Real Estate Auctions
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Real Estate Auctions


There are numerous types of real estate auctions conducted for a wide range of reasons by a variety of agencies. Some real estate auctions are initiated by the property owner; most often, real estate auctions are conducted due to failure by property owners to honor legal commitments such as payment of property taxes, income taxes or mortgage. Other reasons for a real estate auction to be held might include divorce, death of the property owner (as part of an estate sale), lawsuit, government seizure due to illegal activity, or property abandonment.


BUYING FORECLOSED HOMES AT REAL ESTATE AUCTIONS

When you hear of a house selling on the courthouse steps, this is literally what happens. In a home foreclosure auction, lenders and buyers will congregate outside the courthouse, bidding on properties. This bidding is very intense and the process moves quickly. To avoid potentially devastating results, you must conduct as much research as possible prior to bidding in any real estate auction.

In order to participate in home foreclosure auction buying, you first need to do the following:
  • Prior to the sale, thoroughly research any properties you are interested in purchasing;
  • Prior to the sale, perform a full title search on the property to insure that the foreclosing entity is the first mortgage holder;
  • Keep your expectations realistic;
  • Evaluate your potential profit versus loss should you win the bid;
  • Decide what your highest bid will be and stick to it.

Pros of Home Foreclosure Auction Purchase

  • Savings against market value can be high;
  • Outstanding return on investment when performed properly.

Cons of Home Foreclosure Auction Purchase

  • Real estate auctions can be postponed;
  • There is often little or no opportunity to inspect a house prior to sale;
  • Title searches can be costly;
  • Large cash layout is required within a short period following the sale;
  • Hidden problems such as additional lienholders (if the foreclosing entity is not the primary lienholder), land use restrictions (such as zoning or wetlands restrictions) and environmental issues (such as asbestos removal, petroleum contamination or toxic waste hazard).

TAX DEED SALES

In a tax deed state (currently about 17 states employ tax deed systems), county governments sell full ownership and possession rights to an investor when taxes on a property are not paid. This is often but not always done at a public foreclosure auction. A tax deed sale generally takes place at least several years after the first tax payment becomes delinquent. Property is sold for the back tax amount plus any fees, interest charges and court costs. The purchaser generally obtains full ownership rights or all rights held by the county.


TAX LIEN AUCTION

In a tax lien state (currently about 18 states have tax lien systems), county governments sell their right to a tax lien or tax claim on real property. This is usually done at public tax lien auction, but some large counties with a high volume of liens conduct internet tax lien auctions. A tax lien provides an investor with the right to receive interest penalty charges if the tax lien is paid off by the delinquent property owner and the right to foreclose the tax lien and take title to the property if the lien is not paid. A property tax lien is a high priority lien superior to judgment liens, mortgage liens, trust deeds and other private liens.


Real estate auctions are an excellent way for an experienced real estate investor to generate a high return on capital. Unfortunately, real estate auctions are also a great way for novice real estate investors to lose their shirts if they do not perform due diligence. Perhaps the two greatest mistakes novice real estate investors make when bidding at real estate auctions are failing to adequately research the properties upon which they intend to bid (including visual inspection and completion of a full title search) and overbidding after becoming caught up in auction fever during a frenzied round of bidding. Never become married to the idea of buying a particular property, no matter how good it may look to you. I strongly advise anyone desiring to purchase real estate through the auction process to attend numerous auctions without bidding to experience exactly how the process works. It is also a good idea to attend a real estate auction with someone you trust who has a background in real estate if you know such a person.

References:
Authored by Kenneth L. Anderson.  Original article published 20 March 2006.


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