New To REI and Interested in Auctions

[Sharisse Jackson]

Hello BP Community, 

This is my first post since I joined last week and I am extremely excited to get started in RE. I have been looking to invest in Baltimore as there is a lot of opportunity in the area. I plan on using the Buy & Hold Strategy with MTR or house hacking - whichever deal makes the most sense and presents itself first. I see a lot of homes up for auction in the area that are very appealing but I know that auctions tend to have a lot of restrictions. I have read that most auctions take cash but some do accept lending, though I'm not quite sure how that works. I was curious if anyone on here has purchased a house at auction and what the experience was like?

[Randall Alan]

@Sharisse Jackson

Where I am located, auctions come in two main "flavors". There are auctions conducted by local auctioneers - usually contracted by the family of someone who is deceased, but also for other reasons.  These are live auctions with everyone who wants to bid present. There can also be "left bids" for someone who isn't present.   Those auctions usually require a minimum down payment on the day of the sale - maybe $5,000 - or some figure that commits you to the sale.  Then you can use traditional financing to close within 30 days.  Those are pretty typical terms.

Then there are the county conducted auctions - the majority of auctions in my area.  For those,  you deposit money into a bidding account and have to have to be able to cover 5% of your bid from your auction account.  On the day of the sale it is literally just like Ebay.  You bid, and if someone else has a higher bid, you get outbid, but you can immediately bid again.  Each time there is a bid, the auction extends for 2 minutes.  Whoever has the highest last bid wins the auction. If you run out of money in your bidding account ($5,000 per $100,000 you bid) you can no longer bid.  The big catch with county auctions is that the balance of the funds is due the next day by 12pm at the county court house.  So no financing available AT ALL!  So that is a cash buyers market.  If you don't pay the next day, you forfeit the money you used to bid in the auction.

I have won county auctions, only to have the person being foreclosed upon declare bankruptcy the same day as the sale.  That suspends the results of the auction and your money gets tied up for a few weeks... but if you don't get the house, you get your money back.  It just takes the 'wheels of justice' a little time to sort it all out.

Know that on some county auctions the property may not be free and clear. There may be county / federal liens that can remain attached to the property... so it is important to do you due diligence on those. Also be careful to pay attention to who is foreclosing on the property. For instance - a home owners association may foreclose on a property to get their HOA dues... they may only be suing for $2000-$5000. You think, "Wow - I just got a house for $7,000" when you win the bid. But in this case, if you win the house - the mortgage company still has a lien on the house and the house may have a $500,000 mortgage on it. Guess who they will come for when the now displaced owner quits making payments? You - or more specifically they will sue you to foreclose on the property to be able to sell it to recover their $500,000!!! So understanding who is who in the foreclosure is very important. Usually if it is a first mortgage, any later liens / encumbrances get wiped out... like a second mortgage. But if it is the 2nd mortgage who is suing, the first mortgage remains in place and still has claim to the property - even if you win it (ie. they are still owed their money on their mortgage - and while you may not be the one on that loan, you are now holding the collateral that secures it.) You may be able to negotiate with them to take over the loan, but it is also possible you would have to immediately seek traditional financing to pay them off as well - at a high interest rate environment that we are now in.

Also know that on county auctions there is no previewing the property.  We bought one that had 10 cats in it and it was so foul we had to use respirators to be able to clean it out.  And once it was cleaned out, it still smelled like cat urine. So you will see that there is usually a bigger discount on county auctions because you often don't know what you are getting for your money - so you presume the worst and bid accordingly.  Presume a leaky roof, a damaged ceiling, missing appliances, damaged fixtures, cabinets etc.  Hopefully you get lucky and it's all there.  It's not usually the case though.  

Hope that helps with a few things.

All the best!

Randy