Pitfalls of Buying Houses at Auction

Buying a foreclosed house at public auction is not without its perils. A foreclosure action ends with the lender putting the home up for sale at auction to recoup losses. Bidders attend the auction with cash or proof of financing and bid, with the highest bidder becoming the new owner. Before you bid on a home at auction, you'll need to do some research so you don't lose money or otherwise get burned.

Condition

Homes sold at an auction come in "as is" condition. You won't be able to get an inspection, and the lender might not let you into the home beforehand. The lender won't make any repairs even if the property has a major problem, such as an electrical hazard, so you may end up with a house that needs a lot of expensive repair. Therefore, you should have the financing necessary to repair homes you bought at auction. You can't use a home in bad condition to secure a mortgage to cover repairs.

Title Issues

You need clear title -- a chain of ownership with no legal problems -- to sell or mortgage the home and get title insurance. If you can't get title insurance on the home, you have no protection against mistakes made by the foreclosing lender or other title problems uncovered later. A home at auction might have title issues, such as undisclosed owners or liens. You should contact a title company before the auction to find out if the home's title is insurable. You will have to pay for the research, but you'll know which homes to avoid at auction based on the results.

Minimum Bid Prices

The lender will set a minimum bid for each home at auction. A minimum bid is usually determined by how much the borrower owed on the loan and the lender's legal fees. Borrowers who were foreclosed on quickly, such as within two years of buying the home, wouldn't have much equity in the property, so the lender's minimum bid may not represent much of a discount at all. Policies vary by lender, but some lenders will not give out any minimum bid figures before the auction.

Prior Owner

You might have to evict the former owner from the foreclosed home. A lender does give the former owner notice but will not remove him from the home if he is still living there if you buy at auction. You'll have to follow the eviction procedure in your state, which involves filing a lawsuit against the former owner and paying court fees and other legal expenses. While you're trying to evict the former owner, he might damage the property or cause other problems.

Right of Redemption

Some states offer the foreclosed owner a right of redemption period. The previous owner has a specific amount of time, as set by state law, to get the house back if he pays you what you spent at auction plus interest. If you've made any repairs or improvements to the house since the sale, you'll lose the money you spent if the previous owner exercises the right.

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