8 Questions Newbies Have About Starting in Foreclosure Auctions
There is an abundance of opportunities for investors at foreclosure auctions. Every listing is a chance for someone to obtain a fantastic property for a significant discount, restore it, modernize it, and then go on to sell it for a tremendous profit, or rent it out for substantial passive cash flow.
Amazing cash deals happen every day. However, the road to success with foreclosure purchases is paved with the expensive and often devastating mistakes of new investors who didn’t do their research. In school, we were taught, “There is no such thing as a stupid question.” Later in life, it sometimes seems that this isn’t entirely true. Nobody wants to look inexperienced. In the investing world, everyone would prefer to seem like they know what they are doing.
However, it is better to ask questions now and embrace looking naïve than to brazenly advance into the unknown, risking thousands of dollars, months to years of your life, and whatever reputation you were protecting by not asking the questions you had in the first place.
Here are some questions that new investors should be wise enough to ask.
1. Why Do I Need a Title Report?
A general warranty deed is the holy grail of home ownership. It protects you against any defects on the title, going all the way back to the beginning of the property’s existence. You will not receive this type of deed at a county foreclosure auction.
A special warranty deed protects you from defects only for a specific period of time, typically only for the duration of ownership of the grantor of the deed. You will not receive this type of deed either.
At a foreclosure auction, you will receive a certificate of title, and after a tax deed sale, you will receive a tax deed. These are not in any way, shape, or form any kind of warranty. These documents merely show that you purchased the property at an auction and received ownership. Liens and clouds on the title could potentially still attach.
In an HOA foreclosure, you could find that the property still has a mortgage on it — a mortgage that will have every right to foreclose on the property if it is not paid, regardless of who owns it now. Even if it is a mortgage that is foreclosing on the property, you want to verify if this is a senior or a junior mortgage and check for subordination agreements, dates recorded, or any other stipulation that may give you an idea of the lien hierarchy.
You could unknowingly purchase a junior lien foreclosure, only to have the senior lien foreclose a week later! A title report will help you evade being snared by this common pitfall to new investors. Even in the case of a tax deed sale, where private liens typically do not attach after the auction, government liens can remain.
A title report will outline any lien that is recorded with the county that currently attaches to the property. The title reports at PropertyOnion.com are provided to you in easy-to-read report form with the supporting documents attached.
When reading your report, if you have questions, you can always call customer service to have a PropertyOnion.com representative go over the report with you. It is always preferable to spend a small amount of time and money to get clarification prior to the auction than to find yourself in an expensive legal entanglement after “winning” a nightmare property.
2. Can I See the Inside of the Property Before the Auction?
No, you cannot. The reason for this is that the property is still under the ownership of the original owner (the defendant in the foreclosure). It is never advisable to show up at someone’s home, especially someone who is likely in a very unhappy phase of life, and then ask to come inside and look around.
Sometimes the person living in the home is unaware of the foreclosure. This is usually the case if they are tenants. You do not want to be the one to break the unfortunate news to them, considering you do not know how they will react. The county will not be able to assist you with viewing the inside of the home, and neither will your agent if you choose to use one.
Many people opt to drive by the property, and that could give you a vague idea of the condition. If you Google the address, you may find prior listing information that will show you some pictures of the interior.
Another idea is to use the skip trace feature on PropertyOnion.com to contact the owner. You just click on the blue skip trace button on the Property Information Page. This is typically used for discussing the possibility of arranging a short sale prior to the auction. However, you could attempt to speak to the owner or known associates with your questions regarding the property and its condition. If you utilize this option, please be respectful of the owner and their time. If they don’t want to assist you, then take “no” as the answer and move on.
We have other strategies we divulge in our “Step-By-Step How to Buy at Foreclosure Auction” e-book we give to our premium members. These tried-and-true methods will give you the best ways to figure out the condition of the inside of the property.
3. Can I Finance These Deals?
Not exactly. When most people think about buying a home, they envision a to-do list of tasks they will need to complete, and right at the top of it is the pre-approval of a mortgage. Mortgage companies want you to apply, be pre-approved, and endure a time-consuming analysis of your financials and the property’s value.
Many mortgages are not available unless the home is “move-in” ready, which auction properties are not. Financial institutions want to be sure that, if for some reason you can’t pay, the property will be in a reasonable condition with a marketable title. Foreclosure auctions are for distressed properties, and there is no guarantee that they will be a savvy investment for the lender.
Furthermore, there is no time for anyone to even find out. Foreclosure auctions must be scheduled within a very short time of the ruling. According to PropertyShark.com, this would be within 30-60 days. However, you are not without options, even if you don’t have thousands of dollars in liquid assets ready to go.
Many new investors choose to take out a line of credit on their existing home’s equity. This is called a home equity line of credit (HELOC). According to Forbes.com, a 10-year HELOC’s interest rate is averaging 5.49% and a 20-year interest rate is averaging 7.26% in 2022. Managed correctly, this is a potentially lucrative way to leverage your equity. On the other hand, this is a lien on your current home. It is essential to shop around and talk to various financial institutions before making a decision that risks your most important asset.
After you have purchased the property and are ready to rehab it, hard money lenders are a great option. In this case, the investment property itself is the collateral, and interest rates would be high (as much as 21%, according to Realtor.com), and the loan term would be short term (usually 6 months to a year).
The lender would want to look into the location and value of the property, but they would be able to produce the needed funds much more quickly than a traditional mortgage. Private lenders work in a similar way, but they are typically other investors who have sources of revenue outside of lending.
PropertyOnion.com has a list of recommended lenders under More Services.
4. Why Do Auctions Keep Getting Canceled?
Auctions are canceled frequently and for a variety of reasons. If your heart is set on a canceled property, do not lose hope. Many of these auctions will be rescheduled later.
If, for instance, the plaintiff did not submit their proof of publication by the deadline, the auction must be rescheduled. The plaintiff is required to post a notice of foreclosure in a newspaper for two weeks and then again five days before the sale. Prior to the auction, they must prove this to the county. If they are unable to do so, then the auction is rescheduled so they fulfill this important requirement.
Sometimes the auction is delayed due to the actions of the defendant or their attorney. Motions can be filed that will delay the auction, and this can go on for years. The homeowner can also choose to file for bankruptcy, and this will cancel the auction. It will be rescheduled a few months later.
Of course, there is always the possibility that the homeowner was able to pay back their debt and save their home. They could have also sold it in a short sale or worked something out with the lender and permanently stopped the auction.
If a particular property has caught your eye, it is worth keeping tabs on the property’s future. Simply create a saved search for it and then set your notifications to be notified when it is listed again.
5. What Is the Difference Between a Foreclosure and a Tax Deed Sale?
In a judicial state, such as Florida or Ohio, foreclosures go through the court system. A homeowner has an outstanding debt (often a mortgage or a homeowners association balance). The lienholder then initiates a foreclosure sale to recoup the money that the court has determined they are owed (the unpaid amount plus fees). This is called the “final judgment amount.”
A foreclosure auction is then scheduled within a couple months of the ruling. The lienholder will receive a “credit bid,” which is the amount they are owed. They can use this to bid for the property at the auction (if they want it), or they could choose to not participate and then they will be repaid from the proceeds of the auction.
When you see the term “plaintiff’s max bid,” it is referring to the amount that the lienholder has as their credit bid. Bidders who are not the plaintiff are referred to as “third-party bidders.” Don’t be overly discouraged if the plaintiff has a larger maximum bid than yours. The plaintiff does not always participate, and third-party bidders win foreclosure auctions all the time.
On the other hand, don’t assume that you have it in the bag if you don’t see the plaintiff’s max bid. Banks can hide their max bid to increase bidder participation. Should you win a foreclosure sale, after a 10-day redemption period, you will receive a certificate of title. Other liens can still encumber the property as well as taxes.
In a tax deed dale, the homeowner has not paid their taxes, and now there is a tax lien against the property. These tax liens are sold as a debt to an investor who pays the county the amount owed. They are then owed the debt plus the preset interest rate on the tax lien (18% in Florida).
After two years, if the debtor has not paid, the investor can initiate a tax deed sale. The tax deed sale is an auction very similar to a foreclosure auction. Should you win, you will receive a tax deed immediately and will need to do a quiet title action to have a marketable title.
6. How Do I Get Started Buying at County Auctions?
The first step we recommend is becoming a premium member of PropertyOnion.com and downloading the “Step-By-Step How to Buy at Foreclosure Auction” e-book and all the other guides we give to our premium members.
Once you have identified a property that you would like to bid on, order the title search and read it carefully. If you are certain that this is the property for you, the next step is to create a bidder’s account on the county’s auction website.
If you are a Premium member, this can be done by going to the Property Information Page and clicking on “Interested? Bid on this Property” under Auction Information. This will redirect you to the county’s auction site if the county has its auctions online. If the auctions are in person, then you will see a page with the address and information you will need to participate.
Prior to the auction, you must deposit 5% of your maximum intended bid with the county clerk of courts. Take the time to familiarize yourself with the auction website so that on the day of the auction, you can log in and get started with no difficulty.
7. What Happens if I Win?
If you win a Florida foreclosure auction, you must pay the remaining 95% of the winning bid by noon the following business day in almost all counties. If you do not pay, you will forfeit your deposit.
After the auction, a ten-day redemption period begins. Once the ten days have passed, you will receive your ownership documents. For a foreclosure sale, this will be the certificate of title. For a tax deed sale, it will be a tax deed. You can then hire a locksmith to gain entry to the home. You will also want to consult with an attorney about the title and what it will need to be marketable.
For a tax deed, you will need a quiet title action. For a foreclosure sale, you will also need to discuss the title with an attorney or title company and determine what you will need to do to have an unclouded title. You may also need to receive advice on other matters that come up, such as if you have purchased an inhabited property.
It is never a bad idea to seek legal counsel, especially if you are new to real estate investing. Premium and Agent members of PropertyOnion.com receive VIP rates for all our referred attorneys.
8. What Happens if I Lose?
A common question from new investors is, “Will I get my deposit back if I don’t win the auction?” The answer is yes. The county does not keep everyone’s 5% deposits after the auction.
You can contact the county clerk of courts and request your deposit to be sent back to you using the same process as you used to send it. You can also choose to leave your deposit with the county to use on a future property.
Keep Asking Questions on Your Investing Journey
For valuable properties with titles that are not overburdened with clouds and defects, there can be an annoyingly copious number of bidders. Competition, especially in a hot market, can be fierce. It may take you many attempts before finally winning a foreclosure auction, but if you are learning this rewarding investment niche, then you haven’t really lost, have you?
New investors at foreclosure auctions have a lot of questions, and if they don’t, they should! The more nuances about Florida foreclosures that you learn, the more questions you will have. There are layers upon layers of information, laws, strategies, and ideas to explore.
When you think of new questions to ask, write them down and research the answers when you can. The right questions lead to the right answers, and someday you will be the successful investor that the “newbies” come to for advice.