Opening Prices at the Courthouse Steps

[Marian Smith]

I have viewed a couple of auctions but have never tried to figure out whether there was a rhyme or reason to the process. My question: Do loans held by Fannie or Freddie open at the loan value every time? Or do they appear to use a BPO prior to the sale to set a price?
An FHA or VA insured loan would be auctioned at loan value for obvious reasons. The banks, for the most part,either open at loan value (or loan value plus fees etc) or they get a BPO and price it for something like "market value minus 10-25% fix up and 6% realtor fees and holding estimates." That must be why you see a 22 year old 4 bedroom that has been a rental for 4 years with an out of state owner with a starting bid of 30-40k under market.
Do the banks try to open at loan value to be sure someone's relatives don't loan them the money to buy back their house at a steep discount?
Anyone willing to share? I just want to know if it is worth the trouble to research a Fannie Mae property if it is going to automatically open too high to warrant a bid. (They never have enough equity.)

[Jennifer B.]

Hi Marian,

I've been working the foreclosure auction for awhile now... and here is what I came up with: Do NOT try and make sense out of it, because there is no rhyme or reason.

Back in the old days, the opening bid was was the bank was owed, most homes had some equity when foreclosures first started happening back in 2008 - 2009 so many investors knew what the bid would be prior to the bid actually being submitted.

Now, there is no rhyme or reason. What I can tell you is that the bank may not submit an opening bid that is more than they are owed (in addition to default interest and back payments). So if you do your research and in the RARE case that the property actually appears to have equity then that should be with the opening bid is, or less.

Case in point: I often see homes in my area that have loans owing $200,000 + yet the bank has an opening bid of $90,000. Of course other investors will be on this property like vultures... but what this really means is the bank does not want the property back and they are hoping it sells at auction. Now I could go into a million reasons why that would make sense for a bank, but that would be a whole different discussion.

Here is another cash in point: A property is worth $200,000 (today) and the loan amount is $300,000. The opening bid is $300,000 so obviously it is going to get reverted back as a bank owned property.

So moral of the story is, don't just assume that because the amount owing is higher than the property is worth that the bank will not be discounting the note at auction.

Also, VERY IMPORTANT: understand the risks of buying at auction. The auction is not an event set up for investors to buy properties at a discount, but rather the instrument for the bank to take title back to the property (I guess depending on what your state law is). Trustees do not warrant what you are buying and sales are "as is". You DO NOT want to accidently buy a second mortgage (there is some strategy to buying 2nds but again... another discussion). If you buy a second you could potentially lose your entire investment. There are also other liens that follow the auction so please do your research or email me and I will give you some pointers.