Dear Real Estate Adviser,
We finally found our dream home, but before we could contact our agent, it went up for auction. We have never bought this way. What's our next step? This beautiful log home needs quite a bit of fixing, but we'd sure hate to lose it.
-- M. Boylin
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Time is of the essence here. Get your agent back into gear to help you try to scoop up this Lincoln-esque beauty before it goes on the block, so to speak. The lender that now controls the property may be willing to delay or cancel the auction to sell it to you in a short sale (at a price below the mortgage balance), something that's still possible assuming the owner's foreclosure isn't yet official.
Get paperwork in order
But you must quickly prove your wherewithal by at least becoming prequalified, meaning conditionally approved for the mortgage. Better yet, you get preapproved, where you get a commitment for a set loan amount. Realize, too, that some lenders don't like or understand unique homes, even though Fannie Mae has declared log homes acceptable risks.
Beware potential snags
There are more potential pitfalls, both in the short sale or auction process, should you get that far. Fewer than 1 in 4 attempted short sales end up in a closing.
It sounds as though you've at least had a decent look at the place and have some sense of the cost of the repair work needed. (Err on the high side of estimates.) Important: Is there a recent termite inspection to peruse, given the home is wooden and prone to infestation? Would the lender or occupant grant you access to have one performed? If not, you could be stuck with a much bigger repair bill.
Deal with more paperwork
Either way you proceed, you'll need to examine the home's title to see if it's "clouded" with mechanic's liens, back taxes, IRS liens, lawsuits or other encumbrances. You can search for these yourself in city or county deed records, though you may miss some things that a professional with a title insurance company would catch.
Prepare for competition
If the home ends up going to auction, it would occur at a local government courthouse, hotel conference room, through a sealed bid or even online, and you may end up swimming with sharks who do this for a living. Your one advantage is that you're a would-be occupant who is perhaps willing to pay a bit more than an investor. And if it's a reserve auction, in which the seller -- the lender -- gets to establish a minimum reserve price that isn't publicized to bidders, you risk wasting your time if you come in too low. This is where a good agent can help you with your bid. Realize, too, that if the owners, who typically have until five days prior to an auction to remedy arrearages, should somehow settle up, then you're done before you start.
Learn the auction process
Down payments and purchase methods will vary somewhat depending on the auction house, though in most cases you'll need to produce 10 percent upfront and the balance in 28 days, plus you'll pay either an auction fee or a buyer's premium of 5 percent to 10 percent -- the larger sum typically including agent fees. And just like with any other home purchase, you'll still have to go through escrow and closing -- cha-ching again! You're out all this before you spend money fixing the place. Then there's this: If the owners or their tenants are still in the house when you buy it, you risk them trashing the place, especially if you're forced to evict them.
One good thing about the auction process is it typically lasts less than two months from beginning to end, so you'd move fast. Still interested? Then give it your best shot. Go in well prepared but not too expectant in case the deal falls apart. Good luck!