In the United States, after a court enters a judgment of foreclosure in favor of a mortgage lender, the sheriff of the county where the property is located or another officer of the court will hold a public auction to sell the property so that the mortgage debt can be paid. The officer who will conduct the auction will require all bidders to prove that they have the funds to complete the purchase.
Notice of the auction is published in local newspapers, and lists of properties being auctioned on a particular day should be available from the office of the county clerk or the sheriff.
Other interested parties, such as holders of second and third mortgages, may be present at the auction because the foreclosing lender must notify all lien holders of the auction.
Sheriff’s Sale/Foreclosure Auction
In many states, the lender makes the opening bid. This is a formality that usually sets the unpaid balance of the mortgage as the base price for the start of the bidding. Bankruptcy filings and other factors may result in the lender bidding less than the balance due.
The officer who conducts the auction will award a deed to the successful bidder, who then becomes the new owner of the property. The next step is to have the court confirm the sale. This means that the court determines whether the sale was conducted fairly and in accordance with the applicable laws and regulations; state law dictates whether confirmation takes place a few days or a few weeks after the auction.
Potential Problems for Real Estate Investors
Not knowing market value . Because investors cannot evaluate the potential of a property if they do not know the market value of that property, it is imperative that investors familiarize themselves with the prices at which similar properties have recently sold in the area. By knowing what similar properties go for in the neighborhood, investors have a yardstick by which to calculate what is a reasonable price to pay for a distressed property at auction.
Getting occupants out. In states where mortgages are created to evidence purchase-money loans, homeowners may stay in their homes for as long as a year, depending on what the law provides. In states where trust deeds are used instead of mortgages, a homeowner must vacate the property before the sale of the property by the trustee, usually fewer than four months.
As the new owner of the property, it is up to the successful bidder to get rid of whomever is occupying the property. The occupants may not be the former homeowner and family and instead may be relatives of the former owner, renters, or even squatters. The occupants may be reluctant to vacate the property. They may even be hostile.
To evict the occupants, the investor may have to hire an attorney for the court proceedings. A better course may be to offer the occupants an incentive to leave, such as paying the moving expenses or one or two months of storage fees, or an outright cash payment.
For more on what can go wrong for a successful bidder when the foreclosed property is occupied.
Emptying and cleaning the property. In addition to removing the occupants from the property, the successful bidder will have to empty the property of items left behind and of no value. Related to this is cleaning the property. Occupants who were reluctant to leave may have left the property dirty and full of trash and useless items. They may even have damaged the property.
Having insufficient resources. Bidders at foreclosure sales often are not allowed to inspect the property before the sale. This makes it necessary to guess how many repairs, improvements, and updates are needed and what it will cost to make the property legally habitable and marketable; in short, the return on investment cannot be calculated with any certainty. Buying property with this much uncertainty is inadvisable not only for inexperienced investors but also for those whose real estate investment plans do not support such high-stakes risks.