Foreclosure Auction
Hard Money Loans

What is a Foreclosure Auction and Trustee’s Sale?

A property sold at a public foreclosure auction to pay off a debt or obligation is considered a trustee's sale. This happens when a homeowner can’t make their mortgage payments and their lender starts the foreclosure process. The lender often appoints the trustee as an impartial third party to supervise the property's sale. The property is usually sold at the trustee's sale in a public place, such as the county courthouse, with the highest bidder chosen. The outstanding property debt, and any fees and expenses related to the foreclosure procedure are settled with proceeds from the sale. The homeowner usually receives any residual funds – though this is subject to state regulations and the loan terms. Sheriff's sales and foreclosure auctions are other names for trustee's sales.

Three Ways to Buy a Property at Foreclosure Auction

Buying a property at foreclosure auction can be done three different ways:

1. All-cash purchase and cash for renovation
2. Buyer pays cash followed by cash-out refinance
3. Hard money lender funds auction purchase on behalf of buyer

All-Cash Purchase and Cash for Renovation

The simplest way to acquire a property at foreclosure auction is to have the cash in your bank account to purchase the property on the day of the auction. First Capital Trust Deeds (FCTD) has clients who have bought properties at auction for many years. Sometimes, they’ll bring several thousand dollars in cash along with cashier’s checks in denominations of $5K, 10K and 100K.

If you have the money to buy at auction and pay for the inevitable repairs out of pocket, you don’t need us on the day of the auction – and probably don’t need to read any further. Then again, maybe you’ll want to! Real estate investors inevitably find themselves in temporary cash crunches and need hard money loans to smooth things over. So, continue reading if you’d like!

Buyer Pays Cash Followed by a Cash-Out Refinance

One of FCTD’s long-time real estate investor clients used to buy one or two properties each month at foreclosure auction, back in 2013-2016, when the properties were still cheap. They’d pay cash, and FCTD would close a private money bridge loan the following week, even though we didn’t have the Trustee’s Deed. Back then, Linear Title would provide title insurance based on the trustee sale receipts and would condition for the Trustee’s Deed, which worked for the lender.

The investor would keep a property for a rental, and flip the other property. When the renovation on the rental was complete, we’d refinance them into a 30-year fixed-rate rental property mortgage.

This system works well for experienced investors with liquidity and a reliable crew to repair the properties before putting them back on the market to sell, or keep as long-term rentals.

Hard Money Lender Funds Auction Purchase on Behalf of Buyer

The way FCTD has financed lately in Oregon, Washington and Idaho, is the real estate investor places the winning bid the morning of the auction, and the hard money lender wires the full amount to complete the purchase. This gets the property under control, and the lender can order an appraisal and wait for the Trustee’s Deed to come in a few weeks later.

It’s important to note that the buyer will not sign loan docs on the day of the foreclosure auction, but after the title can be insured.

How to Use Hard Money at Auction

This section covers how the financing process works at auction from start to finish – from pre-approval, finding your property, notifying the hard money lender, preparing paperwork, wire funds, titling and ballpark terms. Understanding and preparing for each part of the process will help you more smoothly acquire the right property when it pops up at auction.

Get Pre-Approved for Hard Money Financing

To use a hard money loan to purchase a property at a foreclosure auction, you’ll need to be fully approved for financing. When we at FCTD work with a new real estate investor client, we verify their personal credit, income and liquidity, and run a background check to ensure there aren’t issues from the past that could pose a problem in the future.

Below is the checklist for underwriting the individual:

• Application
  (includes track record of buying, selling, real estate investments, or construction history)
• Credit Check
• Background Check
  (looking for judgments, tax liens, prior foreclosures, convictions, lawsuits, etc.)
• Verification of Deposit
  (hard money loans require 20-30% down payment)
• Entity Information
  (active and in good standing)

Identify the Property You’d Like to Bid on at Auction

Once you’re approved, the next step is to identify a property (or properties) that you’d like to bid on at a foreclosure auction. Gather as much information as possible about the property, including the condition, possible issues from previous real estate listings, neighbors, and any outstanding debts or liens. You can typically find information about upcoming foreclosure auctions online, with a title company, or the county clerk’s office.

Notify Us That You’ll Be Bidding at Foreclosure Auction

Let us know that you’re going to the auction to bid, and what your minimum and maximum bids will be.

Cashier’s Checks and Proof of Funds

Before attending the foreclosure auction, you’ll need to prepare the necessary paperwork. This typically includes a cashier's check or proof of funds showing you have the necessary cash to bid on the property. You may also need to sign a contract or agreement with the hard money lender outlining that they’re funding the purchase for you, and that you’ll receive a loan against the property upon receipt of the Trustee’s Deed.

Winning Bid – Lender Wires Funds Day of Auction

If you’re the winning bidder at the foreclosure auction, you’ll need to close on the property quickly to secure ownership. This typically involves working with a title company to transfer the property into your name and paying any outstanding debts or liens on the property. The lender will give you the funds to complete the purchase.

Appraisal and Title

After you win the bid, it will take about 2-3 weeks to receive the Trustee’s Deed and have a clear title. During this time, you’ll have access to the property to assess the condition and submit a budget to the lender – assuming that the property needs to be repaired and renovated. We’ll submit the budget with the appraisal request. The appraiser will give an AS-IS value along with an After Repair Value (ARV), using the budget to reach the ARV number.

Hard Money Foreclosure Auction Loan Pricing and Terms

In the real world, you’ll have the ballpark pricing and terms prior to submitting your application for pre-approval. If the pricing is too high for you, you’ll say, “Thanks, but no thanks.”

To give you an idea of terms for foreclosure auction hard money pricing, the most recent closed loan came in at the following:

The property had only minor cosmetic repairs and upgrades that the borrower paid out of pocket.

Conclusion

If you’re looking to buy at foreclosure auction, the best way is all-cash with your own funds. If you need financing, you can pay with your own cash and refinance with a hard money loan a few weeks later. Or, you can get pre-approved with a hard money lender that funds auction purchases and go through the process that I detail above.

Connect with FCTD today to find financing for your next foreclosure auction purchase.