By SETH SUTEL
AP Business Writer
Reproduced with permission from The Daily Reporter
It’s no secret that foreclosures are on the rise as a result of the turmoil in the mortgage industry. But if you’re considering jumping in on a foreclosure auction, there are a number of things to watch out for.
First of all, be aware that there are two kinds of auctions: Ones run by the sheriff’s department after a borrower doesn’t make payments, and others run on behalf of lenders auction houses. Lenders often take back ownership of properties in default at sheriff’s auction if there are no other bids and try to sell them at auction to recoup the mortgage balance.
The auctions run by sheriffs can be a tough place for new-comer since you often have to pay for most or all of the price right away in cash or certified check. In the other kinds of auctions, you’ll have a chance to line up mortgage financing, but it’s a good idea to be pre-approved.
Ralph Roberts, founder of a Detroit-area brokerage Ralph Roberts Realty, and co-author of the book “Foreclosure Investing for Dummies,” recommends that potential buyers do lots of research on the property ahead of time, including a trip to city hall to look up public records at the building department to see if there are any outstanding building code violations. You can also pay for an appraisal, which usually goes for about $350 or so.
Even more important, Roberts says, is deciding ahead of time what is the maximum amount you’re willing to pay for a certain home and sticking to it. You can sign a “buyer broker” agreement with a real estate agent to counsel you in the auction process in exchange for a commission, usually about 3 percent of the purchase price, he says.
Another good idea is to bring someone you know and trust on the auction day itself, just to make sure you don’t get carried away in all the excitement and exceed your maximum price.
“People get trapped and bid too much because they caught up the word ‘foreclosure,’ “Roberts said. “They think it’s a automatically a good deal, but it could turn into a money pit.”
Among other things to look out for, you’ll want to see how long the home has been vacant to make sure it’s not run down, whether it’s had a termite or rodent problem and whether there are any outstanding code violations against it, such as an addition to the home that didn’t meet city code. In some cases, you can’t have an inspection beforehand.
Then there’s the question of a “reserve.” Some auctions have them, some don’t – so be sure to check beforehand if there is one, or if there is a provision saying that the final sale is subject to the seller’s approval.
In an auction, the “reserve” is the minimum price that the seller is willing to accept, but the tricky thing is that you won’t know what that price is until someone bids it at the auction, in which case the auctioneer will announce that the reserve has been “met,” meaning that the sale will definitely occur. If it isn’t, the sale will likely not occur. The other kind is an “absolute” auction, where the best price will be guaranteed to win.