A foreclosure auction is designed to sell foreclosed properties at whatever price someone is willing to pay. The final sale price could be considered "bargain basement" pricing in most cases, because the properties have to be purchased with cash in most states, so the buyer pool is limited. The actual auctions are regulated by state law, but the individual county where the property is located actually dictates the specifics of how the actual auction works.
As a rule-of-thumb, the property is offered to the highest bidder by a clerk of the court, a sheriff, or a trustee. The auction is by "open outcry" so that everyone knows what bids are being made. Usually there is a minimal incremental bid which can be $100 to $1,000 or more. It is interesting to watch a novice get excited and bid in increments of $5,000 or even $10,000 in his excitement to get a particular property. The pros who frequent the auctions target unsuspecting "newbies" because they know the newbies have no rational bidding methods and the pros use their experience to bid up the properties the newbies are trying to buy.
The auction or sale starts with the auctioneer asking for an opening bid. Someone will respond and in most cases it will be the bank that starts the foreclosure proceeding. The bank will usually start the bid for the final judgment amount which is the outstanding loan balance, plus the foreclosure processing costs. Let's use an example of XYZ Bank who has a final judgment amount of $200,000 including all costs and expenses. Usually XYZ Bank would start with a bid of $100, because the starting price is most often the final judgment plus $100 as the first bid. Lower bids could start the sale but generally XYZ Bank will always bid the amount owed plus $100 to cover the minimum bid.
In recent months, many banks have started the bid at less than the amount owed them. This is a fairly new strategy that is designed to overcome the issue of doing short sales with investors and all the hassles that go with them. For example, if the bank is willing to discount the loan to 80% of a recent Broker's Price Opinion (BPO), on a $200,000 balance due, they would start the bidding at $160,000. If there were no other bids, the bank would own the property anyway because they have a "credit" to bid up to $200,000 because of the final judgment amount. If anyone bids or the bidding gets heated, the bank will only get their $200,000 reimbursed and the highest bidder above that amount will get the property. If the final bid is, for example, $250,000 the additional $50,000 is called "overage" and will be returned to the homeowner under most circumstances.
Professional buyers who frequent the auctions daily have developed advanced techniques to beat out other bidders and to use "mortgage credits" as real money. Their most advanced technique for stopping competitive bidders is to only bid in the incremental amounts of say $100. This gets the competition very hassled and they will often start jumping the incremental bids in large amounts ($5,000 - $10,000) to get the "pro" to stop bidding. The pro just keeps coming back with an out cry of "plus $100". Eventually, the newbie will quit bidding and the pro will take the property for $100 over the last bid. If the newbie bids well past what the pro wanted to pay, the pro keeps bidding and making the newbie go higher and higher, until the newbie quits because he comes to his senses or doesn't have enough money. But it is not over yet because the pro now reneges on his last bid and the newbie gets the property at a grossly inflated price!
Another advanced tactic the pros use is to buy the worthless second mortgages for a few cents on the dollar. These liens are transferred to the pros at full face value so the pro will pay perhaps $500 for a $25,000 lien. Now the pro has a "bid credit" of $25,000. When the bidding starts the pro starts bidding to pull in newbies from the crowd and can continue bidding for $25,000 without it costing him any money other than the $500 he paid for the second mortgage (lien). Here is where it really gets going - the pro keeps aggressively bidding until the competitor, usually a newbie, quits (i.e. $20,000) and the pro reneges on his last bid. The newbie now owns the property at $20,000 over the first mortgage amount due and the pro has turned $500 into $20,000 with his only risk being his original $500.
The pro uses "shill" bidders so if he has to renege he doesn't get barred from the future sales. There are many other tricks of the trade that the pros use, so if you decide to buy a property at the foreclosure auction you better beware of the hazards. Also find out ahead of time what additional costs the county charges such as auctions fees, title transfer, document stamps, etc. so you aren't surprised at how much money you need for the final purchase amount. Good luck and good bidding!
