Buying Foreclosure property at auction from USDA

I would like to know the correct process in buying foreclosure property from the federal gov’t. The risk involved. I located a property going to auction in less than 2 weeks. I live in AR, the property will be auction off at the county court house. I will be allowed to inspect the property the day before the sale. I want to know what I could be doing in the mean time, I plan to go to the court house and check for tax liens on the property. I have seen the location and the outside of the property. The USDA didn’t give any more info than what was on the site about the property. I know I will have to have the financing ready the day of the sale in full or 10% and the rest in 3 months with 10% interest. What else do I need to do and what else do I need to know before going to auction…first time buyer.

Get a contractor/inspector or handman to come with you on your walk through to gauge the cost of repairs. That will help you determine your maximum bid for the house (or if you want to bid at all).

Start getting preapproved for funding now, so that you will be ready to go at the auction, and know that you will be able to get financing. Worst thing to do is to win the bid, then be unable to come up with the money.

Best advice is to work your numbers and do not be tempted to bid over your maximum, no matter how much you want to buy the property. Don’t let other bidders push you into paying too much.

I appreciate your advice. I also would like to know a little more about buying foreclosure property from the USDA, if anyone knows the in’s and out’s. The property assess for $36,800 and the USDA starting bid is $16,677. How much would be a good cut off bid…I am thinking maybe $18,000 or less. I have never been to an auction before or purchased a piece of property…all help will be very much appreciated.

Well, you need to check comparable sales on like homes for that area in the last 3 months. Get in touch with a realtor and ask for some comps. Do not look at tax assessments to try to determine the value.

Your cut off bid (or maximum) should be based on the area comps, and how much work needs to be done on the house.

A lot of people use a general rule of
70% of ARV
minus repair cost
= maximum offer

Thanks again. With my medical background I know what the abbreviation AVR stand for and that’s Aortic Valve replacement, but ARV has me scratching my head. So I need a realtor, a contractor or an inspector, I need to do a title search or hire a title company to do it for me quicker. I am trying to understand about liens, and are the liens removed in a foreclosure hearing? What are Junior liens? So, with a property search at the court house I can find out about any outstanding loans? I have learned alot and all and any info will be and is very much appreciated. I have a good ideal this house will need repairs and it will be an as is purchase. But knowing exactly what I will be getting myself into will be very beneficial to me.

ARV = After Repair Value

Junior liens are those that are recorded next in line. So if a home owner takes out a second mortgage on their property, it would be a junior lien, since it would be recorded after the primary (first position) mortgage. Also, any mechanic’s liens or other liens put on the property go in order of the filing date.
At auction, all junior liens are wiped out, with the exception of tax liens. If bids go high enough to cover more than the initial bank bid, then that money is distributed to the other liens.

Keep in mind that any lien holder can foreclose, so it’s important to do a title check to make sure that it is the first position that is being foreclosed on. If it is the second and you win the auction, you will also be responsible for the first.

Thanks…So, if it’s the first lien, does that mean that all other liens will be cancelled, with the except of the tax liens…I have my homework cut out for me…I guess the old saying is right…the first will be the hardest…and the rest I hope will be smooth sailing. I appreciate your help.

So if there are 2 (or more) positions on a house, how do you know which position is being foreclosed upon?

All junior liens are wiped out at auction (except tax liens).

You can find out which position is foreclosing by looking at the title recordings.

You have been a big help…thanks…But I am not sure where I will find the title recordings. I know I have a few places to do my research in for this house…one is the court house and another is going to a title company to have them do a title search for me, but if I want to try and do it myself, what do I need to do?

Town/county/city clerk or wherever filings are done where you are located. Start with the county offices and ask whether information is available online or if you have to go to the offices to look.

Thanks…I was just thinking …is investing in foreclosures really worth the effort for beginners…I have so many questions…Like if I when the bid…does that mean that I get clear title to the property…or does it mean the person being foreclosed on still have rights. Meaning if there are no other liens and taxes are paid. I guess I should have gone to foreclosure 101…you have been such a big help…I have learned a lot…

I am not sure I would recommend an auction property for your first one. There are a lot of things dependent upon which state you are in. Each state has a different ‘right of redemption’ period where the foreclosed owner can take back their property. They do have to have funds in full, so it is pretty rare that this happens - but you should know about it.

The other unknown is the condition of the house. Not all states allow you inside the house to preview it, so you are buying it sight unseen.
If it needs more work than you planned on, it will eat your profit right up - especially if it has structural issues. With newer homes it is not as big a deal, but older homes can have a lot of hidden problems.

I might suggest that you get in touch with a realtor to look at bank owned properties that are on the market in your area. See as many as you can. Then you can see what kind of condition they are likely to be in (plus you could find a deal you want that way).

You could try working with owners before their homes are actually foreclosed on. Look in your local paper in the legals section for foreclosure and auction notices - then contact the owners directly.

Thanks…I did a little research yesterday at the court house…I didn’t find any liens against the property…I saw the mortgage contract and the quitclaim deed…I contacted the government who has the property going for auction…I was informed by them that their’s no lien against the property and I also found out that the owner is now deceased and her name was the only name listed as a single person on the mortgage…what puzzles me I guess is this lady has been deceased for years and the property is now just going to auction. I guess my next search need to be a title search…

You have been a great help.

When an owner is deceased and there is no family to inherit the estate - the property can be tied up for a long time in probate. Not to mention the time it takes the bank to foreclose. Here in NY it can take 15 months for the whole foreclosure process to complete to auction.

See if you can’t preview the property. If they were willing to speak with you and give you information, that’s actually pretty encouraging.

I talked to the local director and he told me it will be open to inspection the day before the auction. I think I have everything I need. I have a letter of credit. I did a property search at the court house…I found no liens, the USDA director told me, there are no liens on the property except USDA…the USDA will be issued a deed to the property, all liens will be cleared except property tax that was not due and payable. The deceased family has been notifed. The only thing I have not done is do a title search…besides inspect the interior of the property that is. I was thinking that if I an still interested after viewing the house…do I still need to do a title search before going to auction? Thanks again for your responses.

It’s up to you on the title search. The USDA should be providing you with a clear title.
You may want to get title insurance to CYA when you close.

I’ll be curious to see how the inside inspection turns out!

Foreclosures are not for the first time investors or the light of heart.

Regarding the doc: One of my biggest clients as a Broker was a OB/GYN. Many a day we sat in my office signing paperwork as he fielded calls from the hospital updating him on how long his patients were in labor. He made it back for every delivery. LOL

Okay…the day finally came for me to look at the house. The house interior was worst for wear for me. I really hated the lay out. It looked to have serious plumbing problems. It also happen, that the first owner…the person who had the house built came by while I was there. She told me that she was interested in buying the house back, but after she saw the damage caused by the water leak…she wasn’t sure that buying it back was a good ideal. What I disliked the most was how the contractor took short cuts in the structure of the house, the air conditioning system was placed below the ceiling instead of being hidden above the ceiling.

Anyway, I went to the auction the following morning…in the rain. I wanted to see how the auction would go…I saw a lot of local contractors and investors at the auction…the property went for twice the Bid of the USDA’s. I was very surprised.

Don’t be. Many times you will find properties bid up way over what any sane investor would pay. You know that saying about 95% of investors never buy a second property - this would be why.