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 worth $300,000 or more have sold for $50,000, $10,000, and even $100! How can this be? Surely something is incorrect, or you are being tricked into buying something, right? Nope. 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 is located in a community with an association that charges a monthly maintenance fee. This property also has two mortgages, one for $200,000 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 home equity line of credit (HELOC) from Wells Fargo that is currently maxed out.
Tragedy strikes. The owner loses their only source of income and stops paying their mortgages and HOA monthly dues. Somehow this homeowner manages to get someone to replace the roof. The roofer places a mechanics lien on the property when they are not paid their $2,500 balance. The HOA is also not being paid their monthly maintenance fee, so they place an $8,500 lien on the property.
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, which is the first step in the foreclosure process. The Big Bank’s battle-tested foreclosure machine is firing on all cylinders. The homeowner is distraught, does not seek legal help, and does not respond to the foreclosure lawsuit. The Big Bank fast-tracks the foreclosure process and quickly gets a final judgment of principal plus legal fees for a total of $34,800.
The property goes to auction. An experienced investor armed with our HOA foreclosure play strategy wins the bidding at $40,000. 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, a $300,000 house just sold for $40,000. That’s an 86% discount on its retail market value! Informed members who use our site to do their research know this is not the case. Although this winning bidder will likely make a handsome profit by renting it out, they are probably not making a $260,000 spread. A quick title search shows mortgage #1 and HOA liens that must be dealt with. Both lien holders encumber the property and, without satisfying their liens, the investor does not have a marketable title. The only profitable play is the HOA foreclosure play. 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 second mortgage foreclosed, and the investor who purchased the property has made a tidy little profit renting the house out in the meantime. The first mortgage holder began litigating, so our investor is defending the foreclosure with his lawyer. The first mortgage has a final judgment in the amount of $230,000 for principal and fees. Auction dates are set and canceled as the lawyers battle it out.
The HOA association also has a final judgment 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. The property is sold to a third-party bidder. The third-party bidder is new to county foreclosure investing and unfortunately does not do their research.
This new investor does a title search after he wins the bidding and is quickly told to walk. He will only lose his 5% deposit. With an encumbering first mortgage of over $200,000, our newbie investor does not have the resources and backs out. 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 first mortgage still encumbers, but they have a $230,000 final judgment on this property and their legal eagles have 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. No one bids on it because they can all see the first 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 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 you can get lucky. Once in a while, banks forget to show up on their day of bidding, and you end up winning a $200,000 condo for $10,000 like our friend Joe Perez described in his interview video. Stories like his are the exception, but it happens. Other scenarios can line up to give 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 find things that others 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 them as well. Knowledge is profit in the investing game!