Why are Some Foreclosure Auction Sales so Cheap?
As you look through the previous day’s foreclosure auction results you see some eye-popping sale prices. Some properties you know to be worth $300,000 or more have sold for $50,000, $10,000, even $100! How can this be? Surely something is incorrect, or you are being tricked into buying something right? Well no, not really, you just need a primer on foreclosure auction results.
Let’s start with an example foreclosure property. A property with a market value of $300,000 which is located in a community with an association that charges a monthly maintenance fee. This property also has two mortgages, one for $200,0000 and a second one with an equity line of $20,000. Mortgage #1 is held by a small bank that was prolific during the Great Recession and was packaged up and sold over and over again to other banks and investment firms. Mortgage #2 is an equity line of credit known as a HELOC (home equity line of credit) from Wells Fargo that is currently maxed out.
Tragedy strikes, the owner loses their only source of income and no longer pays their mortgages or HOA monthly dues. Somehow this homeowner manages to get someone to replace the roof and they place a mechanics lien on the property as they have not been paid their $2,500 balance. The HOA is also not being paid their monthly maintenance fee and they place an $8,500 lien on the property for what they are due. This property has a title full of encumbrances, mortgages, HOA liens and a mechanics lien.
The $40,000 Foreclosure Auction Winning Bid Scenario
Within 180 days, mortgage #2 files a notice of Lis Pendens, the first step in the foreclosure process. The Big Bank that is well run has their battle tested and honed foreclosure machine firing on all pistons. The homeowner is distraught and does not seek legal help and does not respond to the foreclosure lawsuit. The Big Bank fast tracks the foreclosure process and they quickly get a final judgement of principal plus legal fees for a total of $34,800. The property goes to auction and an experienced investor armed with our “HOA Foreclosure Play” strategy wins the bidding at $40,0000. The investor then follows our Foreclosure Eviction strategy and our homeowner leaves under win-win terms to rent elsewhere.
To the uninformed person viewing the auction results, they see a $300,000 house that just sold for $40,0000. That is an 86% discount off its retail market value! Our informed members who use our site to do their research know this is not the case. Although this winning bidder will still likely make a handsome profit by renting it out, they are most likely not making a $260,000 spread. A quick Title Search shows there is still Mortgage #1 and HOA liens to deal with. Both these other lien holders encumber the property still and without satisfying their liens you do not have a marketable title. The only profitable play is the “HOA Foreclosure Play” and the returns are juicy on this investing maneuver.
The $10,000 Foreclosure Auction Winning Bid Scenario
Our property worth $300,000 has already sold at foreclosure auction for $40,000. A year has passed since the 2nd mortgage foreclosed and the investor that purchased has made a tidy little profit renting the house out in the meantime. The 1st mortgage holder began litigating and our investor is defending the foreclosure with his lawyer. The 1st Mortgage has a Final Judgement in the amount of $230,000 for principal and fees. Auction dates are set and canceled as the lawyers battle it out.
In the meantime, the HOA association also now has a Final Judgement of $8,500 for unpaid monthly fees our investor was not making. The HOA has their day at the auction and bidding goes up to $10,000 within 10 minutes and it’s sold to a 3rd party bidder. The 3rd Party bidder is new to County Foreclosure investing and unfortunately does not do the research. This new investor does a title search after he wins the bidding and quickly is told to walk and only loses his 5% deposit. With an encumbering 1st mortgage of over $200,000 our newbie investor does not have the resources and walks. In the auction results the county still shows his winning bid of $10,000. Technically the Plaintiff is the winner since the investor walked away without paying.
The $100 Foreclosure Auction Winning Bid Scenario
The Roofer with the Mechanics Lien still has an interest in the property as he was not named in either of the previous foreclosures. Even though his lien was last to be recorded the county did not index his lien properly. The 1st mortgage still encumbers but they have a $230,000 Final Judgement on this property and their legal eagles have in fact named the roofer in the foreclosure. The roofer knows his interest will be wiped out and is persuaded by his lawyer to move ahead with a foreclosure.
The Roofer’s lien is put up for auction and no one bids on it as they can all see there is already the 1st Mortgage Foreclosure auction date for next week on the same property. The roofer is upset because his lawyer friend charged him $1,000 in legal fees to file this foreclosure and now he gets nothing. The auction ends unsold at the $100 starting bid.
The results later that day on the county website show “Winning bidder $100 – Plaintiff”. To the untrained eye it looks like some property was sold for $100 when in fact that was simply the starting bid. The only party that made money in this scenario was the lawyer who suckered his now ex-friend into paying $1,000 in legal fees.
How to Win Foreclosure Properties at Pennies on the Dollar
Can you actually get a $300,000 property for $10,000 or $40,000 winning bids at the county foreclosure auction? Absolutely! It’s not going to happen often, but it absolutely does. Once in a while, banks forget to show up on their day of bidding and you end up winning a $200,0000 condo for $10,000 like our friend Joe Perez described in his interview video. Stories like his are the exception and are pretty rare, but it happens. Other scenarios can line up to give the sharp-eyed investors incredible wins like this.
The key to these “home run” scenarios is understanding how to intensively and thoroughly research a property’s title, and to find things that other will not. Experienced investors learn how to spot opportunity better with each passing auction they have researched. They learn how to easily negotiate down $100,000 worth of code violations to less than $2,500. They learn how to spot a Federal tax lien that can be stripped away using their legal team. The profits are made on the research side of things, not the bidding side. Research your properties, do more research and then pay someone else to research it as well. Knowledge is profit in this investing game!