Bidding at a Foreclosure Sale
With mortgage foreclosures at record levels, prospective real estate investors may be looking for bargains. Bidding at a foreclosure sale is a risky proposition, and while true bargains are few and far between, they can be found. Members of our real estate practice group offer the following suggestions that apply to foreclosures of both residential and commercial property.
Before the Sale
Learn all you can about the property. The sale will be "as is," without any warranties. Check the public records. You can learn about outstanding taxes, building code violations and complaints, and building permits issued for the property.
Call the auction firm or check its website. Sometimes an auctioneer will have a "bid package" of information concerning the property. Do not expect to engage the auctioneer or the lender’s lawyer in any meaningful discussion about the property — the lender must make sure that whatever information is available is given to all, so the auctioneer and the lawyer will be very limited in what they can tell a prospective bidder.
If you need financing, arrange it in advance. The sale will not include any financing, permitting or inspection contingency. Mortgage financing secured by the property will be difficult to obtain in advance. There may be asbestos, unknown hazardous waste, building code violations, or other issues which will make a lender uncomfortable. In addition, the new lender must be ready to close within thirty (30) days of the sale or the deposit will be forfeited.
You will need a certified check or bank check for the deposit amount. A personal check will not be accepted at the sale. You should make the check out to yourself, so that you can easily redeposit the check after the sale or endorse it over to the auctioneer if you are successful.
Foreclosure sales can be cancelled at any time. Do not invest a great deal of money in preparation. Until the auctioneer’s hammer falls, the lender and the owner may make a deal or the owner may file for bankruptcy, which will stop the sale. If the owner has threatened to file bankruptcy, a careful lender will check the bankruptcy docket by phone right up to the time of sale.
The lender has no obligation to deliver the property free of occupants. If you are the successful bidder, you will be responsible for arranging for occupancy of the property, and if necessary, to bring an eviction proceeding. Bear in mind that the property can be damaged as the occupants move out.
Attendance at the Foreclosure Sale
The sale will be at the property, not on the courthouse steps, as it is in some other states. Get there early and identify yourself as a bidder to the auctioneer. The auctioneer will ask to see the deposit check and will then register you as a bidder by taking down your contact information. You do not have to surrender the check unless you offer the winning bid. You may be issued a bidder number (not always), and given a copy of whatever information the lender may have elected to provide.
Remember that you will be buying property that is subject to taxes and any prior liens. The amount of those taxes and prior liens will be announced at the sale, and they should be deducted from the amount you plan to bid.
By arriving early, you will have time to tour the property if it is available for inspection. In some cases, the owner will provide access in the hope of assisting the lender in obtaining the highest possible price. In many other situations, especially if the property is occupied, the lender will not have the right to access and you will not be able to go through the property.
Bidding at the Sale
The lender and the auctioneer control the pace of the sale. It may not start promptly (the ancient rule is that "it is 10 o’clock until it is 11 o’clock”) and the lender may be in last minute negotiations with the owner. Frequently, the sale will be cancelled at the last minute or adjourned (postponed) for a month or more. If you are traveling a distance, call the auctioneer the day of the sale to see if it is still scheduled to occur.
After introducing him/herself, the auctioneer will read the legal notice and the Memorandum of Sale that the winning bidder will be required to execute. S/he will also announce the amount of outstanding taxes and any prior liens about which the lender is aware. The auctioneer may announce other terms of the sale, and ask if anyone has any questions. S/he will answer questions about the sale process, but not about the property.
The lender is permitted to "bid in" the amount of the mortgage indebtedness without making a deposit or paying any cash. The lender is unlikely to bid more than its loan amount. A representative of the lender may be physically present, or may be bidding by telephone. Often, the lender has instructed the auctioneer of its bid in advance. Some lenders will hold back to see if other parties bid, and if so, how much. Other lenders prefer to bid first, usually the amount owed, and wait to see if any bidders advance beyond that.
After the Sale
The successful bidder will be required to execute the Memorandum of Sale, which is essentially a purchase and sale agreement, and endorse over the deposit check. The Memorandum of Sale will require an "as-is" sale, with a closing and the balance paid thirty (30) days after the sale.
If the lender was the successful bidder and you are still interested in the property, approach the auctioneer or the lender’s representative before they leave the property and make your interest known. Lenders are well aware of the limitations of a foreclosure sale and often will discuss the purchase and sale agreement with more customary contingencies and terms in the days and weeks following the sale.
Manage your expectations — few investors are successful bidders at a foreclosure sale. However, there are bargains, and it is worth bidding if a property is attractive to you and you have the means to close. Be prepared for the sale to be cancelled or postponed at the last minute.