Foreclosure Auction Scenarios

[Sara Wylder]

Hi all —

Curious if there are any scenarios where you can loose money at a foreclosure auction.

Say you are the highest bidder and you win the auction - are there any ways that you can still loose the property after that? 

also, do you inherit the other liens associated with the property, ex. Mechanics lien? 

TIA

- Sara 

[Randall Alan]

Quote from @Sara Wylder:

Hi all —

Curious if there are any scenarios where you can loose money at a foreclosure auction.

Say you are the highest bidder and you win the auction - are there any ways that you can still loose the property after that? 

also, do you inherit the other liens associated with the property, ex. Mechanics lien? 

TIA

- Sara 

@Sara Wylder

Different locations operate their auctions in completely different ways. 

In Florida, most counties use the Real Foreclose website.  You have to deposit cash up front in your bidding account to be able to bid.  You are required to have 5% of your bid deposited into the account.  So if you were bidding $100,000 on a property - you would need $5,000.  If the bid jumped to $101,000, and you only had the $5,000 in the account, you would not be allowed to bid again - you would be out of the auction.

But say you won the auction at $100,000.  You then must submit the remaining $95,000 via certified funds within 24 hours of winning the auction.  If you fail to show up with the $95,000, you forfeit your $5,000 bid and the property would be auctioned off again.

So your bidding money is at risk until you pay the balance.

After you win the bid, there is a 10 day redemption period in Florida where the owner can more or less "claw back" the property by paying all the money that is owed to the lender that is foreclosing.  There is a tactic that I have heard about where (rather unscrupulous - but still legal) investors will contact the owner after the close of an auction and will offer them cash on the side to let them buy the property from them during the redemption period.  The owner gets cash, the investor signs a sales contract with the owner, and then proceeds to redeem the property and takes possession through a regular sales transaction.  So that is more a way you can still lose the house, even though you thought you bought it.

We have had an owner declare bankruptcy on the day of the sale, but the sale went through due to the late filing.  We had to petition the court to get our money back since we had already paid it to the court the next day.  Took 4 weeks to get our money back.  Basically - any legal filings that come into play during that redemption period could cost you the house - but you wouldn't lose your money as long as you didn't default on your obligations to the court / auction.

In Florida there is no inspections of foreclosed properties.  You can drive by them, you can maybe press your nose against a window to look and see what you can see if the property is abandoned... but you don't know what you don't know about the property.

We have bought 4 properties through foreclosure.  3 worked out about as we expected.  One had the owner still living in the property with 5 cats, and 10 litter boxes that had never been changed in years.  The entire house was essentially one big litter box.  Once we had the tenant out, we had to literally wear respirators to enter the house.  We stripped out all the carpet and pad, and the unit still wreaked of cat urine.  We had already done exterior repairs to the house including a roof, and an AC.  We sold the house with no carpet, no appliances, etc to a handyman who wanted to refinish it.  We were set to make about $100,000 on the property.  We chose to walk away and let him take it off our hands for about a $40,000 profit after expenses.  We were concerned about being able to sell it at retail with the defects.  So it wasn't a complete loss.  But as previously mentioned - if you didn't know the roof was rotten, and the inside is completely mold infested because of leaks, you could quickly be in for way more money than you expected and you could lose money if your repair costs exceed the value of the property, for instance.

Liens work on the basis of seniority. So any lien filed prior to the one that is foreclosing will survive. So if it was a Home Owners Association suing for their HOA fees, any primary mortgage would survive. Also tax and municipal liens typically survive foreclosure (so think code enforcement liens for not mowing the lawn). We have seen code enforcement liens upwards of $100,000 on a property where they added on weekly for years. Code enforcement in our area will settle those for 10 cents on the dollar if you bring the unit back into compliance - so it would be a $10,000 instead of $100,000 or what have you.

Hope some of it helps!

Randy