Mortgages & Creative Financing

Gambling at the Foreclosure Auction: High Stakes

Expertise:
27 Articles Written

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.

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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.

    J Kavin
    Replied about 11 years ago
    Buying the property or any business at right price is the actual thing that matters in making money. You are right, home work is always required before bidding at Foreclosre Auctions.
    Joshua Dorkin
    Replied about 11 years ago
    Jim – Another great post! I think that your first-hand stories are remarkable teaching tools. The real lesson here is that people must know what they are doing before going to auction, otherwise they may find themselves in the exact same position as the folks you talk about.
    Joshua Dorkin
    Replied about 11 years ago
    Hey Jim . . . congrats on the award at this weeks Carnival of Real Estate! I’m glad I submitted it! Keep up the great work.
    Paul from Charleston
    Replied about 11 years ago
    Wow, what an expensive lesson. I’d love to get an update on buyer decided to do.
    Paul from Charleston
    Replied about 11 years ago
    Wow, what an expensive lesson. I’d love to get an update on buyer decided to do.
    Paul from Charleston
    Replied about 11 years ago
    Wow, what an expensive lesson. I’d love to get an update on buyer decided to do.
    Paul from Charleston
    Replied about 11 years ago
    Wow, what an expensive lesson. I’d love to get an update on buyer decided to do.
    Trevor
    Replied about 11 years ago
    I think this world always has a lesson to teach ignorant. And i also think the buyer really did the right thing last and the wrong thing first. He should have contacted you Jim before buying at such an unbelievable price.
    Amy S.
    Replied 4 months ago
    Hi Jim, very sad story! I've been looking into buying a house at auction..I've been going to the auctions to see how it works, researching home values in specific areas, and looking up the current homeowners to see if I can figure out their situation. This is the one part of the process that truly frightens me, is there some kind of company I can hire to check for liens? Every county seems to do things differently and I'm overwhelmed with info, especially in the larger cities.
    Rebecca Kuzmic
    Replied 3 months ago
    Amy - county records usually have all information for liens on homes but you can risk info being incomplete or filed wrong. it is best to pay a title company to verify information for you.