Buying a Property at a Foreclosure Auction

Most folks follow a traditional path to home ownership that relies on the help of a real estate agent or broker in their search for the perfect home. With access to the Multiple Listing Service, potential buyers are just a click away from the vast majority of homes on the market. When inventory is low, like it has been recently, some buyers may be interested in looking at other non-traditional options to purchase that personal residence or rental property. Purchasing a property at foreclosure auction is one of those options. 

A fair amount of the business we do at RGC is in the area of mortgage foreclosures. We represent both commercial and private lenders in matters where a borrower has failed to stay current on mortgage payments. As a lender’s attorney, it is our goal to convert that non-performing loan into a performing loan and assist with home retention options. if that’s not possible, we commence a legal action to foreclose the mortgage and ultimately sell the property at a public auction. If the lender is the successful bidder, the property can be sold to a third party and the proceeds will be used to offset the lender’s losses on the loan. If a third party is the successful purchaser, a closing will be held and the bid price will be paid to the lender to offset the lender’s losses on the loan.

Mortgage foreclosures are highly regulated in New York State and the foreclosure process is quite costly, time-intensive, and complex. The landscape of mortgage foreclosures has evolved tremendously over the past decades, however, aside from some new rules coming out of the COVID pandemic, the “buying” part of the process has remained very much the same as in years past. While this is not an all-inclusive list, here are a few helpful hints to keep in mind if you are considering buying a property at foreclosure auction.

1. Consult with an Attorney to Check Title – A bidder at sale should not assume that the foreclosing attorney did everything necessary to clear title. For example, all judgment holders and subordinate mortgage holders should be named as defendants in the foreclosure action so that those liens are wiped out by the action. A judgment that survives the sale will require additional judicial relief to clear title. While it’s true that a title issue can be grounds to vacate the sale and demand release of the deposit, these things take time and do not happen quickly. In the meanwhile, a large deposit may be tied up for months, preventing the buyer from moving on to another purchase. The purchaser’s attorney should assist in confirming that there are no obvious issues that would cloud title after sale. Also, a purchaser should not assume that they are buying a property free and clear of all liens.  If there is a prior mortgage to the one being foreclosed, then the sale of the premises is subject to that superior mortgage.  Many title records can be found online, and a purchaser must do their homework before sale. Other considerations are unpaid taxes, municipality charges, HOA, Condo, or Cooperative liens/fees that may all need to be paid at closing.
2. Consult with an Attorney to Understand the Terms of the Sale – In addition to title issues, there are other risks in purchasing a property at auction and a potential buyer should consult with an attorney before bidding at a sale. In New York, the court will appoint a Referee to conduct the foreclosure sale. The Referee will present “Terms of Sale” at the auction that are agreed on by a purchaser but are not subject to attorney approval in the way that a traditional Purchase and Sale Contract for real property would be. On a standard purchase, a buyer would more than likely work with a real estate agent, who would write up an offer on a Monroe County Bar Association approved form. The Purchase Contract would be subject to attorney approval, which is typically a three 3 day cooling off period in which the attorney can “kill” the deal if the buyer has a change of heart. There is no such cooling off period when purchasing a foreclosure. It is a good idea to read the Terms of Sale and understand what they require before signing on the dotted line. 
3. Have Cash Ready – A purchaser must generally give the Referee a 10% deposit at the sale and be able to close within 30 days. Unlike a standard real estate transaction, time is of the essence on a foreclosure closing. It is unlikely that there is enough time to secure financing and close within 30 days. The Terms of Sale will provide details regarding the penalties for failing to close on time. Failure to close timely could cost the purchaser all, or part, of the deposit paid to the Referee.
4. Be Prepared to Accept the Property in As-Is Condition – A purchaser accepts a foreclosed property in “as-is” condition. More often than not, there is no opportunity to view the interior of the property prior to the foreclosure sale. Some interior pictures may be available on-line if a property was MLS listed before the foreclosure sale, but relying on those pics can be risky and they may not represent the current condition of the home. We have viewed properties post-sale that have been gutted by the owners or renters. Kitchen cabinetry, heating, plumbing, or electrical systems may have been removed. There may be mold, water damage, or other conditions that can be costly to remedy. The transaction is not contingent on a home inspection and there are no representations made regarding condition. This is precisely why a property may be offered at a reduced price at auction. The buyer assumes all of the risk. Hiring a home inspector after closing may be a great idea to help identify issues that should be addressed before becoming big problems and to provide valuable information about the condition of the home.
5. While on the topic of purchasing in “as is” condition; the outer condition of the premises is also sold in “as is” condition. The purchaser takes the property subject to encroachments, violations, or other conditions that would otherwise render insurable title unmarketable. Perhaps the neighbor’s fence is two feet over the line onto the premises. Perhaps there is a shed or an out-building that straddles the property line. Perhaps the foreclosed property is landlocked. While these issues are rare, we have seen these sorts of issues arise over the last 40+ years of our foreclosure experience. But, the idea of caveat emptor (let the buyer beware) applies to property purchased out of foreclosure sale since the Terms of Sale frequently requires that the sale be subject to such objections that could readily be observed and would normally be resolved in an arms’-length transaction.

Purchasing a property at foreclosure auction may be a good option for buyers interested in enlarging the scope of their home search. Consulting with your attorney, researching title, investigating the property, verifying funds, and knowing your risk tolerance are important boxes to check when before showing up to bid at a sale.

– Jacqueline A. Carosa, Esq.