Wednesday, March 16, 2011

What Buyers Need to Know About Buying at a New Hampshire Foreclosure Auction

By: Gary A. Coffin                                                              
I have started this blog in order to provide what I hope will be valuable information to real estate consumers, the real estate industry and the lending industry with respect to current real estate related issues and trends.  A question I get most often from buyers and real estate agents at various courses and seminars I conduct is whether buying real estate from a bank at a foreclosure auction is risky.  Generally, buying at foreclosure auctions does contain a certain amount of risk.  Although you may not be able to eliminate the risk, you can minimize the risk by following the tips I have outlined below.  Do not confuse purchasing property from a bank or mortgage company at a foreclosure auction with a transaction where you purchase property from the bank or mortgage company after the bank or mortgage company has acquired the property at the auction themselves.  The tips below are for those bidding and purchasing directly at a New Hampshire foreclosure auction.
  1. Do all your homework BEFORE YOU BID!  First and foremost buyers must do the proper research and take proper action prior to bidding at the auction.  The only item you can negotiate at a foreclosure auction is price.  There are virtually no contingencies and at the very least you stand to lose your deposit if you cannot complete the purchase within 60 days of the auction date.
  2. Consult with a Real Estate Attorney.  You want to make certain you are performing the proper preliminary research and have considered all potential issues.  Real estate law is constantly changing and buyers should make certain they are up to speed with anything that could impede their ability to complete the purchase.
  3. Know what mortgage lien is being foreclosed.  This is important in order to determine if you will be purchasing the property subject to other liens that you will have to pay.  Typically it is a first mortgage that is being foreclosed and if proper procedures are followed, subordinate liens will not have to be paid.  Occasionally an auction may be conducted by a mortgage holder other than the first mortgagee.  If a second lien-holder is conducting the foreclosure auction, you will be responsible for paying off the first mortgage when you take title.  You will want to take into account the payment of this amount when you establish your maximum bid price.  
  4. Hire a Buyer Broker. You will need someone to assist you who knows the local market.  The last thing you want to do is bid higher than what the property is worth.  A buyer broker can assist you in determining an estimate of the market value of the property.  This will help you to avoid a situation where you overbid.  In hiring a buyer broker you should understand that most banks or mortgage companies will not pay the agent’s commission at a foreclosure so that will be an expense you will have to pay.
  5. The property will be sold “as is”.  Inspect it carefully and have a home inspection performed by a licensed home inspector.  You will be purchasing the property in “as is” condition.  Unfortunately many homes are still occupied at the time of the auction and an inspection may not be possible so you may want to avoid bidding on a property that is still occupied. If the interior is damaged at the time of the auction or even after, you could be faced with unexpected repair costs that you did not factor into your bidding price.
  6. You may become a landlord.  Many homes are foreclosed on while the owner still occupies the property.  In New Hampshire you will need to take title to the property and complete the transaction within 60 days of the auction (and often the contract will require you to close within 30 days) .  Although many lenders will do their best to make certain the property is vacant by the closing, there is no guarantee the prior owners will have vacated the premises.  You may end up taking title with the occupants still in the property which means you will be faced with having to evict them.
  7. Have the title examined. Hire a real estate attorney or title company to research the title and obtain an owners title insurance commitment PRIOR TO BIDDING.  You want to make certain the title will be clear  and that you and your lender will be able to get title insurance.
  8. Get pre-approved for financing.  Unless you are paying cash, have a local mortgage lender pre-approve you for financing.  Foreclosure purchase contracts do not contain a financing contingency clause.  If you cannot get financing and are unable to complete the purchase you stand to lose your deposit.
  9. Beware of issues with post auction access. If you are obtaining financing the lender is going to require access to the property in order to conduct an appraisal. If you cannot get access you may not be able to get financing.
  10. Research the property tax situation. You will be responsible for payment of any outstanding property taxes so you should know the amount that is due.  Also be aware of any current use penalties that may be due if the property is in current use.  You may also be responsible for private association and condominium dues.
  11. Contact your homeowners insurance agent.  Make certain you can obtain affordable homeowners insurance on the property before you make the bid.
  12. Beware of IRS liens.  When the title search is performed make certain the owner losing the property does not have IRS liens filed against them.  The IRS will have a 120 day right of redemption after the foreclosure.
  13. Remember you will need to close within 60 days of the auction.  Make certain you will be prepared to close within 60 days of the auction date (and often the contract will require you to close within 30 days).  Any delays may result in you having to satisfy additional liens placed against the property which means you will be paying more than expected.
  14. Preliminary research needs to be done 1st!  Remember these are the items you need to address and research before you bid!
This blog is a condensed version of a New Hampshire Real Estate Commission approved 1 hour elective course entitled “Basics of Guiding Clients Through Foreclosure, REO & Short Sales”.  For information on this or other courses provided by Horizon Settlement Services, Inc., please click on the real estate education tab at www.horizonsettlement.com.  
This blog is intended as a general overview of what a buyer should be aware of when contemplating purchasing at a foreclosure auction.  As this is an ever changing segment of the real estate market, anyone purchasing at a foreclosure auction should seek legal advice prior to bidding and this blog should not be constructed as having provided legal or professional advice.