The caveat is that the highest bidder must offer at least $1 above what the bank is owed on the property, then make a nonrefundable deposit—usually between 10 and 15 percent—and arrange financing within 30 days. In most cases, however, even a bid that's just $1 over the outstanding mortgage is substantially more than the house is worth. The result is the exact opposite of the sort of auctions you read about in the arts pages: a short, utterly boring affair in which no one even bothers to make a bid.
In some places, the owner may then have one last chance to "redeem" the property, paying off the entire loan amount, plus fees and expenses. Such situations are exceedingly rare, however, as few can finagle a new loan at that point, let alone come up with enough cash to pay off the old one.
Equally rare are situations in which homeowners who still have equity are nonetheless foreclosed on and their properties auctioned off. "Some people who come to me are just in denial," attorney Frascona says of some who simply refuse to sell before they're evicted. "But they usually to come to their senses by the time I'm done with them."
Even if they don't, buyers lucky enough to ferret out a "found money" situation still face risks. First and foremost is that fact that publicly auctioned homes are sold "as is," and there's usually little or no opportunity to tour the house, let alone arrange for a full-blown home inspection. Fixing that leaky water heater or protecting the house from termites is usually low on a cash-strapped homeowner's priority list, which means such houses are often fixer-uppers.
Even worse are situations in which soon-to-be-evicted homeowners take out their frustrations through sabotage. "They were so angry that they poured cement into all the drains and blocked up all the plumbing," ZipRealty's Lashinsky recalls of the evicted owners of one property, which cost the new owner about $25,000 to fix.
Owners often leave behind other problems in the form of unpaid taxes and other liens against the property. Back taxes are considered "superliens" that must be paid off by whoever takes ownership of the property. In some states, a foreclosure extinguishes junior-level liens, such as second mortgages, credit card debt, and the like. Others, however, require the new owner to pay off mechanics' liens, such as the money still owed to the repairman who fixed the central air conditioning system last summer.
Information on such debts is usually available through the local county clerk and recorder and the local treasurer's office. Title companies, too, are often willing to do a free cursory "errors and omissions," or E&O, search for prospective customers, although they don't always pick up every outstanding debt.
Bank-owned sales. The last stage of the foreclosure process may offer the smallest upside over the short run but the surest investment over the longer run.
By the time a homeowner has been foreclosed on and evicted, plenty of would-be investors have already had and passed up their chance to buy the house, usually for good reason.
Unable to get what it's owed, the bank then hires an outside real estate agent to put the place on the market, usually for somewhat less than what was originally owed on the mortgage. Spying a potential deal, would-be investors then circle back. Free now to tour the home and do all the due diligence needed to make an informed decision, many nonetheless continue to low-ball the bank and get rebuffed in the process.
Abandoned and unkept, such houses often sit on the market for months — even a year or more — gathering weeds and dust until someone finally hits the bank's target price. As with buying houses during the pre-foreclosure "short sale" period, the best strategy for getting the bank to sell is to offer a fair price and back it up with hard copies of all the research you've done to get there.
Of course, good things may also come to those who wait. With few signs of a bottom to the market and inventories of unsold houses continuing to increase, some major banks are already engaging post-foreclosure auctioneers to sell off their properties en masse. Well publicized in advance, such sales can offer advantages over government-administered foreclosure auctions, allowing prospective bidders to tour the homes in advance, and can even offer help with financing.