Question: Is it
worth the savings to buy a home at auction and how do the risks
differ from a normal residential purchase?
Answer:
The risks at auction are both numerous and important. If
the property is still occupied on the date of the auction,
potential bidders may not be able to inspect the property in
order to determine its condition. Therefore, it may be difficult
to determine how much to bid. There will be no opportunity to
test for lead paint. After the transfer of title to the new
owner, it will become the responsibility of the owner to evict an
occupant who refuses to leave. The eviction process can take
several months.
Inability to inspect the property may make it difficult to
obtain conventional financing for the purchase, since a full
inspection may be necessary as a condition of financing. The
typical Memorandum of Sale signed by the high bidder at auction
will not allow the bidder to withdraw if mortgage financing is
not obtained, unlike the typical Purchase And Sale Agreement
(P&S). Therefore, the high bidder could lose the entire
deposit and more.
In the typical P&S the seller covenants to convey "a good
and clear record and marketable title." This is not so with the
typical Memorandum of Sale in a foreclosure. The buyer assumes
the risk of title problems. However, if there are encumbrances
other than those included in the Notice of Sale that were not
disclosed at the sale and not included in the Memorandum of Sale,
the buyer need not purchase. Similarly, the buyer at a
foreclosure auction assumes the risk of building code violations,
accepting the property "as is".
In the typical P&S, the agreement allows the buyer to
withdraw if the property violates building and zoning codes. If
the defaulting borrower has a state or federal tax lien which was
recorded before the mortgage was recorded, the lien will not be
wiped out by the sale and the federal tax lien will be
extinguished, but the IRS will have a right of redemption, the
right to take the property for the highest price bid at the
auction. If proper notice were given to the IRS (25 days in
advance of the auction), that right of redemption will expire in
120 days. It is rarely exercised.
State tax liens that are junior to mortgages are extinguished
upon sale with no right of redemption. Buyers at auction are also
subject to municipal taxes and liens (water & sewer). As for
the requirement of a smoke detector certificate before closing
and a statement from the seller whether the property contains
urea formaldehyde foam insulation, many foreclosing lenders
believe that the statutes do not apply, even though there are no
stated exemptions. Arranging financing in advance and researching
all other potential problems is crucial when buying at
auction.