To find out which properties are going up for auction, you should read the local legal newspaper in which these auctions are advertised. Alternatively, most counties maintain a service that picks up such notices and mails you a list of them. Sometimes, however, this service tends to be expensive.

Finding out about the sales is therefore relatively easy, but locating the property to be sold can be difficult because only legal descriptions are provided which do not include a street address. It helps to have a friend in a title insurance company who can supply you with usable addresses from legal descriptions.

Do I Check Out the Property?
Once you’ve gotten the address, you must take a look at the property because the public notice does not normally give its value, condition, or title status. You must determine the property’s condition and worth either by using your own judgment or by using expert help. You also need to determine whether there’s an occupancy problem.

Sometimes the original borrower-owner is still living in the property. If that’s the case, you must determine if the trustee or lender will remove the occupant prior to sale or if that occupant has any rights to remain in the property after the sale. A former borrower-seller can turn into a belligerent tenant who can only be removed by eviction. Even this can be problematic if the person has occupancy rights during a redemption period, as may be the case under judicial foreclosure, particularly in some agricultural states.

What Do I Look Out for in Liens and Encumbrances?

The single biggest difficulty in dealing with foreclosure auctions, however, is mistaking which mortgage you’re bidding on. You could examine the house, determine that it’s worth $100,000, and at the sale find out that the mortgage is only $10,000. So you happily bid $10,000 and are successful. You think you’ve just bought a house worth $100,000 for $10,000. How¬ever, it turns out that there are $90,000 worth of superior mortgages on the property, so in reality you’ve just bought a house that’s no bargain.

TIP

The rule to remember is that any mortgages or other liens recorded prior to the mortgage that is foreclosing are not affected by the auction but remain on the property. These are called superior liens. Any mortgages or liens with the possible exception of federal tax liens recorded after the mortgage that is foreclosing are generally wiped out (extinguished) at the auction. These are called junior liens.

Tax liens are a special problem. Generally speaking, if they are junior (recorded after the mortgage is in foreclosure), the process wipes them out (from the property, not from the seller who may still remain personally liable for the debt). If they were recorded prior, however, they remain in effect, and you will need to pay them off to remove them.

Federal tax liens are somewhat different because federal law supersedes state law. With a federal tax lien, even if junior, the government may have a right of redemption for up to 4 months (and sometimes longer).

Should I Buy Title Insurance?

Yes, by all means. This is really your best title protection. Be aware, how¬ever, that most title companies will not usually sell title insurance on prop¬erties sold at auction until all redemption periods have cleared.

TRAP

If the borrower filed for bankruptcy, chances are the bankruptcy court stayed the auction of the property pending dis¬position of the suit. However, the lender may have pleaded that the asset was wasting, and the stay may have been lifted. Be aware that bankruptcy is handled at the federal court, whereas foreclosures are handled at the state level (or privately as with a trust deed). This means that even after you buy the property at auction, the federal court may decide that it did not sell for close enough to market value, and it may set aside the sale. Yes, this is probably a remote possibility, but it’s something else to consider.

How Do I Protect Myself Against Hidden Liens?

Ultimately, there is no way to guarantee that there won’t be any hidden mortgages, tax liens, or similar problems on the property. However, there are some steps you can take to protect yourself.

The Mortgage

The mortgage document and the trust deed itself is probably recorded, and you may be able to obtain a copy through a title insurance company. You can also ask the borrower-owner to see a copy, if they kept theirs. The Trustee may also have a copy.

Be wary of what you read, however. You may still not know whether the mortgage is a first, second, third, or another just by examining it. Although in recent years many title insurance companies have taken to writing, for example, “this is a secondary lien” on the face of the mortgage, lest anyone be uncertain, that’s not a rule cast in stone. The mortgage may not specify that it’s a second, first, or whatever.

Sometimes you can directly ask, “Are there any other mortgages or liens on the property?” Ask this of the borrower- seller if they are willing to talk with you. Ask the trustee. Ask any attorneys or agents who are involved in the sale. It couldn’t hurt.

Search the Title

This can be done fairly quickly, but it can be expensive. However, if you’re a client of a title insurance company, you can sometimes get a preliminary title search (or “prelim”) done for free. The prelim should show liens against the property currently of record.

Some investors rely entirely on the prelim, feeling that if it’s clear, they have nothing to worry about. Most of the time, they’re probably right. But sometimes things do slip through. After all, the title company does not back the prelim. It’s only a statement of opinion.

Find Out about Redemption Equities

As noted earlier, the most cases of judicial foreclosure there is also an “equity of redemption.” This means the former owner-borrower can redeem the property for a set time after the sale is completed. (In some states this time is a year or longer.)

In other words, if you are in a state that has only judicial foreclosure and you buy a property through a foreclosure sale, it may be that even after you have title, the former owner still has a claim on the property; once having paid back all your foreclosure costs plus interest, the person could demand the property. This potential claim could prevent you from reselling, refinancing, or otherwise dealing with the property.

In addition, as previously noted, there may be a tax redemption period. Be sure you check this out if you find a tax lien on the property.

Determine Your Maximum Bid
Based on your analysis of the property, the title, its condition and how much it will cost to fix it up, how much it’s market value is, what your profit will be, and any other factors of influence, determine what your maximum bid will be. Then never bid above that amount.

I can still remember my first auction when I and another person were the last remaining bidders on the property. I was determined to get it. But the other bidder was more determined. I even went a bit above my maximum bid in the heat of the contest. Fortunately, I cooled down and stopped bidding.

The other person got the property (or more than I thought it was worth. When I met her a few months later, she bemoaned the fact that she had outbid me. Her costs proved more than anticipated, and instead of a profit, it had turned into a loss.

Remember, the goal is to get a property at a bargain, not to win the bid¬ding at all costs.

Check with an Agent and Attorney

Sometimes you don’t have to do much investigating at all. Agents and attorneys who specialize in foreclosure auctions usually keep up on most of the sales. Locate one of these agents or attorneys and give them a call. Right over the phone they may be able to tell you. “That property’s so encumbered it isn’t even worth considering!” Or. ”You won’t be alone in bidding because a lot of other investors have seen what a good deal it is.” One phone call to the right person can give you a lot of insight.

TIP

If a superior mortgage is foreclosing, prior to the auction find out if there are junior mortgages. If there are, to protect their position (remember, junior mortgages are wiped out in the auction sale), the lender will need to reinstate the superior mortgage, then add the costs of doing so to its junior mort¬gage, and start its own foreclosure procedures. However, these junior mortgages are often held by former owners of the prop¬erty who took back the mortgage as part of a previous sale. They may not know what to do, when to do it or how. They may be planning on doing nothing and letting their junior mortgage be wiped out by the sale. Contact these people and see if they are willing to sell yon the junior mortgages for as an example, 50 cents on the dollar. If they are, you can then take over the process, carry it out, and get the property at a bargain price. Remember, you’d be doing them a favor because they otherwise might get nothing for their mortgage.