Let’s Make a Deal

Purchasing properties at auctions and sheriff’s sales


 Debbi Conrad  |    August 02, 2010
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Ever been approached by a buyer who has been watching infomercials on late night T.V. and has heard he can buy a home "on the cheap" if he bids at a foreclosure sale?

The first thing to do in such as situation is to find out if this prospect is talking about buying a property at an auction conducted by an auction company, either in person or online, or buying a property at a sheriff’s sale.

Both auctions and sheriff’s sales can be intimidating and there are dangers lurking for the uninformed. Finding a good buy is possible, but it requires thorough preparation and homework. The key is to find out as much as possible about the property, including title, extent of repairs needed and value, before any bids are placed.

Auctions 

Who is the Seller? Properties sold at auction may be REOs or real estate-owned properties that lenders have acquired at sheriff’s sales because there was no other bidder willing to pay more than the total amount due on the lender’s mortgage. The seller at auction might also be an investor trying to quickly resell properties purchased in bulk. Other auction properties are not foreclosures or distressed properties and even may be brand new. Sellers are attracted to auctions because they are quick, efficient, public and generally set a valid market price.

"As-is": Auction properties are almost always sold in "as-is, where-is" condition. This means that prospects looking at REO properties have to be extra cautious. The former owners of distressed properties were in financial trouble and likely not focused on home repair. Some angry homeowners may have damaged the home or ripped out appliances and property components.

Open house previews: Fortunately, most auction companies hold open houses before the auction. A prospect should inspect a property before bidding on it, ideally bringing a home inspector or rehab contractor along to find hard-to-spot damage and help estimate repair costs. A property at a lower price is no longer a bargain if the repair and renovation costs will be high. 

Bidder’s package: Often the prospect will receive a bidder’s package while at an open house. The bidder’s package normally includes the contract that will be used by the winning bidder to purchase the property. These contracts usually are "as-is" with no contingencies and no attorney review provision. The buyer will have approximately 30-45 days after acceptance to secure funding, if not already done, and close. Prospects can take the contract to their attorney for review before the auction. The bidder’s package may also contain copies of a home inspection report, a survey and floor plans and a title report. A home warranty might be offered. 

REO properties often have title issues, so a buyer should also have a title search report prepared if there is no report in the bidder’s package or if it is not current. A bargain price evaporates quickly if the buyer must pour money into outstanding taxes, liens and encumbrances.

Neighborhood comps: Find out the recent selling prices on neighboring homes. Real estate agents can provide these "comps," which show what comparable homes in the neighborhood are selling for. 

Auction tips 

  1. Observe first. Both real estate agents and prospective buyers should first attend and watch a real estate auction before actually going to bid.
  2. Registration and rules. Contact the auction company conducting the auction to verify the requirements of the sale and get registered. Advanced registration, sometimes at least 24 or 48 hours before the auction, is often required.
  3. Types of bidding. The bidding for any given property may be absolute, with reserve or a minimum bid format. In an absolute auction, the property goes to the highest bidder, regardless of price. In a reserve auction, the seller retains the right to accept or reject the high bid after the auction has concluded. In a minimum bid auction, the public is made aware that the seller has set a minimum bid and is not obligated to sell to anyone bidding any less.
  4. Auction format. Traditional bidding starts with the auctioneer asking for an opening bid and then the price increases until the highest bid is reached. The most familiar auction is an open outcry auction, but auctions can also be conducted using sealed bids, online bids or a combination of these techniques.
  5. Bidder deposits. Bidders must bring a 5 – 10 percent earnest money deposit — for instance, a certified check made payable to the bidder, to show that they are serious. The successful bidder signs the check over to the auction company. This nonrefundable earnest money will be lost if the buyer cannot close.
  6. Buyer surcharge. The buyer’s fee or surcharge is an amount of money, usually based on a percentage of the successful bid, charged to the successful bidder and either added to the successful bid to determine the final selling price or paid separately by the successful bidder in addition to the successful bid.
  7. He who hesitates. When several bidders are competing for a property, a wise buyer will wait until the bids start to die down before bidding. Realize that the first few properties offered often sell for less because most bidders are trying to get a feel for pricing patterns before jumping into the fray.
  8. Dress like a banker. Some buyers like to dress like bankers and arrive early to position themselves near the auctioneer so other bidders will assume they’re representing the lender and possibly shrink back from a bidding war.

Sheriff’s sales 

Sheriff’s sales mark the final stage of the foreclosure process. Sheriff’s sales are open outcry sales with no sealed bids. The successful bidder, upon full payment and judicial confirmation, will receive a sheriff’s deed. The rule of Caveat Emptor ("let the buyer beware") is in full force at sheriff’s sales.

Notice published: Sheriff’s sales are advertised in the newspaper once for each of the six weeks prior to the date of sale. Written notice describing the properties to be sold are also posted in three public places in the town or municipality (1) where the real estate is to be sold and (2) where the real estate is situated at least three weeks prior to the sale. 

Peeking through the window: The sheriff’s office does not know whether or not the properties for sale are occupied and cannot give permission for prospective bidders to enter and inspect the home. Some people drive to the house and look in windows when no one is around or talk with neighbors. This may help a buyer find out a bit more about the home’s interior but it also might result in trespass charges. A drive around the neighborhood, however, may be instructive because a home in a neighborhood where there are a large number of foreclosures may lose value as prices are probably still dropping. 

Sheriff’s deed comes with no guarantees: The sheriff’s deed is a quitclaim and may not give clear title to the property — each property is sold subject to any restrictions not removed in the foreclosure action. Consequently, a title search is recommended before a bid is made. If there is a legal question, an attorney should be consulted. Some sheriff’s sale buyers have found themselves obligated for past-due taxes, IRS liens or construction liens, and some discovered they were responsible for evicting property occupants. 

10 percent down: The highest bidder at the sale shall be the buyer, who must pay 10 percent of the total bid in cash or with a certified check or money order immediately after the sale. Upon judicial confirmation of the sale, the highest bidder must pay the balance of the sale price. The court then pays the parties entitled to the sale proceeds and delivers the sheriff’s deed transferring ownership to the highest bidder. If the buyer fails to pay the balance of the sale price within 10 days after the confirmation of sale, the deposit is forfeited and a resale is held. The purchaser must pay the recording fees and Real Estate Transfer Fees when the sheriff’s deed is recorded. 

Agent best practices 

The agent will be wise to sign this infomercial-watching prospect to a buyer agency agreement. Cooperating agents should attend pre-auction open houses with buyers, help buyer-clients determine the market value of the property prior to the auction, assist the buyer with auction registration and strategy and attend the auction with the bidder. Many auction companies pay cooperative commissions when the property closes. Be sure to check with the auction company regarding commissions and pre-auction registration requirements.

While many auctioneers will pay commission to agents working with successful bidders, the same is not true at a sheriff’s sale. The buyer will have to pay any fee due to the broker out-of-pocket.

  • For more information about auctions see the July 2007 Legal Update, "Real Estate Auctions," at www.wra.org/LU0707 and Legal Update 97.10, "Real Estate Auctions," at www.wra.org/LU9710
  • For more information about sheriff's sales, read Legal Update 99.05, "Mortgage Foreclosures," at www.wra.org/LU9905 and pages 12-15 of the March 2009 Legal Update, "Working with Distressed Sales," at www.wra.org/LU0903.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.

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