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You are here: Home / Buyers / Buying a Foreclosure at Auction? Better Do These 8 Things First

Buying a Foreclosure at Auction? Better Do These 8 Things First

May 14, 2013 By Raymond Stoklosa

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8 ways research foreclosure auction austinBefore attempting to purchase a foreclosure at auction in Travis County through a Trustee’s Sale, you’ll want to make sure you know what you’re buying. Here are 8 things successful foreclosure investors do before they even think about buying a foreclosure at auction.

#1: Do Your Due Diligence – Research, Research, Research

The goal of every foreclosure investor is to acquire instant equity (e.g. fair market value minus cost of all the liens) at the least cost. However, apparent equity can evaporate if the property is laden with liens. Prudence dictates to examine the title of the property that will be sold. Is the lien being foreclosed a second or third lien? If so, then the first lien (usually a purchase-money lien held by a financial institution) will continue in force and effect. First liens are supreme. They are not extinguished by foreclosure on a junior (inferior) lien. What about IRS liens? Improvement liens? Liens imposed by homeowners associations? Any or all of these could consume any equity might have otherwise existed in the property. If you are unsure as to whether or not such liens will be wiped out in the foreclosure sale, then you should check with a real estate attorney and a title company.

Where Can I Find More Info About the Foreclosure?

If you need more information about the property itself, contact the trustee named in the Notice of Trustee’s Sale. Trustees are often willing to provide information if they have it. You might even be able to arrange to view the property if it is unoccupied. Information is critical; do your homework. There is no such thing as “too much info” if you are going to succeed in buying foreclosed properties.

#2 Evaluate and Determine the Property’s Condition

What you see is what you get. A foreclosure sale is an “as is – where is,” transaction. You get the property is its present existing condition, without warranties, express or implied. Knowing the property’s physical condition is vitally important. When buying residential properties, for example, you should be especially careful about condition of the foundation (i.e. signs of signs of settlement), whether the property is flood-prone, and whether environmental contamination may be present.

How to Research Environmental History of an Austin Foreclosure

Previous or ongoing presence of hazardous substances can impose huge liability, since both Texas and federal law provide that any owner of property (including the investor) is jointly and severally liable with any prior owner for cleanup costs. The Texas Commission on Environmental Quality (TCEQ) maintains a web site at www.tceq.state.tx.us where the environmental history of a property can be researched.

#3 Preserve the Foreclosure’s Value and Only Buy Value

cash buyers only austin foreclosures at auctionIt’s easy to get caught up in the thrill of the auction. Emotions run high and competition can be seemingly fierce. But, guard against bidding more than the equity in the property (e.g. fair market value less the total dollar amount of all the liens, if any that will survive the foreclosure). Discovering Fair Market Value is the key starting point? Again, it is a question of getting the reliable information and understanding the market trend. The best way is to retain an experienced Buyer’s Agent and obtain a Comparative Market Analysis (CMA). Remember: You make your profit on the purchase and you realize your profit at the sale.

#4 Be Prepared to Pay Cash at the Foreclosure Sale

In larger counties, foreclosure sales may seem to appear chaotic. Generally, there are no rules with respect to where a trustee must stand or that only one trustee can carry on a sale at one time. In fact, often several trustees may be talking simultaneously. There are no prescribed words, although trustees usually recite the details of the note and lien, the fact that it went into default, proper notice was given, the note was subsequently accelerated, and the property is now for sale to the highest cash bidder. That’s right! Foreclosure sales are all cash purchases. No loans, no lenders, no financing contingencies, money up front! Trustees must, however, conduct their sales within the four-hour period specified in their notices. You may need to seek out the right trustee with the right property, so be proactive. Warning: do not let the excitement of the sale cause you to exceed your pre-established maximum bid.

#5 Find the Closet Bank Where You Can Obtain a Cashier’s Check

It is cumbersome and potentially dangerous to bring large sums of cash. Most trustees will permit a buyer a short period of time (e.g. 1-2 hours) to return with a cashier’s check in the amount of the sales price. If the buyer does not return within that time, the sale is resumed. Many investors will carry several cashier’s checks in different amounts, allowing them flexibility in bidding.

#6 Know Your Options if the Foreclosure is Occupied

Your Substitute Trustee’s Deed will supersede any existing lease that the former owner signed with a current tenant. This seems unfair for the tenant – but that’s the law. You will therefore have a choice in the case of occupied properties – whether to allow the tenant to remain on terms acceptable to you or, alternatively, to lawfully evict the tenant. Eviction under such circumstances is seldom accomplished without resort to filing a forcible detainer action in Justice of the Peace court in the precinct in which the property is located. Evictions usually take 3 to 4 weeks and may involve substantial attorney’s fees. These costs should be built into your budget.

#7 Know the Right of Redemption Rules

rights foreclosure auction occupied homeAn investor should be prepared to hold the property and defer either making substantial improvements to it or reselling the property until after any applicable rights of redemption have expired.

Chapter 209 of the Property Code, known as the “Residential Property Owners Protection Act,” requires provides for certain procedures and protections in the event of foreclosure by a homeowners association. The redemption period is 180 days (Property Code Sec. 209.011).

After foreclosure for unpaid taxes, the former owner of homestead or agricultural property has a two-year right of redemption (Texas Tax Code Sec. 34.21a). The investor is entitled to a redemption premium of 25% in the first year and 50% in the second year of the redemption period, plus recovery of certain costs that include property insurance and repairs or improvements required by code, ordinance, or a lease in effect on the date of sale. For other types of property, the redemption period is 180 days and the redemption premium is limited to 25%.

#8: Find Out if the Foreclosed Owner Filed for Bankruptcy

No due diligence is complete until a search is made of the bankruptcy records to make sure the owner in default has not filed bankruptcy immediately before the sale. If so, the sale is null and void. The problem for the investor is that it is sometimes a difficult and lengthy process to recover the money the investor paid for the property at auction. Sheriffs, constables, and tax authorities are notorious for this. Bankruptcy is a major stumbling block.

Miss One of These Steps?

Missing any one of these steps might mean the difference in making a profit or not. Diligently go through all of these steps for each property you are considering to minimize risk everywhere you can. Still not scared away yet? Check out our post, 4 Keys to Success When Buying Foreclosures at Auction. Have questions or need help? Email us at info@11OaksRealty.com.

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Filed Under: Buyers Tagged With: Buying Foreclosures at Auction, Foreclosures, Top 10 Lists

About Raymond Stoklosa

Raymond has been a respected authority in residential real estate since 1978. Having sold more than $150 million worth of property, in a variety of high-intensity markets, he possesses a noteworthy portfolio of success. A former real estate instructor, Raymond brings a passion for education to the real estate process. With an uncompromising attention to detail, he counsels clients to a well-informed business decision. He takes particular pride in assertively negotiating for the client's best interests. Raymond has earned elite professional designations from the Certified Residential Specialists (CRS) and Accredited Buyer Representative(ABR) of the National Association of Realtors held by fewer than 4% of the agents in the industry.

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