While foreclosure auctions include family tragedies, they also include opportunities for others. There are many real estate auctions today that aren’t foreclosure auctions. Non-foreclosure auction opportunities differ in many ways from foreclosure auctions. Most of the time, at a foreclosure auction, the lender bids its debt, which is called a credit bid.
Most of the time, at a foreclosure auction, the lender bids its debt.
As a general rule of thumb, that happens about 90 percent of the time. The lender then takes title to the property and resells it afterward at a price that is less than the credit bid but higher than an investor would pay at the foreclosure auction. If the leader doesn’t credit the bid, that’s usually because there’s mortgage insurance, and the lender needs to establish the loss at the foreclosure auction, and/or the loan is extremely upside down. The remaining 10 percent of the homes auctioned in foreclosure, on which the lender doesn’t credit bid, are primarily bought by investors because someone purchasing a home to live in usually needs a mortgage and isn’t in a position to buy for cash at auction.
Location is always a major consideration in real estate, and now North Shore locations are increasingly going to foreclosure auctions. There’s also truth in the adage that you make the most money in real estate when you buy it, but in foreclosure auctions, that’s also where you can lose big. That’s why it’s critical, particularly for first-time foreclosure auction bidders, to do your homework carefully and include qualified people experienced in foreclosure auction purchasing, distressed sales, evaluating property condition, value, rental or remarketing, cost estimating, and a contractor-ready to do any needed improvements and repairs.
Such a team must include an attorney familiar with the additional title and other legal risks that are peculiar to a foreclosure auction. Examples include the post-sale Court approval required for the sale and the possibility of a borrower bankruptcy delaying that approval. Because an auction bidder must post cash to bid and make payment in full almost immediately, all due diligence must be paid before the auction; any mistakes are likely to be costly. If access to the interior isn’t available prior to the auction, there’s an unknown risk as to repair costs that a buyer cannot afford to gloss over.
An educated guess as to the possible price range and the repairs most likely needed is critical, and it requires experience. Accurately estimating repair costs and time to completion for repairs before resale or re-occupancy is another issue. Knowing the marketplace and gauging the property’s value at and after the foreclosure auction is even more important in this market because values don’t appear to have hit bottom, and when that may occur is uncertain.
Selecting the right team to evaluate potential foreclosure auction purchases is the critical first step to avoiding costly missteps, both at auction and afterward. Purchasing wisely and avoiding costly foreclosure auction mistakes isn’t easy; it requires careful due diligence and follow-through, but the rewards can be very profitable for those who do it right.
S. Keith Collins is an attorney with over thirty years of diverse experience, including estate planning, succession planning, commercial and residential real estate, banking, lending, litigation, loan workouts, and transactions. Keith is a member of the American Bar Association, LawyersConnecting™, and the Illinois State Bar Association. Learn more about Keith Collins on LinkedIn™ at http://www.linkedin.com/in/skeithcollins. His email is keith@collinslawyer.com or call his office in Deerfield at 847/831-2178. This article is meant for general educational purposes only. It is not meant to offer legal advice and it does not create an attorney-client relationship with the reader. Neither a question from a reader nor a response creates an attorney-client relationship. Hire an attorney for legal advice.
Originally published in the March 19, 2011 issue of What’s Happening! Magazine.
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