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I keep searching for why foreclosed home auctioned are typically discounted. Here's what I found:
The reason you can get great deals on houses at auction is that these homes are usually the products of foreclosure or unpaid property or state income taxes.
But that still doesn't explain why they aren't just sold like normal through a real estate agent, since this "discount" is less money the seller would receive. If the bank will be getting less money, why even sell it at an auction? I have a friend told me how he's bought about 10 homes through an auction site a huge discounts and made a big profit, but I am skeptical. Whats the catch?
Many times because they have had a realtor try to sell them and it's been unsuccessful. At that point the auction is used to get the property off the balance sheet with the idea that a little bit of money is better than continue to carry the property, and the expenses, and getting nothing.
Generally but not always those homes are in need of some (or a lot) of repair so the average buyer won't be interested in them.
The bank may also want to move the property quickly. There are carrying costs that the bank will incur and a realtor will take their cut too. The bank wants to cut their losses and move on. They're in the banking business not the real estate business.
" I have a friend told me how he's bought about 10 homes through an auction site a huge discounts and made a big profit, but I am skeptical"
Sure.. does your friend have a lot of cash? There is no freebies out there. You are not going to be able to borrow money to buy really distressed homes. Auctioned homes are usually distressed. A bank is losing money with the property. They are doing their best to minimize their loses. Some of these bank owned properties have been that way for years.
I keep searching for why foreclosed home auctioned are typically discounted. Here's what I found:
The reason you can get great deals on houses at auction is that these homes are usually the products of foreclosure or unpaid property or state income taxes.
But that still doesn't explain why they aren't just sold like normal through a real estate agent, since this "discount" is less money the seller would receive. If the bank will be getting less money, why even sell it at an auction? I have a friend told me how he's bought about 10 homes through an auction site a huge discounts and made a big profit, but I am skeptical. Whats the catch?
Because to sell it through a real estate agent requires a clear title. When a lender, say Wells Fargo for example, foreclosures on a home with a loan of say $120,000. They are just foreclosing to get their own money back. There could be IRS tax liens, second mortgages, etc on that house. The foreclosure sale and Wells getting their money back DOES NOT clear those liens from the property.
Auction properties are cash only and carry risk that their might be other liens on the property, and if it looks like there was any sort of recent construction, contractor liens could be placed on the property.
Because to sell it through a real estate agent requires a clear title. When a lender, say Wells Fargo for example, foreclosures on a home with a loan of say $120,000. They are just foreclosing to get their own money back. There could be IRS tax liens, second mortgages, etc on that house. The foreclosure sale and Wells getting their money back DOES NOT clear those liens from the property.
Auction properties are cash only and carry risk that their might be other liens on the property, and if it looks like there was any sort of recent construction, contractor liens could be placed on the property.
Any junior mortgages (2nds, 3rds) will be wiped off title if the 1st trust deed is the one foreclosing.
On the tax sale auctions it's pretty simple. Before they auctioned them there were lots of accusations of corruption and lots of actual corruption around them. Basically a lot of politicians did or were accused of selling public property to their friends for cheap. Banks, same deal. The reform was simple, they passed laws that all public property sold for private use had to get "fair market value". There are a few ways to do fair market value 1. is auction it 2. is competitive bidding 3. is get an appraisal and make a deal at that price or higher.
Of those three auction on the courthouse steps as is, with no representations, and requiring an immediate cash close is the simplest, cheapest, and most transparent way to do it. There isn't a way to manipulate it or accuse anyone of corruption like there are with the other two. They also don't have to pay for anything like an appraisal or marketing or make a deal with a guy and he shows up at closing and doesn't have the money. There's also no liability for property condition like in other types of sales. I've been involved in competitive bidding sales of public land and it's a giant multi year pain in the ass.
It's also important to realize in tax and foreclosure auctions the primary objective is to just get the money they are owed. If they get more it's going to someone else so why spend the extra money and time for someone else's benefit? It's also liability wise precarious because any deal other than an auction can be questioned by the person foreclosed on as having hypothetically screwed them out of money.
That being said there usually is a process for determining if a tax sale is the best thing. On larger and more valuable properties the lender can and will bid at the foreclosure auction if they think they can get more for the property. After buying it with their debt they then go and sell it.
Have you tried to buy a foreclosure property? Were you able to have physical access ahead of the sale? Probably not. Perform an inspection? I highly doubt it. Plus, a seller disclosure is not provided.
You can have a title company or attorney search for any liens, but each search will likely cost you money. If you track foreclosures you'll find that many of them are canceled just before, or even during, the auction, so your time and money have been wasted.
In some jurisdictions, the owner has a "right of redemption" for several months after the sale. If they can clear the debt, they can have the property back, though this doesn't happen often.
We know that the greater the risk in buying something, the lower the price. To me, that is why foreclosures are priced less, because there is much more risk in buying a foreclosure than in a "standard" real estate transaction.
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