules will vary between properties at the same auction, so it’s critical to carefully read the terms of each auction before participating.
Sometimes REO auctions offer inspections, title insurance, certain days where you can preview the property, and even financing. Sometimes these auctions require you to pay in cash and you may have to deal with evicting the current occupant.
In addition to the bid price of the property, often you will have to pay the auctioneer what is known as a “buyer’s premium.” This is typically a 5-10% fee of the winning bid.
Where to Find REO Sale Auctions
Auction Formats
There are various types of bidding methods available. Gain a competitive edge by familiarizing yourself with the diverse bidding options before attending an auction in person or online. Access detailed information on bidding styles through the auctioneer's website or request a direct communication for a comprehensive overview. Stay informed and be prepared to engage effectively in the upcoming auction event.
Auction Bidding Type Review
Absolute Auction – The property will be sold to the highest bidder no matter what (there’s no reserve). The property will not be returned to the bank. This causes a higher level of attendance and excitement.
Minimum Bid Auction – There is a published minimum price, and if that price is not met, then the property will not be sold. This minimum is distributed on the listing and marketing materials, so only qualified bidders attend and understand the price desired by the seller.
Reserve Auction – While there is no published minimum bid with this type of auction, sellers choose the price at which they will sell but do not have to disclose this information. Often the seller also has a specific amount of time to confirm the sale, usually 48 or 72 hours.
You Won a Foreclosure at a Real Estate Auction – Now What?
What's next will vary a bit from quick locksmith solutions to redemption periods depending on the auction format. Now matter the auction format, the next 3 steps will take place:
Next steps:
Complete the sale – Meet with the auctioneer (online registration often takes care of this step prior to bidding) to provide your contact information, how you want the property to vest (for example as an individual, a partnership, an LLC or a trust) and pay up.
Payment – You’ll typically need a cashier’s check for all or a portion of your maximum bid and a photo ID. At an online auction, you may have to post a deposit 5-10 business days in advance. Be sure to check the rules for the particular type of auction you will be attending. Pay the required amount on the spot in with the accepted form of payment. Any overage paid will be refunded to you when at the time you take deed.
Taking deed – The Deed of Sale confers the title of the property to the investor that placed the winning bid. If the sale has a redemption period you may receive a certificate of purchase entitling you to receive a deed after the redemption period is over, assuming the owner doesn’t pay to redeem the property.
The Takeaway: Thoroughly Investigate Each Auction to Reap the Reward
When it comes to real estate auctions, the potential for high risk is matched by the possibility of significant rewards. Prepare thoroughly to minimize risks and maximize your chances of reaping the rewards.
