The auction is the stage of the foreclosure process in which the default or preforeclosure phase of the property has ended. The lender now wants to recapture its losses by selling the property to the highest bidder.

Proceeds from the auction go to the lender who initiated the foreclosure action. Usually this is the lender holding the first mortgage. When the first mortgage holder's position has been satisfied, any additional funds are used to settle other remaining obligations, if any. If all encumbrances against the property are resolved, any remaining funds are given to the homeowner.

Purchasing at auction is a great way to buy houses at bargain prices but you prepare to act quickly.

Preparing for the Auction:
Before you bid in any auction it’s vital that you do a title search. The goal is to determine whether there are any liens or judgments against the property. These can include unpaid personal property taxes, civil lawsuit judgments and state and federal tax liens. If you present the winning bid, you will be granted title to the property, and will inherit all such liens. This can significantly affect the value of your purchase.

You also must be prepared with financing. Cash or cash equivalent will be required at the auction. If you are the winning bidder, a 5 to 10 percent deposit is required at the conclusion of the auction. The balance is usually due within a few days.

We recommend that you attend at least two auctions prior to making your first official bid. This will make you comfortable with the process and give you the confidence you need. It is easy to get caught up in the excitement of the bidding process and make a poor decision. Composure and discipline are essential.

The Opening Bid:
Prior to the auction, the trustee establishes the opening bid. This is determined by summing the remaining loan balance, court costs, interest and back taxes, legal fees and liens and judgements. The winning bidder normally must satisfy all these expenses at closing. If no one bids above the opening bid, the lender may take back the property. It then becomes a Bank Owned or REO Real Estate Owned Property.

How to Bid:
Approach the auctioneer, give your name and discreetly show him the amount of your cashier’s check or cash. The auctioneer will note your name and the limit of your bidding ability. Bids over this recorded amount will not be accepted from you unless you evidence an additional check or cash during the bidding.

Prior to the opening bid, the trustee will read aloud the legal description and terms of sale for each property. This is a technical step. Don't expect the trustee to provide information about the quality or characteristics of a property.

The Winning Bid:
If yours is the highest bid and the hammer strikes the third time, you own the property. At this point, you’re expected to make the deposit of 5 to 10% of the purchase price. The remainder of the purchase price will be required sometime within 24 hours and 30 days afterward. Your deposit is non-refundable and all sales are as-is and final.

While you are now the owner of the property, in some cases it may be possible for the owner to buy back the property. The period is called the Redemption Period, which gives the original owner the opportunity to redeem himself. In most cases, this doesn’t happen since if the owner were in a financial position to buy back the property he likely wouldn’t have defaulted in the first place. But it can happen, so be aware of this issue.