A few years ago I was in the office, when the receptionist said a gentleman was on the phone and had a question about the house he bought at the auction that day, and asked if I would talk to him.
I picked up the phone and asked what I could help him with.
Finding Great Deals at Foreclosure Auctions
The man said he bought a house that day and wanted to know when he would be able to go into the house and start working on it. I verified which auction he bought it at (Foreclosure or Sheriff sale) and told him that as long as the house is not occupied, he can enter the house right away but, it would be a good idea to wait a few days. This was to make sure the previous owner didn’t file a last minute bankruptcy — the Trustee would inform him if that happened.
The man got excited and went on to tell me that he got a “sweet deal.” I asked him what the numbers were and he told me that he bought a house that was worth $450,000 for $67,000.
My eyes grew very wide and I quickly asked him if he had done research on the title before he bought it? His response was that it was his understanding that the auction wipes out all junior liens so he didn’t see why he needed to research the title.
I remember shaking my head in feeling sorry for him and said, “I’m sorry Sir. I’m pretty sure you just lost $67,000.”
Be Sure You Know What You’re Bidding on at Foreclosure Auctions!
The man shot back in a loud voice, “What!? How do you assume that with what I have told you?” I replied by saying, “You bought a property in what I am assuming is a nice part of town for fifteen cents on the dollar or 85% equity, right?” He said that was correct. I continued by saying, “Can I assume that you were the only person who bid on the property?”
He paused a few seconds and cautiously said, “Yeah. How did you know that?”
I answered by saying, “There are a lot of investors down at the Dallas auction that aggressively bid up to seventy five cents on the dollar all the time but, not a single one of them bid against you on a house that had a huge equity spread. The reason they all passed on it which allowed you to buy it uncontested is because it’s a second lien. You are now responsible for the first lien which is likely close to 80% of $450,000.”
There was a silence on the phone for several seconds until the man responded by simply saying, “S*%#.”
I told him to call the trustee right away and pray that the previous owner filed bankruptcy and if they didn’t beg the trustee for mercy, ask if he will refund your money and explain that you made the bid without knowing you would be responsible for the first lien.
He said he would call right away and said he wished he would have talked to me before he went to the auction.
The man called me the next day and unfortunately, he said the trustee said he was sorry but, he couldn’t deem the sale invalid at that point and suggested he call the 1st lien holder and find out if they will do a short sale.
The man told me that he couldn’t come up with the amount of money it would take to satisfy the first lien and his credit wasn’t strong enough to get a loan for it.
Surely, that was the most expensive mistake that he had ever made but, entirely avoidable.