June 27, 2019 by
If you are familiar with Forrest Gump, you may have heard the expression: “Life is like a box of chocolates. You never know what you’re gonna get.” Believe it or not, the experience of buying a foreclosed home at auction is quite similar. Most times, buyers can’t even see inside the home before the purchase! So, is the low price tag too good to be true?
When you see a home that is listed as a “Pre-Foreclosure” or “Foreclosure,” it is hard not to be drawn in by the asking price – which is typically much lower than the list price of a traditional home for sale. Whether you are weighing the pros and cons of a foreclosure as an investment property or as a new home, you will want to have the full picture of what lies ahead.
What Is Pre-Foreclosure?
Pre-foreclosure is the VERY early stage of foreclosure. When a home is in this stage, it means the lender is unhappy with the borrower for missing three to six months’ worth of mortgage payments. At this point, the lender or financial institution has not repossessed the home. The majority of Pre-foreclosure homes do not advance. Instead, the owners will pay off money that is owed, declare bankruptcy, or challenge the proceedings in court.
However, once a home is considered Pre-foreclosure, it can be purchased as it moves through the foreclosure process:
- During Pre-foreclosure, a prospective buyer could purchase the home outright from its current owners before they have lost it.
- After being repossessed, a foreclosure auction is typically the next step. However, state law will govern particulars of the sale process.
- Following state regulations, the home may be in possession of the bank – if it is not sold at auction, for example. You may see these referred to as “Real Estate Owned,” or REO, when they are back on the market.
How to Buy a Foreclosed Home at Auction in Missouri
Buying and selling a foreclosure looks fun on TV, but it is a very complicated process. That is not to say it cannot be profitable, or even enjoyable, for people who thrive on the excitement that comes with unexpected hurdles! Regardless, your best asset in buying a home at a foreclosure auction will be a licensed real estate agent with previous experience buying similar homes.
Buying a foreclosure at auction in the state of Missouri is a fast process, and typically involves the following steps:
1. Advertised Notice of Sale.
The bank (henceforth “trustee”) files a Notice of Sale with the county recorder, and then has to advertise the foreclosure for 21 days in a public notice. Each county will advertise in a local publication and may use more than one, such as in St. Charles and St. Louis-area newspapers. The public notice will specify the time and location of the auction.
2. Logistics of the Auction.
It is standard for foreclosure auctions to take place in front of the main doors of the county courthouse, as in St. Charles, Lincoln and Warren counties. It is also common for trustees to have their sales bundled into groups so they can be auctioned off on a predictable cadence. For example, an experienced foreclosure agent may already know that when Trustee XYZ has a sale in St. Charles County, it will take place on Tuesday at 9:30 a.m. in front of the courthouse.
3. Attending the Home’s Auction.
Trustees may give out the bank’s bid, if the lender allows it. This opening bid sets the minimum for the property – which is often a surprise for attendees who expected the bidding to start at $1.00! As in any other auction, the house will be sold to the highest bidder. If no one bids higher than the lender’s opening or subsequent bids, the property becomes bank-owned and can be purchased from the bank or through the MLS.
4. Paying the Winning Bid.
Typically, 10% of the winning price must be paid at the time of the sale in the form of a cashier’s check. The balance is due within a few hours (read: same day!) and wiring the funds is generally acceptable. Again, we would like to emphasize that these are “Cash Today” transactions. If the buyer is unable to come up with the balance of the sale, they lose the initial 10% payment as forfeit funds, and the auction is re-cried. In other words, it is possible to lose the money and the house if you do not act quickly.
The Challenges of Buying a Foreclosed Home
There are many notable differences between buying a foreclosure at an auction and closing on a home that has been listed “For Sale” by a family across town. A winning bid on a foreclosure is not going “Under Contract.” Instead, you are the home’s new owner!
After the home’s auction, other challenges may present themselves, such as:
Clearing Up the Home’s Title.
The first thing you do after buying a foreclosed home at auction is have a reputable title company run the title. You take the title as the lender had it when the loan was made – for better or worse. The sale of the home will wipe out some, but not all, of the subsequent liens placed on the property since the loan was made.
Repaying Back Taxes.
County real estate taxes are not released from the winning bidder. These are still due and payable. Special taxes, such as the city mowing the grass, also are not released. You may even have liens from court actions, as well as state and federal tax liens.
State tax liens are generally erased from the home’s title by foreclosure. With federal tax liens, the IRS has 120 days to redeem the property – which means they can buy the home from you at the price you paid for it. In other words, if you buy a home at auction with a federal tax lien, you cannot do anything to the home for 120 days.
Buying a Home “As-Is.”
In a typical real estate transaction, buyers will usually have a property inspected by a licensed professional prior to closing. There are NO inspections before a foreclosed home is auctioned, and entering the property at that time is considered trespassing. The buyer assumes the home with all faults and no obligation for the seller to make repairs.
When a home has been abandoned by its delinquent owners, it may have suffered from improper heating and cooling during extreme weather, among other ailments. Similarly, if the previous owners were as careless or struggling in their lifestyle as they were in missing mortgage payments, the house will likely be left in a state of disarray.
Evicting the Previous Owner.
In our experience, approximately two out of three foreclosed homes are occupied by their previous owners at the time of purchase. Possession is not automatic and is best achieved through negotiation or an unlawful detainer lawsuit. The good news is you can win a decent judgement while someone is unlawfully occupying your property. The bad news is a person who lost their home is probably already on the verge of bankruptcy. When you do take possession, then you can begin the rehab and resell process.
Buying a Foreclosure? Meyer Real Estate is Your Ally.
Rehabbing a foreclosed home can turn into a profitable sale, but it is critically important to have the right knowledge and expertise on your side. Many of the agents at Meyer Real Estate have successfully flipped dozens of foreclosures won at auction over the course of our 70 years in the greater St. Charles area. Before you bid on a foreclosed home, schedule a consultation with Meyer Real Estate to make sure you are equipped with the best information.
If you are looking for an ally at the public auction, contact Meyer Real Estate today.
Buying a home of any type is a major financial decision and should not be based solely on the contents of this article. Please consult a real estate and/or financial professional regarding the foreclosure process in your state of residence before you consider participating in this type of transaction.