How do homes wind up being auctioned off on the courthouse steps in the first place? When a lender agrees to loan you money to buy your home you are asked to sign a document called a Deed of Trust. That document usually runs about 20 pages of single spaced legalese but basically says: “If you pay, you stay [in your home]. If you don’t, you won’t.”
When a borrower fails to pay his loan payments, the Deed of Trust permits the lender to auction off the home in order to recover as much of its loan as possible. In the Deed of Trust, the lender appoints one or more people, called trustees, who are empowered to sell your home at the courthouse steps if you fail to make your loan payments.
Although the trustees are appointed by the lender, they have a fiduciary duty to the borrowers to sell the home at auction for the highest bid possible. In the off-chance that the home sells at auction for more than the amount owed to the lender, trustees make sure that the excess goes back to the borrowers. For this reason, the trustees will not disclose the outstanding balance owed on the loan to prospective bidders.
How do you locate homes being auctioned off? These days, locating properties being auctioned off is quite easy. There are many Web sites that compile foreclosures, and many real estate agents and auctioneers maintain lists of properties being auctioned off at foreclosure.
By law, all foreclosures must be advertised in the local newspapers of general circulation. Those ads contain the very detailed legal description of the property, the terms and conditions of the sale and the date, time and place of the auction. The ads also indicate that in order to bid at the auction you will have to bring certified funds in a certain dollar amount. That dollar amount often represents approximately 10 percent of the outstanding balanced owed to the lender. What the ad will not tell you is anything about the property features such as the square footage of the lot and the home, the number of bedrooms or baths or the property condition.
What you should do before even bidding? The maxim caveat emptor or “buyer beware” is never more important than when buying a foreclosed home. All foreclosures are sold in “as-is” condition. Because lenders legally do not have the right of possession of the home until the auction is completed, there is typically no opportunity to conduct a pre-bid interior inspection, unless the current owner is willing to allow you to enter his home to conduct an inspection.
Because the home still belongs to the borrower, anyone attempting to visit or inspect the property in foreclosure does so at his own risk. Entering another’s property without permission is essentially trespassing and punishable under the criminal laws.
You can learn some information about the home from public records. Public land records can be searched online or in person to discover who owns the home, when they bought it, perhaps how much they originally borrowed, the address where the real property tax bills are sent, the amount of any real property arrearages or other tax liens. In the District, you can also learn how much the owner paid for the house.
Another source of reliable data about the home is the local multiple listing service. The full version is available to licensed real estate agents and other professionals who pay a subscription fee. The local Metropolitan Regional Information Service has its listings at homesdatabase.com, which contains information about the home’s features.
How do you bid? Once you have located a property you wish to bid on, have at least conducted a visual inspection, researched the property online and via the real estate agent’s databases and have your minimum bid amount in the form of a certified check, you are almost ready to bid.
Unless you are prepared to pay all cash, one more critical step should be taken if you are the winning bidder: getting pre-qualified by a reputable lender for the amount of the home you intend to finance.
What if you are the successful bidder? Auctions typically only last a few minutes. The bidding starts with the amount the bank is owed, which is often far more than the home is now worth. So the vast majority of homes “sold” as foreclosure auctions these days will be “bid-in” by the lender. This means that the lender will open the bidding at the amount it is owed, and the auction will not even generate any bids.
Even if this occurs, you may still follow up with the bank and make a post-auction offer to buy the home. Because the bank is on its way to owning that home, it will eventually need to dispose of it. If, in the unusual case that the home is “worth” more than the opening bank bid and you wind up being the successful bidder, you will need to go to settlement usually within 30 days of the auction or as soon as the results of that foreclosure auction have been ratified by the local court.
During that 30-day period, you will need to finalize your loan, have your settlement attorney conduct a title search and survey and coordinate all other required steps, such as conduct any inspections you or your lender require.
On settlement day, you will pay for the remaining balance of the home and receive the Trustee’s Deed, which must be recorded in the local land records office. Once recorded, you are the official owner of your new home.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement lawyer and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.