When buying at auction, how can you be sure that there are not title problems or other liens on a property? Is there any way to protect yourself?
Do a title search before you bid?
@Joe Gore , if a title search is all that is required, why do I hear on BP that buying at auction is risky and not for beginners? Would doing a title search clear up any potential problems?
What everyone is saying most new investors over pay. A title search will give you details on the property, and you will see if the deed is defected.
I was basically going to backup and elaborate slightly more on what Joe Gore posted, however Sean O'Toole said it best, so I thought I would share his experience and wisdom...
Sean O'Toole has purchased upward of 150 investment homes at courthouse auctions, or trustee auctions. They aren't for the fainthearted, he says.
"These take a more sophisticated effort (than the larger auctions)," says O'Toole, founder and chief executive of ForeclosureRadar.com, a foreclosure service for real-estate professionals. "They are a different animal. Five guys standing around a courthouse with a million dollars in checks in their pockets -- that can be bizarre and a little intimidating."
A title search is your best chance for success. Many buyers have left the courthouse steps after unwittingly buying only one of two mortgages when they thought they were getting a clear title. "If you listen carefully, you'll hear something to the effect that, 'This property is sold subject to all liens and encumbrances,'" O'Toole says. First-time buyers won't always know what liens and encumbrances are, he says. Some buyers will also find themselves obligated for past-due taxes, IRS liens or liens imposed by unpaid contractors. They may even be responsible for evicting the occupant. "The title search is a must," O'Toole says.
So in a nutshell, always understand what you are vying for otherwise you definitely can be left holding the bag on other liens you assumed would be wiped away at auction.
Sean's a friend of mine and in my little uber-elite mastermind group. His company is now called PropertyRadar.
What you also need to know about auctions is that some competitive buyers will play an endless number of games with other bidders, especially mind games. Here are a few to beware of:
1) Seasoned bidders overpay just to force you to spend your money faster or send you home empty-handed.
2) Form collusive partnerships with other bidders (illegal, but it happens).
3) Bidders bid on properties w/either known title of other defects but they know how to fix (but you don't see even the title flaw). Examples: fractional interest; life estate.
4) Lien position fun. Mortgage subordination agreements that others don't catch ( or understand).
I could go on. Many (if not most) mortgage foreclosures (judicial and non-judicial, such as trustee sales) are buyer beware, all cash auctions where title insurance is not available.
This means buyers need to understand title in your property state and to chain out title quickly and accurately.
Nobody is perfect however the difference between pros and amateurs is that pros do their homework and don't give up when they make errors. (Because none of us is perfect!).
A title search will not clear up any title defects, it will however let you know if there are any title issues. It allows you to verify if the foreclosing entity was in 1st position. You can private message me if you'd like more information on title searches.
Lien Search, O & E searches, that's what Investors typically get before they do any bidding, we do tons of them for our clients.
Tried attending a few auctions, but the thing that confuses me isn't so much the title issues as much as how the buyers are making profit at something in which they are bidding up to 85-88% of market value.
There is a quote above attributed to a Sean O'Toole that seems to be one that perpetuates a myth about IRS liens that I have heard from some gurus. The IRS lien myth was discussed in this next link:
The biggest risk is lien position, as many have mentioned already. Let's say that this has been researched thoroughly so the doubts there have been diminished. Then let's say that the other risks that @Rick H. has listed are non-factors; I believe that in most auctions lots of those do become non-factors (subordination is part of establishing lien position; title defects do exist but are not so commonplace). So that brings us to risks not yet mentioned.
What might those be? How about property condition and determining cost of repairs and renovations, particularly on the interior? Sometimes that is a crap shoot. And let's not forget about dealing with any occupants after the auction (sometimes trying to deal with them before the auction will tell you whether they will pose a challenge down the road).
No argument about the importance of checking the collateral, Steve. However, the OP concerned title and lien problems, in particular.
My point was really only to raise the consciousness of a would-be bidder that there are plenty of risks to consider and that a newer bidder needs to be aware that games are played by other bidders.
As far as the collateral (for which there is occasionally more than one property!) Im with you in encouraging the new bidder to determine if property is occupied and if so, by owner or tenant as it affects the eviction timeline, hence the budget.
To be candid, should you ever see me at a foreclosure sale, for instance, it's because I'm either trying to protect my junior position or assure over-bidding, perfect title (via foreclosure) or liquidate an asset for which I've determine a trustee sale is the preferred method. It is rare that I attend a sale concerning my own first mortgage.
All I got to say is "word."
This thread is a little old, but after hours of reading, it seems the right place to ask this question:
We are quite interested in a property going up for Sheriff's auction next week here in Portland, OR. Inventory is very low here at the moment, and this property needs help, but is quite nice and will definitely go significantly above the minimum bid. Have you folks ever heard of an aggressive bidder buying rights of redemption for a given property prior to an auction, then coming out of the woodwork after the sale to demand a huge fee to sell those rights to the high bidder? Apparently, this can be timed so as not to become public record in time to show up on a title search. I have found nothing like this anywhere on BP, but someone told us that such things can happen.
This would be our first unassisted auction purchase and we are asking ourselves serious questions about whether we should proceed. On the other hand, we think it could be a very cool project, and don't want to lose out on a good property when they are so hard to find right now. We have
- Toured the property inside and out and have a fairly detailed list and estimate for repairs;
- Prepared our financial scenarios and established our max bid amount;
- Done our own research of public records to establish that liens formerly in place have been satisfied; and
- Requested a "liens and encumbrances report" from a title company.
Are we missing anything?
Thanks so much for sharing your valuable experience!
it's more likely that a local company like Bulldog capital would buy redemption rights after the sale not before. which is why you wouldn't put any money into the property until the 6 month reception period expires. Redemptions tend to come in the last week as many hope to sucker the buyer into free repairs.
Also if the listed party to the foreclosure auction holds first position in the lean then that should obviate those in lesser position.
make sure to check sewer abatements and anything else the county may have red tagged.
Finally be prepared to deal with collision and maybe intimidation at the auction. You may decline to speak with anyone wanting to make a side deal with you; ask me how I know
Also if it's a sheriff sale I'm not sure how you toured the property as they are always locked up
@Peter Hanaway who do you use for title search, and how much does it cost? I asked about it once with a title company, and they are asking for $350, which is way more than I expect.
With the redemption rights, how about contacting the owner and buy the rights from them and try to get it recorded ASAP. All it matters is who gets it recorded first right? This redemption issue is what scares me from Sheriff sale.
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