How Does a Foreclosure Sale Work?

Foreclosing Bank Conducts Title Search

When the bank determines that the borrower is unable or unwilling to make monthly payments on the outstanding home mortgage, it may exercise its option to foreclose on the property, evict the home owner and take back the real estate. Prior to listing the property for sale, the bank's agent conducts a title search to uncover any outstanding liens on the property---such as mechanic's liens for work the previous homeowner had done but failed to completely pay off---and negotiate settlements with the various entities.

Foreclosed Property is Listed for Sale "As Is"

Unlike a private sale, a bank does not commission any improvements on the property to be made prior to the actual sale. Each foreclosed property is listed "as is," and it is up to the buyer to present an offer with a lower price with an eye on the likely expenditure of bringing the home up to par. If you are interested in buying a foreclosed home, realize that it is listed at the cost of the outstanding loan balance, and if the previous homeowner kept the property in good repair and did not refinance it lately, you stand to get a good deal. On the other hand, if the previous homeowner bought the home while the market was booming, refinanced once or twice, and failed to keep up with basic maintenance, you are looking at a home that is overpriced.

Listed and Sold During Foreclosure Auctions

Even as the bank's foreclosed property agent may list individual properties for sale, the real action takes place during a foreclosure auction where large quantities of foreclosed are put up for auction and sold to the highest bidder. Registered bidders have the opportunity to have professional home appraisers and home inspectors visit the homes prior to auction to get a realistic overview of how much the home is really worth. Keep in mind that particularly attractive homes may be looked over by a large number of potential bidders, and it is possible to get into a bidding war during the auction. If this is the case, you may spend more money than you had initially planned for this particular home! The winning bidder is expected to pay for the property with cash or a cashier's check.

High Bidder may Encounter Some Problems After Winning an Auction

It is always preferable to negotiate a foreclosure sale outside of an auction. The properties sold during auction are not always free and clear of IRS liens. Because of the way these particular properties were ceased, there is a chance that the previous homeowner may undo the sale simply by presenting the cash needed to buy back their home. Conversely, the IRS may also stake its claim to the property. This is referred to as the "right of redemption" and although it is not frequently exercised, it needs to be in the back of your mind that your dream home may be taken away from you. The rights of redemption laws differ from state to state (a link to a listing is provided in the resources section), and it is advisable for you to contact an experienced Realtor dealing in foreclosures, so that you may go into the auction with your eyes open.